Internal only

(January 2019)

IFRS 15 Revenue from Contracts with Customers: Shipping terms decision tree
Background
In accordance with IFRS 15 Revenue from Contracts with Customers, an entity recognises revenue only when it satisfies an
identified performance obligation by transferring a promised good or service to a customer. A good or service is considered to
be transferred when the customer obtains control. IFRS 15 states that “control of an asset refers to the ability to direct the use
of and obtain substantially all of the remaining benefits from the asset”.1 Control also means the ability to prevent others from
directing the use of, and receiving the benefit from, a good or service.
Determining the point in time when control over shipped goods transfers to the customer may involve the exercise of significant
judgement and entities must consider all relevant facts and circumstances. To assist an entity in determining when control
transfers, IFRS 15.38 provides indicators of the transfer of control, which include, but are not limited to, the following: (a) the
entity has a present right to payment for the asset; (b) the customer has legal title to the asset; (c) the entity has transferred
physical possession of the asset; (d) the customer has the significant risks and rewards of ownership of the asset; and (e) the
customer has accepted the asset. None of the indicators of control in IFRS 15.38 are meant to individually determine whether
the customer has gained control of the good or service.
While shipping terms may provide information about when legal title to a good transfers to the customer, they are not
determinative when evaluating the point in time at which the customer obtains control of the promised asset. Entities must
consider all relevant facts and circumstances to determine whether control has transferred. For example, when the shipping
terms are free on board (FOB), entities need to carefully consider whether the customer or the entity has the ability to control
the goods during the shipment period. Furthermore, if the entity has the legal or constructive obligation to replace goods that
are lost or damaged in transit, it needs to evaluate whether that obligation influences the customer’s ability to direct the use,
and obtain substantially all of the remaining benefits from the goods. A selling entity’s historical practices also need to be
considered when evaluating whether control of a good has transferred to a customer because the entity’s practices may
override the contractual terms of the arrangement.
Contractually specified shipping terms may vary depending on factors such as the mode of transport (e.g., by sea, inland
waterway, road, air) and whether the goods are shipped locally or internationally. A selling entity may utilise International
Commerce Terms (Incoterms) to clarify when delivery occurs. Incoterms are a series of pre-defined commercial terms published
by the International Chamber of Commerce (ICC) relating to international commercial law. For example, the Incoterm ‘EXW’ or
‘Ex Works’ means that the selling entity ‘delivers’ when it places the goods at the disposal of the customer, either at the seller’s
premises or at another named location (e.g., factory, warehouse). The selling entity is not required to load the goods on any
collecting vehicle, nor does it need to clear the goods for export (if applicable). The Incoterm FOB means “the seller delivers the
goods on board the vessel nominated by the buyer at the named port of shipment or procures the goods already so delivered.
The risk of loss of or damage to the goods passes when the goods are on board the vessel, and the buyer bears all costs from
that moment onwards”.2

Purpose of this decision tree

The decision tree below is intended to guide the reader through considerations when assessing the point in time at which control
of the shipped goods transfers to the customer and the interrelationship with identifying performance obligations. It is important
to note that the contractual terms in a contract can override a stipulated shipping term. Furthermore, an entity’s customary
business practices also need to be considered when evaluating whether control of a good has transferred to a customer because
the entity’s practices may override the contractual terms of the arrangement.
Incoterms are driven by the notion of risks and rewards of ownership, including questions such as which party is responsible for
collection and transportation of the goods, which party bears the costs of said transportation (including other costs such as
insurance) and also who is responsible for the goods during the entire transportation process. While not determinative of when
the risks and rewards of ownership transfer, they are a useful starting point. However, it is important to remember that, under
IFRS 15, the transfer of risks and rewards of ownership to the customer only constitutes an indicator that control may have
transferred. Therefore, other indicators will need to be considered.
Also note that Incoterms are not used in all jurisdictions. Where Incoterms are not used, the decision tree may not be applicable,
but it might be helpful to consider when similar shipping terms have been stipulated in the contract.

1
IFRS 15.33.
2
See the ICC website for further information.

Internal only IFRS 15: Shipping terms decision tree (January 2019)
 Internal only
(January 2019)
Shipping terms direct the parties on obligations (including payment for e.g. shipping
What are the applicable shipping terms? and insurance) and do not dictate when control* over goods passes, although it may
provide information about when legal title transfers.

