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IFRS 15 - Solutions (MQ)

The document outlines the application of IFRS 15, detailing the five-step model for revenue recognition from contracts with customers, including identifying contracts, performance obligations, transaction prices, and revenue recognition timing. It also discusses contract modifications, distinguishing between separate contracts and cumulative catch-up adjustments, and highlights the importance of explicit and implicit performance obligations in revenue recognition. Various scenarios illustrate how to allocate revenue and recognize it based on performance obligations and contract modifications.

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8 views4 pages

IFRS 15 - Solutions (MQ)

The document outlines the application of IFRS 15, detailing the five-step model for revenue recognition from contracts with customers, including identifying contracts, performance obligations, transaction prices, and revenue recognition timing. It also discusses contract modifications, distinguishing between separate contracts and cumulative catch-up adjustments, and highlights the importance of explicit and implicit performance obligations in revenue recognition. Various scenarios illustrate how to allocate revenue and recognize it based on performance obligations and contract modifications.

Uploaded by

sa3182712
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as XLSX, PDF, TXT or read online on Scribd
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IFRS 15 - REVENUE FROM CONTRACTS WITH CUSTOMERS - SOLUTIONS

Question 1. [5 Step model] [IFRS Kit – IFRS Box]

Step 1: Identify the contract with a customer

= Written contract between Johnny and ABC Corp.

Step 2: Identify the performance obligations

PO #1: Network services (monthly plan)


PO #2: Handset

Step 3: Determine the transaction price

Monthly fee: 100.00


Months of subscription: 12.00
Total transaction price: 1,200.00

Step 4: Allocate the transaction price to the performance obligations

Performance Stand-alone Allocated


Revenue Billing
obligations selling price transaction price
Network services 960.00 914.29 => 76.20/month
Handset 300.00 285.71 285.71
Total 1,260.00 1,200.00 =>100 / month

Step 5: Recognize revenue when (or as) an entity satisfies a performance obligation

PO #1: Network services => Over time, as monthly network services are provided
PO #2: Handset => At the point of time, when handset is delivered to Johnny

Journal entries:

Revenue from handset:

1 July 20X1 Contract asset 285.71


Revenue from sale of goods 285.71

Invoice - month 1:

31 July 20X1 Trade receivable / Cash 100.00


Contract asset [285.71 / 12] 23.80
Revenue from services 76.20

Total revenue till 31/Dec/20X1:


Revenue from handset 285.71
Revenue from network services (6 months) [76.2 x 6] 457.20
Total: 742.91
IFRS 15 - REVENUE FROM CONTRACTS WITH CUSTOMERS - SOLUTIONS

Question 3. [Contract modification] [IFRS Kit – IFRS Box]

SCENARIO - 1

1.1 Assessing the type of contract modification

As the additional 200 computers are distinct and the consideration for additional 200 computers reflects
their stand-alone price, Contract modification is separate contract.

1.2 Amount of revenue

Revenue from the original contract (contract #1):


Products delivered until 31 December 20X1 300
Originally agreed price: 2,000 Rs/computer
Total revenue from contract #1: 600,000 Rs

Revenue from the additional contract (contract #2):


Products delivered until 31 December 20X1 100
Agreed price: 1,940 Rs/computer
Total revenue from contract #2: 194,000 Rs/computer

Total revenue in 20X1 from contracts #1 and #2: 794,000 Rs

31 Dec 20X1 Contract asset / Trade receivable 794,000.00


Revenue from sale of goods 794,000.00

SCENARIO - 2

2.1 Assessing the type of contract modification

Partial credit of Rs. 240 per computer on 50 computers initially delivered would require "catch-up
adjustment", as the goods are not distinct.

Futher, the additional 200 computers are distinct but the consideration for additional 200 computers does
not reflect their stand-alone price, Contract modification is not a separate contract. There would be
termination of old contract and creation of new contract.

2.2 Contract modification - Cumulative Catchup Adjustment

a) Revenue from the original contract - before modification:


Products delivered before contract modification 100
Originally agreed price: 2,000 Rs/computer
Total revenue from contract #1: 200,000 Rs

b) Reduction of revenue for initial 50 computers ("catch-up")


N. of products with minor defects (initial delivery) 50
Reduction of price per computer 240 Rs/computer
Total adjustment of revenue for initial delivery 12,000 Rs
Total revenue before contract modification 188,000

31 Dec 20X1 Contract asset / Trade receivable 188,000.00


Revenue from sale of goods 188,000.00

2.2 Contract modification - Terminate the old contract and create a new contract

a) Total n. of products after modification:


Products from original contract not yet delivered before modification 200
Products agreed in modification 200
Total n. of products to be delivered after modification 400 a

b) Total consideration to allocate


Consideration from original contract not yet recognized 400,000
Consideration from contract modification (without credit for defective
products) [200 x 1,400] 280,000
Total 680,000 b

c) Total revenue after modification until 31 December 20X1:


Allocated price per 1 computer 1,700 (c = b/a)
N. of computers delivered after modification until 31/12/20X1
- from original contract (300-100) 200
- from modification 100
Total no of computers 300 d
Total revenue after modification until 31 December 20X1: 510,000 (c x d)

31 Dec 20X1 Contract asset / Trade receivable 510,000.00


Revenue from sale of goods 510,000.00
IFRS 15 - REVENUE FROM CONTRACTS WITH CUSTOMERS - SOLUTIONS

Question 7. [Explicit v/s implicit performance obligation] [IFRS Kit – IFRS Box]

1. Contract A

Here, explicit promise of free maintenance services is offered in the contract.


As a result, there are 2 performance obligations:
#1 Delivery of 10 cleaning machines
#2 Repair and maintenance services within 2 years

As a result, ABC cannot recognize revenue from sale of machines of Rs. 200,000, because a part of total
transaction price needs to be allocated to repair and maintenance services, too.

2. Contract B

There is no explicit promise of repair services in the contract, but based on


ABC's practices and reputation, ABC made an implicit promise to deliver free services, too.
As a result, there are 2 performance obligations:
#1 Delivery of 5 cleaning machines
#2 Repair services within 1 year

As a result, ABC cannot recognize revenue from sale of machines of Rs. 100,000, because a part of total
transaction price needs to be allocated to repair services, too.

3. Contract C

There is neither explicit nor implicit promise in the contract.


The promise of free repairs is NOT included in the contract with customer in its inception.
As a result, there is just 1 performance obligation: delivery of 50 cleaning machines.

ABC recognizes revenue from sale of machines amounting to Rs. 1,000,000.

With regard to subsequently promised free maintenance services - ABC should recognize a provision for
free maintenance under IAS 37.

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