P2 Day 18 IFRS 15 (Tang) Question

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Day 17 – P2
Tang (IFRS 15)

QUESTION

There has been significant divergence in practice over recognition of revenue mainly because
International Financial Reporting Standards (IFRS) have contained limited guidance in certain
areas. The International Accounting Standards Board (IASB) as a result of the joint project with the
US Financial Accounting Standards Board (FASB) has issued IFRS 15 Revenue from Contracts
with Customers. IFRS 15 sets out a five-step model, which applies to revenue earned from a
contract with a customer with limited exceptions, regardless of the type of revenue transaction or
the industry. Step one in the five-step model requires the identification of the contract with the
customer and is critical for the purpose of applying the standard. The remaining four steps in the
standard’s revenue recognition model are irrelevant if the contract does not fall within the scope of
IFRS 15

Required:

(a)

(i) Discuss the criteria which must be met for a contract with a customer to fall within the
scope of IFRS 15.

(5 marks)

(ii) Discuss the four remaining steps which lead to revenue recognition after a contract has
been identified as falling within the scope of IFRS 15.

(8 marks)

(b)

(i) Tang enters into a contract with a customer to sell an existing printing machine such that control
of the printing machine vests with the customer in two years’ time. The contract has two payment
options. The customer can pay $240,000 when the contract is signed or $300,000 in two years’
time when the customer gains control of the printing machine. The interest rate implicit in the
contract is 11·8% in order to adjust for the risk involved in the delay in payment. However, Tang’s
incremental borrowing rate is 5%. The customer paid $240,000 on 1 December 2014 when the
contract was signed.

(4 marks)

(ii) Tang enters into a contract on 1 December 2014 to construct a printing machine on a
customer’s premises for a promised consideration of $1,500,000 with a bonus of $100,000 if the
machine is completed within 24 months. At the inception of the contract, Tang correctly accounts
for the promised bundle of goods and services as a single performance obligation in accordance
with IFRS 15. At the inception of the contract, Tang expects the costs to be $800,000 and
concludes that it is highly probable that a significant reversal in the amount of cumulative revenue
recognised will occur. Completion of the printing machine is highly susceptible to factors outside of
Tang’s influence, mainly issues with the supply of components.

At 30 November 2015, Tang has satisfied 65% of its performance obligation on the basis of costs
incurred to date and concludes that the variable consideration is still constrained in accordance
with IFRS 15. However, on 4 December 2015, the contract is modified with the result that the fixed
consideration and expected costs increase by $110,000 and $60,000 respectively. The time
allowable for achieving the bonus is extended by six months with the result that Tang concludes
that it is highly probable that the bonus will be achieved and that the contract still remains a single
performance obligation. Tang has an accounting year end of 30 November.

(6 marks)

Required:

Discuss how the above two contracts should be accounted for under IFRS 15. (In the case
of (b)(i), the discussion should include the accounting treatment up to 30 November 2016
and in the case of (b)(ii), the accounting treatment up to 4 December 2015.)

Note: The mark allocation is shown against each of the items above.

Professional marks will be awarded in question 4 for clarity and quality of presentation.

(2 marks)

(25 marks)

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