IFRS 15 Revenue Recognition for Manufacturing

IFRS 15 Revenue Recognition for Manufacturing

IFRS 15 Revenue Recognition in Manufacturing presents several complex judgement areas that auditors and preparers must navigate carefully. The manufacturing sector frequently features multi-element arrangements combining equipment, installation, warranties, training, and ongoing spare-parts supply — each of which may represent a separate performance obligation under the five-step model.

Step 1 — Identifying the Contract: Manufacturing contracts range from simple one-off purchase orders to multi-year master supply agreements with call-off schedules. Per IFRS 15.10, a contract exists when it is approved, each party's rights are identifiable, payment terms are identified, the contract has commercial substance, and collectability is probable. For long-term supply agreements, entities must determine whether each purchase order is a separate contract or whether the master agreement itself constitutes the contract (IFRS 15.17).

Step 2 — Identifying Performance Obligations: A key judgement in manufacturing is whether installation and commissioning are distinct from the equipment itself. Under IFRS 15.27, a good or service is distinct if the customer can benefit from it on its own (or with readily available resources) and the promise is separately identifiable from other promises. For standard equipment requiring routine installation that could be performed by third parties, the equipment and installation are typically separate performance obligations. For highly specialised or bespoke machinery where the manufacturer's installation expertise is integral, they may form a single performance obligation (IFRS 15.29).

Warranties — Assurance vs Service-Type: IFRS 15.B28-B33 requires entities to distinguish between assurance-type warranties (accounted for under IAS 37 as a cost provision) and service-type warranties (a separate performance obligation under IFRS 15). If the warranty provides the customer with a service beyond assurance that the product complies with agreed-upon specifications — for example, extended coverage beyond the statutory period or coverage for wear and tear — it is a service-type warranty.

Bill-and-Hold Arrangements: IFRS 15.B79-B82 sets out criteria that must all be met for revenue recognition in a bill-and-hold arrangement: (a) the reason for the arrangement is substantive; (b) the product is identified separately as belonging to the customer; (c) the product is currently ready for physical transfer; and (d) the entity cannot use the product or direct it to another customer.

Step 3 — Variable Consideration: Volume rebates, retrospective discounts, penalties for late delivery, and bonus payments for early completion are pervasive in manufacturing. IFRS 15.50-54 requires the entity to estimate variable consideration using either the expected-value method or the most-likely-amount method. The constraint in IFRS 15.56 requires that variable consideration is included only to the extent it is highly probable that a significant reversal will not occur.

Step 5 — Over-Time vs Point-in-Time: Standard manufactured goods are typically recognised at a point in time upon transfer of control. However, highly customised or bespoke manufacturing may qualify for over-time recognition under IFRS 15.35(c) — the asset has no alternative use to the entity and there is an enforceable right to payment for performance completed to date.

Common Audit Pitfalls:

• Failing to separate service-type warranties from assurance warranties.
• Not reassessing variable consideration estimates (rebates, penalties) at each reporting date as required by IFRS 15.59.
• Insufficient documentation for bill-and-hold arrangements.
• Applying over-time recognition to standard goods without meeting the strict 'no alternative use' and 'right to payment' criteria.

Typical Contract Structures

Manufacturing contracts typically involve a master supply agreement or a project-specific purchase order. They may bundle equipment delivery with installation, commissioning, training, spare parts supply, and extended warranty. Pricing structures often include list prices subject to volume-based rebates, early-payment discounts, and penalty or bonus clauses linked to delivery schedules or quality benchmarks. Bill-and-hold arrangements are common where the customer requests manufacture but delays physical delivery.

Common Performance Obligations in Manufacturing

Regulatory Context

Manufacturers in regulated industries (defence, aerospace, pharmaceuticals) should consider whether regulatory approval milestones affect transfer of control. Export controls may also restrict when control passes to overseas customers.

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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