IFRS 15 - Revenue I

Illustration 1

Fresco sells an IT system to Dining on the first day of a new accounting period.

The package includes hardware delivered immediately and a contract for support over the
next 3 years with that support worth $50,000 p/a.
The total cost of the contract is paid up front and is $300,000.

How much should Fresco recognise as revenue from the transaction in the current year?

Solution
Step 1 - Identify the Contract

Fresco has agreed to supply Dining with goods and services.

Step 2 - Identify the performance obligations

Fresco has promised to do two things:

- Supply the hardware

- Supply the support
Step 3 - Determine the transaction price

The total price is $300,000

Step 4 - Allocate price to obligations

Based on the individual prices the support is worth (50,000 x 3) $150,000 leaving the rest
of the $300,000 to be for the hardware (300,000 - 150,000) = $150,000.
Step 5 - Recognise the revenue when (or as) the performance obligation is satisfied

The supply of the hardware happens immediately so the revenue for it should be
recognised now.
The support is provided over time so should be recognised on that basis i.e. $50,000 per
year over the 3 years.
Illustration 2
Jumbo has agreed to sell a piece of complex machinery with two years free servicing to
Jet for $441,000. The machine usually sells for $420,000.
The servicing will cost Jumbo $50,000 to provide and they generally include a mark-up of
40% when setting the price to charge customers for servicing.
The two year servicing contract is not available as a stand-alone product.

How should the transaction price be allocated to the machine and servicing?

Solution
We can see that the machine generally sells for $420,000 but there is no comparable price
for the servicing contract.
Based on the cost + mark-up the servicing would be worth (50,000 x 140%) $70,000.

Therefore the total value of the performance obligations is (420,000 + 70,000) $490,000.

The fact that Jumbo is selling these for $441,000 would imply that a 10% discount has
been applied.
This should be allocated proportionally to the machine and servicing so the amounts
recognised should be:
Goods (420,000 x 90%) $378,000
Services (70,000 x 90%) $63,000 (Recognised over 2 years)

Total (378,000 + 63,000) $441,000

Illustration 3

Jumbo has agreed to sell a piece of complex machinery with two years free servicing to
Jet for $700,000. The machine usually sells for $600,000 although a 5% discount is often
applied to machines of this specification.
The servicing will cost Jumbo $100,000 to provide and they generally include a mark-up of
30% when setting the price to charge customers for servicing.
The two year servicing contract is not available as a stand-alone product but Jumbo has a
policy of not offering discounts on servicing contracts.
How should the transaction price be allocated to the machine and servicing?

Solution
We can see that the machine generally sells for $600,000 but there is no comparable price
for the servicing contract.
Based on the cost + mark-up the servicing would be worth (100,000 x 130%) $130,000.

Therefore the total value of the performance obligations is (600,000 + 130,000) $730,000.

The fact that Jumbo is selling these for $700,000 would imply that a $30,000 discount has
been applied.
However rather than be allocated proportionally to the machine and servicing the discount
should be applied to the machine only because:

- The discount amounts to 5% of the $600,000 for the machine which is the standard
discount for this item given generally.
- There is not generally a discount on servicing.
…so the amounts recognised should be:

Goods (600,000 x 95%) $570,000

Services (130,000 x 100%) $130,000 (Recognised over 2 years)
Total (570,000 + 130,000) $700,000
Illustration 4

Placo obtained a contract to sell Davo $3m worth of services over a 3 year period. Specific
costs that would not have been incurred otherwise amounted to $120,000.
How should the revenue and costs be recognised?

Solution
The revenue should be recognised in line with the contract terms over 3 years so ($3m / 3)
$1m per year.
The costs should be capitalised as they are specific to the contract so…

DR Asset (Costs) $120,000

CR Cash $120,000
…then recognised in line with the revenue over 3 years

DR Profit/Loss (120,000 / 3) $40,000

CR Asset (Costs) $40,000

Multiple Choice Questions

1. LP received an order to supply 10,000 units of product A every month for 2 years.
The customer had negotiated a low price of $200 per 1,000 units and agreed to pay
$12,000 in advance every 6 months.
The customer made the first payment on 1 July 2012 and LP supplied the goods each
month from 1 July 2012.
LP’s year end is 30 September.

