In other cases in which the entity’s performance does not create an asset with an alternative use to the entity, it is less clear that the customer benefits from the entity’s performance as it occurs. To address this issue, the second criterion would require an entity to consider whether another entity would need to substantially reperform the work completed to date to fulfill the remaining obligation. That is because a customer must have benefited from the entity’s performance completed to date (that is, received goods or services) if another entity could simply fulfill the remaining obligation to the customer without substantially reperforming the work completed to date. For example, consider a freight logistics company that has an obligation to transport a customer’s asset by road from Vancouver to New York. If the company transports the asset halfway to its destination (or perhaps to a hub that may be further away from the asset’s destination), another company could fulfill the remaining obligation to the customer without having to reperform the transportation service provided to date.
The Boards decided that when determining whether another entity would need to reperform any work, it is important to disregard the benefit of any assets related to the contract (for example, work-in-process) that are controlled by the entity. For instance, in a construction contract, another entity would not be able to fulfill the remaining obligation without reperforming work completed to date if the entity controls the work-in-process. It would be able to do so only if the customer controls the work-in-process.
In practice, there may be contractual or other constraints on an entity’s ability to transfer a (partially satisfied) performance obligation to another entity. However, the Boards decided that the application of this criterion should not be constrained by contractual or practical limitations of transferring the performance obligation because the objective is to determine whether goods or services are transferred to the customer as the entity performs.
For some performance obligations for which performance does not create an asset with an alternative use to the entity, the criteria of a “customer simultaneously receives and consumes the benefits” and “another entity would not need to substantially reperform” will not help the entity in determining whether its performance transfers goods or services over time. To address these circumstances, the Boards decided that the entity should consider whether it has a right to payment for performance completed to date. The Boards decided that if an entity’s performance completed to date does not create an asset with an alternative use to the entity (for example, an asset that could readily be directed to another customer) and the customer is obliged to pay for that performance to date, then the customer could be regarded as receiving the benefit from that performance.
In using the term right to payment, the Boards mean a payment that is intended to compensate an entity for its performance completed to date rather than, for example, payment for a deposit or to compensate the entity for inconvenience or loss of profit. Accordingly, an entity would not have a right to payment for its performance completed to date if the entity could recover only compensation from the customer for a loss of profit that would occur as a result of the customer terminating the contract and the entity incurring significant rework costs to be able to redirect the asset to another customer. In addition, the Boards do not mean that the entity must have a present unconditional right to payment. In many cases, an entity will have that right only at an agreed-upon milestone or on complete satisfaction of the performance obligation. Therefore, in assessing whether it has that right, the entity should consider whether it is entitled to payment for performance completed to date, assuming that it will fulfill the remaining performance obligation(s) (unless it does not expect to fulfill the contract as promised, in which case the entity may not be entitled to payment for performance completed to date).
For example, consider a consulting contract in which the consulting entity agrees to provide a report at the end of the contract for an amount that is conditional on successfully providing that report. If the entity is performing under that contract, it would have a right to payment if the terms of the contract (or the contract law in the entity’s jurisdiction) require the customer to compensate the entity for its work completed to date if the customer terminated the contract.
In the proposed guidance for determining when a performance obligation is satisfied over time, the Boards decided that the criterion of whether an entity has a right to payment for performance completed to date was necessary only in cases in which the entity’s performance does not create an asset with an alternative use to the entity and neither of the criteria in paragraphs 35(b)(i) or (ii) is met. The Boards considered whether they should specify a right to payment for performance completed to date as a more overarching criterion in determining when a performance obligation is satisfied. However, they decided against this for the following reasons:
(a) An entity must have a contract to recognize revenue in accordance with the proposed guidance, and a component of a contract is a right to payment.
(b) The core revenue recognition principle is about determining whether goods or services have been transferred to a customer, not whether the entity has a right to payment. Including a right to payment as an overarching criterion could potentially obscure that revenue recognition principle.
(c) A right to payment does not necessarily determine a transfer of goods or services (for example, in some contracts, customers are required to make nonrefundable upfront payments and do not receive any goods or services in exchange).
(d) In cases in which the customer clearly receives benefits as the entity performs, as in many service contracts, the possibility that the entity will not ultimately retain the payment for its performance is dealt with in measuring revenue. For example, in some service contracts that would meet the combination of the criteria in paragraph 35(b) and paragraphs 35(b)(i) or (ii), the customer may be able to terminate the contract and receive a full refund of its consideration. In such cases, the Boards decided that because the entity is transferring services to the customer, it should recognize revenue subject to being reasonably assured of being entitled to the consideration.