IFRS 15: Definition of a customer
Put simply, a customer is the party that purchases an entity’s goods or services. In many transactions, a customer is easily identifiable. However, where transactions involve multiple parties, it may be less clear which counterparties are customers of the selling company. For some arrangements, multiple parties could all be considered customers of the seller. However, for other arrangements, only some of the parties involved are considered as customers. Identification of performance obligations in a contract can also have a significant effect on the determination of which party is the entity’s customer.
Example — Identification of a customer
Co X provides internet-based advertising services to companies. As part of those services, X purchases banner-space on various websites from a selection of publishers. For certain contracts, X provides a sophisticated service of matching the ad placement with the pre-identified criteria of the advertising party (i.e., the customer). Additionally, X pre-purchases the banner-space from the publishers before it finds advertisers for that space. Assume that X appropriately concludes it is acting as the principal in these contracts. Accordingly, X identifies that its customer is the advertiser to whom it is providing services.
In other contracts, X simply matches advertisers with the publishers in its portfolio, but does not provide any sophisticated ad-targeting services or purchase the advertising space. Assume that X appropriately concludes it is acting as the agent in these contracts. Therefore, X identifies that its customer is the publisher to whom it is providing services.
In several transactions, a counterparty may not always be a ‘customer’ of the entity. Instead, the counterparty may be a collaborator or partner that shares in the risks and benefits of developing a product to be marketed. For example, an arrangement wherein one party is responsible to perform research and development, while another party is responsible for marketing/commercialisation activities would not result into a vendor-customer relationship. Such agreements are common in the pharmaceutical, bio-technology, oil and gas, real estate and health care industries.
However, depending on the facts and circumstances, these arrangements may also contain a vendor-customer relationship component. Such contracts can still be within the scope of IFRS 15, at least partially, if the collaborator or partner meets the definition of a customer for some, or all, aspects of the arrangement.
The parties to such arrangements need to consider all of the facts and circumstances to determine whether a vendor-customer relationship exists that is subject to the standard.
Interaction with other standards
Revenue from transactions or events that do not arise from a contract with a customer is not in the scope of IFRS 15 and should continue to be recognised in accordance with the other standards. Such transactions may include dividends, non-exchange transactions such as donations or contributions and change in the fair value of biological assets and the inventory of broker-traders.
Entities may also enter into transactions that are partially within the scope of IFRS 15 and partially within the scope of other standards, say, revenue transactions with an embedded lease or an embedded derivative. If the other standards specifies how to separate and/or initially measure one or more parts of the contract, then an entity will first apply the separation and/or measurement requirements in those standards. If the other standard does not specify how to separate and/or initially measure one or more parts of the contract, then the entity will apply IFRS 15 to separate and/or initially measure the part (or parts) of the contract