In addition to recording the cash received, how should LP record this order, in its financial
statements for the year ended 30 September 2012, in accordance with IFRS 15?
A Include $6,000 in revenue for the year and create a trade receivable for $36,000
B Include $6,000 in revenue for the year and create a current liability for $6,000
C Include $12,000 in revenue for the year and create a trade receivable for $36,000
D Include $12,000 in revenue for the year but do not create a trade receivable or current
liability

Answer B
 2. CF, a contract cleaning entity, signed a contract to provide 12 months cleaning of an
office block. The contract for $12,000 commenced on 1 June 2012. The terms of the
contract provided for payment six monthly in advance on 1 June and 1 December
2012. CF received $6,000 and started work on 1 June 2012.
How should CF account for the contract in its financial statements for the year ended 30
June 2012?
A Debit cash $6,000 and credit revenue $6,000
B Debit cash $6,000, credit revenue $1,000 and credit deferred income $5,000
C Debit cash $6,000, debit receivables $6,000 and credit revenue $12,000
D Debit cash $6,000 and credit deferred income $6,000

Answer B

3. On 28 September 2011, GY received an order from a new customer, ZZ, for

products with a sales value of $750,000. ZZ enclosed a deposit with the order of
$75,000.
On 30 September 2011, GY had not completed the credit referencing of ZZ and had not
despatched any goods.
Which ONE of the following will correctly record this transaction in GY’s financial
statements for the year ended 30 September 2011 according to IFRS 15:
A Debit Cash $75,000; Credit Revenue $75,000
B Debit Cash $75,000; Debit Trade Receivables $675,000; Credit Revenue $750,000
C Debit Cash $75,000; Credit Deferred Revenue $75,000
D Debit Trade Receivables $750,000; Credit Revenue $750,000

Answer C

4. OC signed a contract to provide office cleaning services for an entity for a period
of one year from 1 October 2009 for a fee of $500 per month.
The contract required the entity to make one payment to OC covering all twelve months’
service in advance. The contract cost to OC was estimated at $300 per month for wages,
materials and administration costs.
OC received $6,000 on 1 October 2009.

How much profit/loss should OC recognise in its statement of comprehensive income for
the year ended 31 March 2010?
A. $600 loss
B. $1,200 profit
C. $2,400 profit
D. $4,200 profit

Answer B
 IFRS 15 - Revenue II
Illustration 1

Badger Co. manufactures smart phones and sells them through a contractual relationship
with Bodger Co. Badger provides Bodger with the phones for a price of $150 payable once
the phone is sold on to a customer.
Bodger has also agreed to a clause in the contract of sale that they cannot sell the phone
for less than $200.
How should the goods and revenue be treated in the financial statements of Badger and
Bodger?

Solution
When the goods are provided to Bodger initially they still remain the property of Badger as
they have retained control of them by stipulating the price at which they should be soldr
They will stay as part of Badger’s inventory and no revenue recognised until it is sold to an
end customer.
Once the goods are sold to the customer for $ 200 Bodger should only recognise the
commission they have received on selling the goods i.e. $50.
The other $150 is paid to Badger and should be recognised as their revenue on the sale.

Illustration 2

Johnston enters into a contract to sell a piece of plant to Paints on 01 Jan 20X6 and delivers
the plant on that date for Paints to begin to use. The price agreed in the contract is $400,000
to be paid on 01 Jan 20X8.
The market rate of interest available to this customer is 10%.

How should this transaction be accounted for in the accounts of Johnston?

Solution

Discount the Revenue and recognise a receivable on the discounted amount

DR Receivable ($400,000 x 1 / 1.12) 330,578

CR Revenue 330,578

Unwind the discount over the two years

Year 1
DR Receivable (330,578 x 10%) 33,058
CR Finance Income 33,058
Year 2
DR Receivable ((330,578 + 33,058) x 10%) 36,364
CR Finance Income 36,364

Final Receivable (330,578 + 33,058 + 36,364) 400,000

Illustration 3

Gerry has just completed a contract to supply Roses with 200 pineapple trees over the
next 2 years for a set price of $40,000.
As part of the contract Gerry agreed to pay $2,000 to increase the height of the doors at
Roses in order to get the trees into the store.
How much revenue should be recognised in year 1 of the contract?

Solution
The consideration paid to Roses should be treated as a reduction in the transaction price.

The price therefore will be reduced to (40,000 - 2,000) $38,000.

This will be recognised over the term of the contract so in year 1 ($38,000 / 2) $19,000 will
be recognised.

Illustration 4
Avon has sold goods to 1000 customers at a price of $400 each. The goods are delivered
and control passed to the customer immediately and they are paid for up front. Each good
is currently in inventory at a value of $200.
The customers have the option to return the goods to Avon if they are not sold in the next
60 days for a full refund at which stage Avon will be able to sell them on at a profit.
Based on prior experience Avon estimates that 95% of the goods will not be returned.

Solution
Based on the amount of expected revenue Avon should recognise ((1000 x $400) x 95%)
$380,000.
A refund liability for the rest ((1000 x $400) x 5%) $20,000 should be created.
The entries for this will be:

DR Cash $400,000
CR Revenue $380,000
CR Liability $20,000
The inventory will have been derecognised when transferred to customers but an asset
should be created for the goods expected to be returned
DR Asset ((1000 x $200) x 5%) $10,000
CR COS $10,000