Example 28—Determining the discount rate

An entity enters into a contract with a customer to sell equipment. Control of the
equipment transfers to the customer when the contract is signed. The price stated in the
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contract is CU1 million plus a five per cent contractual rate of interest, payable in 60
monthly instalments of CU18,871.

Case A—Contractual discount rate reflects the rate in a separate financing transaction

In evaluating the discount rate in the contract that contains a significant financing
component, the entity observes that the five per cent contractual rate of interest reflects the
IE144 rate that would be used in a separate financing transaction between the entity and its
customer at contract inception (ie the contractual rate of interest of five per cent reflects
the credit characteristics of the customer).
The market terms of the financing mean that the cash selling price of the equipment is
CU1 million. This amount is recognised as revenue and as a loan receivable when control
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of the equipment transfers to the customer. The entity accounts for the receivable in
accordance with IFRS 9.
Case B—Contractual discount rate does not reflect the rate in a separate financing
transaction
In evaluating the discount rate in the contract that contains a significant financing
component, the entity observes that the five per cent contractual rate of interest is
significantly lower than the 12 per cent interest rate that would be used in a separate
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financing transaction between the entity and its customer at contract inception (ie the
contractual rate of interest of five per cent does not reflect the credit characteristics of the
customer). This suggests that the cash selling price is less than CU1 million.
In accordance with paragraph 64 of IFRS 15, the entity determines the transaction price by
adjusting the promised amount of consideration to reflect the contractual payments using
the 12 per cent interest rate that reflects the credit characteristics of the customer.
IE147 Consequently, the entity determines that the transaction price is CU848,357 (60 monthly
payments of CU18,871 discounted at 12 per cent). The entity recognises revenue and a
loan receivable for that amount. The entity accounts for the loan receivable in accordance
with IFRS 9.

Example 29—Advance payment and assessment of discount rate

An entity enters into a contract with a customer to sell an asset. Control of the asset will
transfer to the customer in two years (ie the performance obligation will be satisfied at a
point in time). The contract includes two alternative payment options: payment of
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CU5,000 in two years when the customer obtains control of the asset or payment of
CU4,000 when the contract is signed. The customer elects to pay CU4,000 when the
contract is signed.
The entity concludes that the contract contains a significant financing component because
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transfers the asset to the customer, as well as the prevailing interest rates in the market.
 The interest rate implicit in the transaction is 11.8 per cent, which is the interest rate
necessary to make the two alternative payment options economically equivalent.
IE150 However, the entity determines that, in accordance with paragraph 64 of IFRS 15, the rate
that should be used in adjusting the promised consideration is six per cent, which is the
entity’s incremental borrowing rate.
The following journal entries illustrate how the entity would account for the significant
financing component:
recognise a contract liability for the CU4,000 payment received at contract
inception:
(a) Cash CU4,000
Contract liability CU4,000
during the two years from contract inception until the transfer of the asset, the
IE151 entity adjusts the promised amount of consideration (in accordance with paragraph
65 of IFRS 15) and accretes the contract liability by recognising interest on
(b) CU4,000 at six per cent for two years:
Interest expense CU4946
Contract liability CU494
recognise revenue for the transfer of the asset:
(c) Contract liability CU4,494
Revenue CU4,494

Example 30—Advance payment

An entity, a technology product manufacturer, enters into a contract with a customer to

provide global telephone technology support and repair coverage for three years along
with its technology product. The customer purchases this support service at the time of
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buying the product. Consideration for the service is an additional CU300. Customers
electing to buy this service must pay for it upfront (ie a monthly payment option is not
available).
To determine whether there is a significant financing component in the contract, the entity
considers the nature of the service being offered and the purpose of the payment terms.
The entity charges a single upfront amount, not with the primary purpose of obtaining
financing from the customer but, instead, to maximise profitability, taking into
consideration the risks associated with providing the service. Specifically, if customers
could pay monthly, they would be less likely to renew and the population of customers
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that continue to use the support service in the later years may become smaller and less
diverse over time (ie customers that choose to renew historically are those that make
greater use of the service, thereby increasing the entity’s costs). In addition, customers
tend to use services more if they pay monthly rather than making an upfront payment.
Finally, the entity would incur higher administration costs such as the costs related to
administering renewals and collection of monthly payments.
In assessing the requirements in paragraph 62(c) of IFRS 15, the entity determines that the
payment terms were structured primarily for reasons other than the provision of finance to
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the entity. The entity charges a single upfront amount for the services because other
payment terms (such as a monthly payment plan) would affect the nature of the risks
assumed by the entity to provide the service and may make it uneconomical to provide the
service. As a result of its analysis, the entity concludes that there is not a significant
financing component.