IFRS 15 Revenue for Healthcare & Pharmaceuticals

Step 1: Identify the Contract

IFRS 15.9–21All five criteria must be met for a contract to exist

Have the parties approved the contract and are committed to perform their respective obligations?

IFRS 15.9(a)

Approval can be written, oral, or implied by customary business practice. Commitment means the parties intend to enforce their respective rights. Consider whether there is a signed agreement, purchase order, or established pattern of dealing that evidences approval.

Can the entity identify each party's rights regarding the goods or services to be transferred?

IFRS 15.9(b)

The contract must establish enforceable rights for each party. This includes identifying what goods or services the entity will transfer and what the customer is entitled to receive. Even if terms are implicit or established by customary business practice, rights must be identifiable.

Can the entity identify the payment terms for the goods or services to be transferred?

IFRS 15.9(c)

Payment terms include the amount, timing, and form of consideration. The terms need not be explicitly stated if they can be determined from customary business practices or the contract's terms and conditions. Consider fixed prices, variable elements, milestone payments, and credit terms.

Does the contract have commercial substance — that is, the risk, timing, or amount of the entity's future cash flows is expected to change as a result of the contract?

IFRS 15.9(d)

A contract has commercial substance when it is expected to change the entity's future cash flows. This criterion prevents entities from recognising revenue on reciprocal exchanges of goods or services of similar nature and value (e.g., barter transactions between oil companies to fulfil demand in different locations). Most arm's-length commercial transactions have commercial substance.

Is it probable that the entity will collect the consideration to which it is entitled in exchange for the goods or services that will be transferred to the customer?

IFRS 15.9(e)

Assess the customer's ability and intention to pay. Consider the customer's credit history, financial condition, collateral or guarantees, and the entity's past experience with similar classes of customers. 'Probable' means more likely than not under IFRS. If the entity offers a price concession, assess collectability on the reduced (expected) amount, not the stated contract price (IFRS 15.9.A1).

Contract Combination Assessment

(Optional)

Are there multiple contracts with the same customer (or related parties) entered at or near the same time that should be combined?

Contract Modification Assessment

(Optional)

IFRS 15 Revenue Recognition for Healthcare & Pharmaceuticals

IFRS 15 in Healthcare & Pharmaceuticals presents unique challenges with complex licensing, milestone payments, and multi-element deals.

Licensing IP — Right-to-Use vs Right-to-Access: Under IFRS 15.B56-B63, a licence is right-to-access if: (a) the entity undertakes activities that significantly affect the IP, (b) customer rights are exposed to those effects, and (c) activities don't transfer separate goods/services. In pharma, ongoing clinical development often qualifies as right-to-access.

Performance Obligations: Licence + clinical trial services may be combined if development significantly modifies the compound (IFRS 15.29). Regulatory filing support may be distinct.

Variable Consideration: Milestones are estimated using most-likely-amount (binary outcomes). The constraint in IFRS 15.56-58 is critical — early-phase milestones are often fully constrained. Sales-based royalties follow the IFRS 15.B63 exception.

Common Audit Pitfalls:

Premature milestone recognition before constraint is overcome.
Treating right-to-access as right-to-use.
Not reassessing the constraint at each reporting date (IFRS 15.59).
Misapplying the royalty exception to non-licence predominant arrangements.

Typical Contract Structures

Licence agreements for IP bundled with clinical trial management, regulatory support, and manufacturing/supply. Consideration includes upfront payments, development milestones, regulatory milestones, and sales-based royalties. Collaboration agreements may include cost-sharing.

Common Performance Obligations in Healthcare & Pharmaceuticals

Drug compound licence Clinical trial services Regulatory filing support Manufacturing & supply Co-promotion services

Regulatory Context

FDA and EMA approval processes directly affect milestone timing and probability. Transfer pricing in cross-border licensing may also influence transaction price analysis.

Worked Example: Pharma Licensing with Clinical Trials and Regulatory Support

PharmaCo licences Compound X to BioPartner. Includes: exclusive licence, Phase III trials (3 years), and regulatory filing. Consideration: $20M upfront, $15M Phase III milestone, $25M regulatory milestone, 10-15% sales royalties. PharmaCo's ongoing activities significantly modify the compound.

Step 1: Identify the Contract

Single licensing and services agreement. All IFRS 15.9 criteria met. Simultaneous supply agreement combined per IFRS 15.17.

Step 2: Identify Performance Obligations

Two POs: (1) Combined licence + clinical trials (licence is right-to-access because ongoing activities significantly modify IP); (2) Regulatory filing support — distinct.

Step 3: Determine the Transaction Price

$20M upfront. Phase III milestone ($15M): fully constrained (30-40% success rate). Regulatory milestone ($25M): fully constrained. Royalties: IFRS 15.B63 exception applies. Transaction price = $20M.

Step 4: Allocate the Transaction Price

PO1 SSP: $50M (comparable deals). PO2 SSP: $5M. Allocation: PO1 = $18.2M; PO2 = $1.8M.

Step 5: Recognise Revenue

PO1: over-time using cost-to-cost over the 3-year trial period. PO2: over time as filings completed. Royalties: as underlying sales occur.

IFRS 15 Revenue Recognition Audit Toolkit — free PDF

Complete audit toolkit: IFRS 15 five-step decision flowchart poster, contract assessment template, PO identification checklist, SSP allocation worksheet, and industry-specific application notes.

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Frequently Asked Questions

How do I determine right-to-use vs right-to-access?

Apply IFRS 15.B58's three criteria. If the entity's activities significantly affect the IP, customer is exposed to those effects, and activities don't transfer separate goods/services — it's right-to-access (over-time). Otherwise, right-to-use (point-in-time).

When can milestones be included in the transaction price?

Only when highly probable a significant reversal won't occur (IFRS 15.56). Regulatory and development milestones are often constrained until achievement. Reassess each reporting date.

Do sales-based royalties follow general variable consideration rules?

No. IFRS 15.B63 provides a specific exception: recognise only when the later of (a) the sale occurs or (b) the related PO is satisfied. Only applies when the licence is predominant.

Should co-development be under IFRS 15?

Not necessarily. If both parties contribute IP and share risks as partners, the counterparty may not be a 'customer.' The arrangement may fall outside IFRS 15.

What are key pharma disclosures under IFRS 15?

Significant judgements on transaction price constraint, revenue disaggregation by type, methods for over-time recognition, and amounts recognised from previously constrained milestones.

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