Upon receiving a prepayment, an entity must recognise a contract liability for the obligation to provide future goods or services. Once those goods or services are provided, the liability is derecognised and revenue is recognised. Non-refundable prepayments grant customers rights to future goods or services, but customers might not use all these rights, known as breakage. If an entity expects to keep the breakage amount, it should recognise this as revenue in line with the customer’s pattern of exercising their rights. If no breakage is expected, revenue is recognised when it’s unlikely the customer will exercise any remaining rights.
Entities need to assess if they expect breakage by referring to rules on variable consideration estimates. Any consideration received linked to a customer’s unexercised rights that must be given to another party, like a government, should be recognised as a liability, not revenue (IFRS 15.B44-B47).
Example 52 accompanying IFRS 15 illustrates the application of these requirements.
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More about IFRS 15
See other pages relating to IFRS 15:
Identifying a Contract
Performance Obligations and Timing of Revenue Recognition
Contract Modifications
Transaction Price
Principal vs Agent, or Reporting Revenue Gross vs Net
Revenue from Licensing of Intellectual Property
Revenue from Customers’ Unexercised Rights (Breakage)
Customer Loyalty Programmes and Other Options for Additional Goods or Services
Warranties
Contract Assets and Contract Liabilities
Contract Costs
Disclosure