Revenue – ifrs 15 handbook

Example 32 – Payments to customers: Payment on entering into a 
new framework agreement
Supplier S makes a non-refundable up-front payment of 1 million to Customer 
C as part of the negotiations for a three-year framework agreement to supply 
specialised parts to C exclusively. The parts will be assembled into C’s main 
product, which has been successful in the market. C has been a customer of S 
for many years and S has been able to provide reliable forecasts of the results of 
its projects with C.
The framework agreement stipulates a price of 100 per part. C provides a 
non-binding projection of its supply requirements, which forecasts probable 
purchases of 100,000 parts over the three years (for a total of 10 million). S’s 
profit margin on these parts is 20%. However, there is no enforceable contract 
until C submits a purchase order.
S considers the following factors to evaluate the accounting for the 1 million 
up-front payment to C.
– S has secured an exclusivity agreement with C.
– S has a long history of doing business with C that is used as a basis for 
forecasting C’s future purchases.
– The payment is expected to be recoverable from probable future purchases 
that will earn S a margin of 2 million (10 million × 20% profit margin).
– The primary purpose of the fee is to secure an exclusive relationship with C 
and these transactions are common in the industry.
Based on its overall evaluation of these factors, S concludes that the payment 
should be capitalised and amortised as a reduction in revenue over the 
anticipated future purchases.
Example 33 – Payments to customers: New product for a new 
customer
Supplier S enters into a framework agreement with Carmaker B to supply a 
specialised component as part of a new product that B is developing. Supplying 
the part will require extensive pre-production engineering activities, for which S 
will be paid only if the development process succeeds. B does not commit to a 
minimum quantity of parts before S produces the first prototype. Because this 
is a new product, S does not have historical experience with it.
As part of the arrangement, S pays a non-refundable up-front fee to B of 100,000.

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88 | Revenue – IFRS 15 handbook
When determining how to account for the payment to B, S notes that it:
– cannot reasonably estimate whether the development process will be 
successful and therefore whether it will receive payment for this activity;
– has no contract for a minimum quantity of parts; and
– lacks historical experience with the new product. The uncertainty over the 
pre-production engineering activities indicates that the payment may not be 
recoverable through future purchases.
On evaluating these factors, S concludes that this up-front payment does not 
represent an asset. Therefore, it accounts for the payment in profit or loss when 
it is obliged to make the payment.