EXW FCA FAS FOB CPT CIP CFR CIF DAT DAP DDP/DTP

Likely transfer of legal title and Likely transfer of legal title and Likely transfer of legal title Likely transfer of legal title and Likely transfer of legal title and
risks and rewards of ownership: at risks and rewards of ownership: and risks and rewards of risks and rewards of ownership: risks and rewards of ownership:
the seller’s premises at the port or over the ships rail ownership: on the water (if at the destination port (if at the customer’s premises
(if mode of transport is by sea) mode of transport is by sea) transport mode is by sea)

When does control of the goods transfer to the customer? Control of an asset refers to the ability to direct the use of, and obtain substantially all of the remaining benefits from, the asset. Control includes the ability to prevent
other entities from directing the use of, and obtaining the benefits from, an asset. To assist an entity in determining when control transfers, IFRS 15.38 provides indicators, which include, but are not limited to, the following:
· Right to payment (differs between contracts, including % of transaction price, deposits can be driven by circumstances other than control, is deposit refundable)
· Legal title (can possibly be protective in nature)
o Can the customer redirect the goods whilst being transported? (differs between contracts, also consider customary practices in jurisdiction)
· Physical possession (only once delivered)
· Significant risks and rewards of ownership (upon loading, possibly more relevant indicator)
o In a loss event, who bears shortfall when insurance pays out? (differs between contracts, indicator not determinative)
· Customer acceptance (only once delivered)

Control over goods transfers at Control over goods transfers Control over goods transfers Control over goods transfers at Control over goods transfers at
the sellers premises on/before loading while on the water the destination port the customer’s premises

Any shipping services provided up to the point that control of the goods transfers are part of the performance obligation to transfer the goods to the customer**

Does the entity provide shipping services after control has transferred?

No Yes
Transfer of goods to customer is the only performance obligation. The goods and the shipping services are separately identifiable: two performance obligations. Allocate the transaction price between the
Recognise revenue when control of the goods is transferred two performance obligations. For goods, recognise allocated consideration when control transfers

With regards to shipping service ***, is entity acting as principal or agent (i.e. Transport company => Entity => Customer)? If it’s not clear whether the entity controls the shipping
service before it is transferred to the customer, consider the principal indicators in IFRS 15.B37:
· Entity is primarily responsible for fulfilling the (shipping) promise (e.g., Entity has discretion in choosing transport company)
· Entity has inventory risk before transfer (e.g., entity obliged to compensate transport service provider regardless of customer acceptance)
· Entity has discretion in establishing price

Principal Agent
Performance obligation is to provide shipping services. Revenue recognised as shipping services are Performance obligation is to arrange for someone else to provide shipping services. Revenue
provided (meets IFRS 15.35(a)) and costs are presented as part of cost of sales/fulfilment costs. recognised when shipping is arranged in the amount of commission the entity expects to be entitled to.

* Control of an asset refers to the ability to direct the use of, and obtain substantially all of the remaining benefits from the asset (IFRS 15.33). This is generally when the customer obtains control, rather than when the seller loses control.
**Goods sold and shipping service are not separately identifiable, as the entity is using the goods and shipping service as inputs to produce a combined output as a single PO. Revenue recognised at destination port / delivery at customer premises.
*** If the promised goods or services include Insurance, this will also need to be assessed.
Internal only IFRS 15: Shipping terms decision tree (January 2019)
APPENDIX
Extract from website of ICC1
The Incoterms® rules are an internationally recognised standard and are used
worldwide in international and domestic contracts for the sale of goods. The rules
have been developed and maintained by experts and practitioners brought
together by ICC. They have become the standard in international business rules
setting. Launched in mid-September 2010, Incoterms® 2010 came into effect on
1 January 2011. The trade terms help traders avoid costly misunderstandings by
clarifying the tasks, costs and risks involved in the delivery of goods from sellers to
buyers.
The Incoterms® rules have become an essential part of the daily language of
trade. They have been incorporated in contracts for the sale of goods worldwide
and provide rules and guidance to importers, exporters, lawyers, transporters,
insurers and students of international trade.
Below are short descriptions of the 11 rules from the Incoterms® 2010 edition.
These should be read in the context of the full official text of the rules which can be
obtained from the ICC Store.
· RULES FOR ANY MODE OR MODES OF TRANSPORT
EXW - Ex Works
“Ex Works” means that the seller delivers when it places the goods at the
disposal of the buyer at the seller’s premises or at another named place
(i.e.,works, factory, warehouse, etc.). The seller does not need to load the
goods on any collecting vehicle, nor does it need to clear the goods for export,
where such clearance is applicable.

Illustration from ONE Integrated Logistics Limited

1
For further information please refer to: www.iccwbo.org/resources-for-business/incoterms-rules/

Internal only IFRS 15: Shipping term decision tree (January 2019)
 FCA - Free Carrier
“Free Carrier” means that the seller delivers the goods to the carrier or another
person nominated by the buyer at the seller’s premises or another named
place. The parties are well advised to specify as clearly as possible the point
within the named place of delivery, as the risk passes to the buyer at that point.

