QUESTION 46 Illustration 46 AFS Limited is a risk advisory firm and enters into a contract with a company – WBC Limited to provide audit services that results in AFS issuing an audit opinion to the Company. The professional opinion relates to facts and circumstances that are specific to the company. If the Company was to terminate the consulting contract for reasons other than the entity's failure to perform promised, the contract requires the Company to compensate the risk advisory firm for its costs incurred plus a 15 per cent margin. The 15 per cent margin approximates the profit margin that the entity earns from similar contracts. Whether risk advisory firm’s performance obligation is met over period of time.

Solution

Based on the criteria set in IFRS 15, a performance obligation is satisfied over time if any of the following criteria are met:

  1. The customer simultaneously receives and consumes the benefits provided by the entity’s performance as the entity performs.
  2. The entity’s performance creates or enhances an asset (for example, work in progress) that the customer controls as the asset is created or enhanced.
  3. The entity’s performance does not create an asset with an alternative use to the entity, and the entity has an enforceable right to payment for performance completed to date.

In the case of AFS Limited, the third criterion is applicable. The performance of AFS Limited doesn't create an asset with an alternative use as the audit services are specific to the client, WBC Limited. Furthermore, AFS Limited has an enforceable right to payment for the work done to date as specified in the contract terms, which would include costs plus a reasonable profit margin if the contract is terminated early for reasons other than AFS Limited's failure to perform as promised.

Therefore, AFS Limited's performance obligation is satisfied over time and they should recognize revenue accordingly over the term of the audit contract.

Complete and Continue