137 Updated September 2019 A closer look at IFRS 15, the revenue recognition standard
specified good or service to the customer and for the acceptability of the
specified good or service. We believe that one of the reasons that this indicator
supports the assessment of control of the specified good or service is because
an entity generally controls a specified good or service that it is responsible for
transferring control to a customer.
The terms of the contract and representations (written or otherwise) made by
an entity during marketing generally provide evidence of which party is
responsible for fulfilling the promise to provide the specified good or service
and for the acceptability of that good or service.
It is possible that one entity may not be solely responsible for both providing the
specified good or service and for the acceptability of that same good or service.
For example, a reseller may sell goods or services that are provided to the
customer by a supplier. However, if the customer is dissatisfied with the goods
or services it receives, the reseller may be solely responsible for providing
a remedy to the customer. The reseller may promote such a role during the
marketing process or may agree to such a role as claims arise in order to
maintain its relationship with its customer. In this situation, both the reseller
and the supplier possess characteristics of this indicator. Therefore, it is likely
that other indicators will need to be considered to determine which entity is the
principal. However, if the reseller is responsible for providing a remedy to
a dissatisfied customer, but can then pursue a claim against the supplier to
recoup any remedies it provides, that may indicate that the reseller is not
ultimately responsible for the acceptability of the specified good or service.
The second indicator that an entity is a principal, in IFRS 15.B37(b), is that
the entity has inventory risk (before the specified good or service is transferred
to the customer
or upon customer return). Inventory risk is the risk normally
taken by an entity that acquires inventory in the hope of reselling it at a profit.
Inventory risk exists if a reseller obtains (or commits to obtain) the specified
good or service before it is ordered by a customer. Inventory risk also exists if a
customer has a right of return and the reseller will take back the specified good
or service if the customer exercises that right.
This indicator supports the assessment of control of the specified good or
service because when an entity obtains (or commits to obtain) the specified
good or service before it has contracted with a customer, it is likely that the
entity has the ability to direct the use of and obtain substantially all of the
remaining benefits from the good or service. For example, inventory risk can
exist in a customer arrangement involving the provision of services if an entity
is obliged to compensate the individual service provider(s) for work performed,
regardless of whether the customer accepts that work. However, this indicator
often does not apply to intangible goods or services.
Factors may exist that mitigate a reseller’s inventory risk. For example,
a reseller’s inventory risk may be significantly reduced or eliminated if it has
the right to return to the supplier goods it cannot sell or goods that are returned
by customers. Another example is if a reseller receives inventory price
protection from the supplier. In these cases, the inventory risk indicator may
be less relevant or persuasive to the assessment of control.
The third principal indicator, in IFRS 15.B37(c), is that the entity has discretion
in establishing the price of the specified good or service. Reasonable latitude,
within economic constraints, to establish the price with a customer for the
product or service may indicate that the entity has the ability to direct the
use of that good or service and obtain substantially all of the remaining benefits
(i.e., the entity controls the specified good or service). However, because an
agent may also have discretion in establishing the price of the specified good