Illustration from ONE Integrated Logistics Limited

CPT - Carriage Paid To

“Carriage Paid To” means that the seller delivers the goods to the carrier or
another person nominated by the seller at an agreed place (if any such place is
agreed between parties) and that the seller must contract for and pay the costs
of carriage necessary to bring the goods to the named place of destination.

Illustration from ONE Integrated Logistics Limited

CIP - Carriage And Insurance Paid To

“Carriage and Insurance Paid to” means that the seller delivers the goods to the
carrier or another person nominated by the seller at an agreed place (if any
such place is agreed between parties) and that the seller must contract for and
pay the costs of carriage necessary to bring the goods to the named place of
destination.
‘The seller also contracts for insurance cover against the buyer’s risk of loss of
or damage to the goods during the carriage. The buyer should note that under
CIP the seller is required to obtain insurance only on minimum cover. Should
the buyer wish to have more insurance protection, it will need either to agree
as much expressly with the seller or to make its own extra insurance
arrangements.’

Internal only IFRS 15: Shipping term decision tree (January 2019)
 Illustration from ONE Integrated Logistics Limited

DAT - Delivered At Terminal

“Delivered at Terminal” means that the seller delivers when the goods, once
unloaded from the arriving means of transport, are placed at the disposal of the
buyer at a named terminal at the named port or place of destination.
“Terminal” includes a place, whether covered or not, such as a quay,
warehouse, container yard or road, rail or air cargo terminal. The seller bears
all risks involved in bringing the goods to and unloading them at the terminal at
the named port or place of destination.

Illustration from ONE Integrated Logistics Limited

DAP - Delivered At Place

“Delivered at Place” means that the seller delivers when the goods are placed
at the disposal of the buyer on the arriving means of transport ready for
unloading at the named place of destination. The seller bears all risks involved
in bringing the goods to the named place.

Illustration from ONE Integrated Logistics Limited

Internal only IFRS 15: Shipping term decision tree (January 2019)
 DDP - Delivered Duty Paid
“Delivered Duty Paid” means that the seller delivers the goods when the goods
are placed at the disposal of the buyer, cleared for import on the arriving
means of transport ready for unloading at the named place of destination. The
seller bears all the costs and risks involved in bringing the goods to the place of
destination and has an obligation to clear the goods not only for export but also
for import, to pay any duty for both export and import and to carry out all
customs formalities.

Illustration from ONE Integrated Logistics Limited

· RULES FOR SEA AND INLAND WATERWAY TRANSPORT

FAS - Free Alongside Ship
“Free Alongside Ship” means that the seller delivers when the goods are placed
alongside the vessel (e.g., on a quay or a barge) nominated by the buyer at the
named port of shipment. The risk of loss of or damage to the goods passes
when the goods are alongside the ship, and the buyer bears all costs from that
moment onwards.

Illustration from ONE Integrated Logistics Limited

FOB - Free On Board

“Free On Board” means that the seller delivers the goods on board the vessel
nominated by the buyer at the named port of shipment or procures the goods
already so delivered. The risk of loss of or damage to the goods passes when
the goods are on board the vessel, and the buyer bears all costs from that
moment onwards.

Internal only IFRS 15: Shipping term decision tree (January 2019)
 Illustration from ONE Integrated Logistics Limited

CFR - Cost and Freight

“Cost and Freight” means that the seller delivers the goods on board the vessel
or procures the goods already so delivered. The risk of loss of or damage to the
goods passes when the goods are on board the vessel. the seller must contract
for and pay the costs and freight necessary to bring the goods to the named
port of destination.

Illustration from ONE Integrated Logistics Limited

CIF - Cost, Insurance and Freight

“Cost, Insurance and Freight” means that the seller delivers the goods on board
the vessel or procures the goods already so delivered. The risk of loss of or
damage to the goods passes when the goods are on board the vessel. The seller
must contract for and pay the costs and freight necessary to bring the goods to
the named port of destination.
‘The seller also contracts for insurance cover against the buyer’s risk of loss of
or damage to the goods during the carriage. The buyer should note that under
CIF the seller is required to obtain insurance only on minimum cover. Should
the buyer wish to have more insurance protection, it will need either to agree
as much expressly with the seller or to make its own extra insurance
arrangements.’

Illustration from ONE Integrated Logistics Limited

Internal only IFRS 15: Shipping term decision tree (January 2019)