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IFRS 15 Revenue from Contracts with customers
Home Level 2 2.1 Financial Reporting Archive by Category "IFRS 15 Revenue from Contracts with customers"

Category: IFRS 15 Revenue from Contracts with customers

2.1 Financial ReportingIFRS 15 Revenue from Contracts with customersLevel 2

May 2020 Q2 a.

Ejura Ltd (Ejura) is a Manufacturing and retail company which prepares financial statements in accordance with International Financial Reporting Standards (IFRS) up to 31 December each year.

In order to generate or improve sales on one of its older products, Ejura offered a promotion named ‘something for free’. The promotion included free maintenance services for the first two years. On 1 October 2019, under the promotional offer, Ejura sold goods to a supermarket chain for GH¢4.4 million. A two-year maintenance contract would normally be sold for GH¢0.5 million, and the list price of the product would normally be GH¢5 million. The transaction has been included in revenue at GH¢4.4 million.

Required:
In accordance with IFRS 15: Revenue from Contracts with Customers, justify the appropriate accounting treatment for the above transaction in the financial statements of Ejura for the year ended 31 December 2019.   (7 marks)

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Under (IFRS 15), each component should be measured separately. As only three months of the maintenance service has been provided, we should only recognize 3/24 of the maintenance fee as revenue in the year ended 31 December 2019. The remainder should be treated as deferred income and recognized as the service is being provided.

The sale of goods, however, should be recognized immediately. As the total of the fair values exceeds the overall price of the contract, a discount has been provided.

As we do not know what has been discounted, it would seem reasonable to apply the same discount percentage to each separate component.
The discount is 20% based on listed prices (i.e. [4.4m/(5m + 0.5)] – 1).

Five (5) point criteria for recognition of revenue
Step 1: Identify contract with the customer
Step 2: Identify the performance obligations within the contract

  • Sale of product
  • Maintenance contract

Step 3: Determine the transaction price – the transaction price is GH¢4.4 million
Step 4: Allocate the transaction price among the performance obligations within the contract

  • Based on the standalone selling price of the individual obligations
  • Where the standalone selling price are not available, use expected cost plus %
  • Where the above is not available, use the residual approach.

In this case, the scenario provides the standalone selling prices and hence, these shall be used to allocate the price. Allocation of transaction price to:

Sale of products (GH¢5 million / GH¢5 million + GH¢0.5 million x GH¢4.4 million = GH¢4
Maintenance: GH¢0.5 million/ GH¢5 million + GH¢0.5 million x GH¢4.4 million =

Step 5: Recognise the revenue over time or at point in time

  • Revenue from the product would be recognize during the contract period as control over the product is transferred to the customer.
  • Revenue from the maintenance contract would be earned over a period of 24 months. Therefore, for the current period, 3/24 months would be recognised as revenue, and the remainder would be deferred.

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2.1 Financial ReportingIAS 8 Accounting Policies, Changes in Accounting Estimates and ErrorsIFRS 15 Revenue from Contracts with customersLevel 2

Nov 2015 Q4 b.

LB Ltd is a construction contract company involved in building commercial properties. Its current policy for determining the percentage of completion of its contracts is based on the proportion of cost incurred to date compared to the total expected cost of the contract.
One of LB Ltd’s contracts has an agreed price of GHS500million and estimated total costs of GHS400million.
The cumulative progress of this contract is:
Year ended:

Based on the above, LB Ltd prepared and published its financial statements for the year ended 30 September 2011. Relevant extracts are:

Contract receivables (150-140)            10
LB Ltd has received some adverse publicity in the financial press for taking its profit too early in the contract process, leading to disappointing profits in the later stages of contracts. Most of LB Ltd’s competitors take profit based on the percentage of completion as determined by the work certified compared to the contract price.
Required:
(i) Assuming LB Ltd changes its method of determining the percentage of completion of contracts to that used by its competitors, and that this would represent a change in an accounting estimate, calculate equivalent extracts of profit or loss and statement of financial position for the year ended 30 September 2012.                                                                              (7 marks)

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Based on value of work certified, the contract is 64% complete ((320 / 500) x 100) at 30 September 2012. Extracts for 2012 are:

(ii) Explain why the above represents a change in accounting estimate rather than a change in accounting policy.          (2 marks)

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Accounting policies are the rules, principles and practices adopted by an entity in preparing its financial statements. They should be based upon IFRSs or other financial reporting standards.
Accounting estimates are the measurements and valuations arrived at by an entity in applying accounting policies to specific items and transactions.
In the case of LB Ltd, the accounting policy is in accordance with IAS 11 Construction Contracts. Revenue and costs are recognized according to the stage of completion of the contract. LB’s current means of estimating the stage of completion is based on proportion of cost to date to total cost.
Although the question refers to it as LB’s ‘current policy’, this is an accounting estimate, because it is LB’s method of applying the accounting policy. A different measurement basis, based on the same accounting policy, is to estimate stage of completion based on the value of work certified. In transferring from one to the other, LB is making a change of accounting estimate.

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