QUESTION 4 Illustration 4 An entity promises to sell 120 products to a customer for $ 120,000 ($ 1,000 per product). The products are transferred to the customer over a six-month period. The entity transfers control of each product at a point in time. After the entity has transferred control of 60 products to the customer, the contract is modified to require the delivery of an additional 30 products (a total of 150 identical products) to the customer at a price of $ 950 per product which is the standalone selling price for such additional products at the time of placing this additional order. The additional 30 products were not included in the initial contract. It is assumed that additional products are contracted for a price that reflects the stand-alone selling price. Determine the accounting for the modified contract.

Solution

According to IFRS 15, when a contract is modified to add distinct goods or services that are priced at their standalone selling prices, the modification should be treated as a separate contract.

In this case, the entity and the customer modify their initial contract to add an additional 30 products that were not included in the initial contract. The price for these additional products ($950 per product) is their standalone selling price at the time the additional order is placed. As such, these additional products are distinct and priced at their standalone selling prices.

So, under IFRS 15, this contract modification would be treated as a separate contract. This means that the revenue from the additional 30 products would be recognized when control of each of these products is transferred to the customer, which is presumably at a point in time for each product.

Therefore, the entity would account for the initial contract (120 products for $120,000) separately from the contract modification (30 additional products for $28,500). Revenue from the initial contract would be recognized as each of the 120 products is transferred to the customer, and revenue from the contract modification would be recognized as each of the additional 30 products is transferred to the customer.

Complete and Continue