TEST 2 - FAC4862/NFA4862/ZFA4862 - SUGGESTED SOLUTION

QUESTION 1 - Suggested solution

PART I

Lasting Impressions

Dr Cr
R R

J1 Contract costs: Incremental costs (SFP) 300 000 (1)

Bank (SFP) 300 000 (½)
Recognition of the incremental costs of obtaining the contracts
J2 Contract costs: Costs to fulfil the contract (SFP) [C1] 295 000 (3½)
Bank (SFP) 295 000 (½)
Recognition of costs to fulfil the contracts
J3 Amortisation (P/L) [C2] 86 770 (½)
Contract costs: Incremental costs (SFP) 43 750 (2)
Contract costs: Costs to fulfil the contract (SFP) 43 020 (2)
Recognise amortisation on contract costs capitalised for the
contracts
(10)

CALCULATIONS

C1. R

Training of staff 120 000

Exterior design 150 000
Testing of all systems 25 000
295 000

C2. Amortisation

Amortisation will be accounted for on the straight line method which is consistent with the transfer
to the customer of the services to which the asset relates (IFRS 15.99)

Contract costs - Incremental costs:

(R300 000)/(4 x 12) x 7 months = R43 750 [1½]
Contract costs - Costs to fulfil the contract:
(R295 000)/(4 x 12) x 7 months = R43 021 [1½]

Open Rubric
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PART II

Identify and discuss whether the training service and warranty promised in the contract between
Bricks for U Ltd and Mr Cordez gives rise to separate performance obligations in terms with
IFRS 15 Revenue from Contracts with Customers.

MEMORANDUM

To: Senior Manager

From: IFRS specialist
Date: 1 March 2020
Subject: Identification of performance obligations in a contract

This memorandum responds to the matters, as requested. These explanations are based on
my understanding of the facts provided to me:

Training services

In order for goods and services in a contract to each be accounted for as separate performance
obligations, Bricks has to assess at contract inception the goods and services promised in the
contract and identify as a performance obligation each promise to transfer either:

(a) a good or service (or a bundle of goods or services) that is distinct; or (½)
(b) a series of distinct goods and services that are substantially the same and that have the
same pattern of transfer to the customer (IFRS 15.22). (½)

A good or service that is promised to Mr Cordez (a customer), is distinct if both of the following
criteria are met (IFRS 15.27):

(a) Mr Cordez can benefit from the good or service either on its own or together with other
resources that are readily available to him; and (½)
(b) Bricks promise to transfer the good or service to Mr Cordez is separately identifiable from
other promises in the contract. (½)

The first criterion of the definition of being distinct is met because Mr Cordez can benefit from
the training services on its own as customers have the option to purchase the training service
separately. (1)

The second criterion of the definition of being distinct is met because Bricks promise to transfer
the training services is seperately identifiable from other promises in the contract. (1)

Factors which indicate that a promised good or service is separately identifiable (IFRS 15.29)
is:

(a) Bricks does not provide a significant service of integrating the good or service with other
goods or services promised in the contract into a bundle of goods or services that
represent the combined output for which the customer has contracted. (1)

The machine can be operated without providing training services (IFRS 15.29(a)). (1)

(b) the good or service does not significantly modify or customise another good or service
promised in the contract.
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The training services do not significantly modify or customise the machine

(IFRS 15.29(b)). (1)

(c) the good or service is not highly dependent on, or highly interrelated with, other goods or
services promised in the contract.

