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Hello Mike,
According to IFRS 15, “revenue should be recognized when the entity satisfies its performance obligation.
Revenue is recognized as control is passed, either over timeor at a point in time. Factors that may indicate the point in time at which control passes includes:
The customer has the significant risks and rewards related to the ownership of the asset.”
I have a question regarding Jun 2015 Q1 Sale of licence as follows:
In the sample answer, it says “if it were found that Ted has no continuing management involvement, and that all risk and reward has been transferred to the buyer, then the revenue should be recognized immediately and not deferred.”
What does it mean by “the risk and reward being transferred to the buyer in the context of the sale of licence to allow Ted’s product (computer games) to be distributed under the licence.”
I am thinking for REWARD is that customers are granted with exclusive rights and entitled to income generated from the sales of the computer games in that specific country stated on the agreement as this is protected by the licence agreement.
As for RISK, does it mean that if the computer games are no longer popular and no demand for it in that specific country, the customer will bear the risk of the loss of revenue?
Conversely, what does it mean by “Ted has retained the risk and reward in relation to the license agreement?”
I think I am really confused with the term “retain/transfer risk and reward”.
Thank you.
Regards,
Marthew“Risk and reward” is a concept that used to be a feature in the (now-removed) IAS on Leases where a finance lease was “… substantially the whole of the risks and rewards of ownership …” and that meaning segues easily into the Revenue IFRS
For ‘risks’ we can consider matters such as theft, insurance, maintenance, fall-off of demand
For ‘rewards’ we could include matters such as the right to exclude others from access, the right to all revenues that flow from the asset involved, the right to allow access to others of our choosing
Your suggestions of “exclusive rights and income generated” and “bear the risk of loss of revenue” are fine
Conversely, if Ted were to be residually involved following the granting of that licence, then that involvement would suggest that ‘total ownership’ has not been passed and Ted’s continuing involvement precludes treating the item as revenue
OK?
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