Mr Cordez can purchase the machine without the training services (IFRS 15.29)(c)). (1)

Conclusion

The training services are distinct because they meet both the criteria of the definition of being
distinct. The training services are therefore a separate performance obligation in the contract
with Mr Cordez. (1)

Warranty

Bricks does not sell the warranty separately. Mr Cordez does not have an option to purchase
the warranty separately and therefore provides no evidence that the warranty provides a service
to Mr Cordez in addition to the assurance-type warranty (IFRS 15.B30). (2)

The warranty is consequently not a distinct service. (1)

The 12 month warranty period is not a long cover period and therefore it is less likely that the
warranty is a separate performance obligations because it is less likely to provide a service in
addition to the assurance. (1)

The warranty is required by law, which also indicate that the promised warranty is not a
performance obligation. (1)

Conclusion

The warranty does not provide Mr Cordez with a good or service in addition to that of assurance
and, therefore, Bricks does not account for it as a separate performance obligation. (1)

The warranty shall be accounted for as a provision in accordance with IAS 37 Provisions
Contingent Liabilities and Contingent Assets. (1)
Total (16)
Maximum (14)
Communication skills: logical flow and conclusion (1)

PART III

Discuss the appropriate accounting treatment of the right of return of The Mighty Ardent
Tyre in accordance with IFRS 15 Revenue from Contracts with Curstomers for the year
ended 31 January 2020.

• To account for the transfer of the Mighty Ardent Tyres with a right of return, Thebike
should in accordance with IFRS 15.B21 recognise all of the following:
- Revenue for the transferred tyres it expects to be entitled to (therefore revenue is
not recognised for products expected to be returned);
- A refund liability in respect of the tyres expected to be returned;
- An asset for its right to recover the tyres from customers on settling the refund
liability (IFRS 15.B21).
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REVENUE

Recognition
• Revenue is recognised when the Thebike satisfies a performance obligation by
transfering the Mighty Ardent Tyres to a customer. The tyre is transferred when (or as)
the customer obtains control of the tyre (IFRS 15.31). (1)

• The performance obligation to transfer the tyres to a customer is not satisfied over time
but at a point in time because control of the tyres transfers to the customer on the delivery
date of the tyres to the customer. (1)

• Hence, revenue from the sales of the tyres is recognised when the tyres are delivered to
customers. (1)

• Revenue from the 150 units of the Mighty Ardent Tyres sold to customers should be
recognised by Thebike on 31 January 2020 since all the tyres were delivered on this
date. (1)

Measurement
• The transaction price is the amount of consideration Thebike expects to be entitled to in
exchange for transferring the promised tyres to a customer (IFRS 15.47) (1)

• When determining the transaction price Thebike should consider the effects of variable
consideration (IFRS 15.48). (½)

• The consideration received from the sale of the tyres to customers is variable because
the contract allows customers to return the tyres (IFRS 15.51). (½)

• Because the consideration received from the customers includes a variable amount,
Thebike should estimate the amount of consideration it will be entitled to in exchange for
transferring the tyres to the customers (IFRS 15.50). (1)

• The estimated variable consideration for the 90 tyres that are not expected to be returned
is R90 000 (R1 000 x (150-60)). This amount should be recognised as revenue/sales in
the financial statement of Thebike for the year ended
31 January 2020. (2)

REFUND LIABILITY

• A refund liability should be recognised by Thebike because it receives consideration from

customers and expects to refund some or all of that consideration to the customers (IFRS
15.55). (1)

• The refund liability should be measured at the amount of consideration received for which
Thebike does not expect to be entitled (IFRS 15.55). (1)

• Hence a refund liability amounting to R60 000 (60 x R1 000) should be recognised by
Thebike in the financial statements for the year ended 31 January 2020. (1)

ASSET

• IFRS 15.B25 notes that Thebike’s right to recover an asset is initially measured by
reference to the former carrying amount of the product less the expected costs to recover
those products. (1)
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• Thebike will therefore recognise an asset of R30 000 (60 x R500) for the expected returns
of the tyres on 31 January 2020. (1)

• The cost of sales recognised for the sales of tyres, taking into account Thebike’s right to
recover the tyres on meeting the refund obligation, amounts to R45 000
((150 – 60) x R500) for the year ended 31 January 2020. (1)

• The expected costs to recover the products will be zero since those costs are immaterial.
(1)
Total (16)
Maximum (14)
Communication skills: presentation and layout (1)