QUESTION 18 Illustration 18 Customer buy a new data connection from the telecom entity. It pays one-time registration and activation fees at the time of purchase of new connection. The customer will be charged based on the usage of the data services of the connection on monthly basis. Are the performance obligations under the contract distinct?
Solution
By selling a new connection, the entity promises to supply data services to customer. Customer will not be able to benefit from just buying a data card and data services from third party. The activity of registering and activating connection is not a service to customer and therefore does not represent satisfaction of performance obligation.
Entity’s obligation is to provide data service and hence activation is not a separate performance obligation.
Based on the provided information, let's consider the two main performance obligations in this contract:
- One-time registration and activation of the data connection.
- Provision of data services on a monthly basis.
According to IFRS 15, two goods or services promised in a contract are distinct if both:
a) The customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer.
b) The promise to transfer the good or service is separately identifiable from other promises in the contract.
The application of these criteria to the present scenario would be:
Based on this analysis, the performance obligations under the contract are distinct, and should be accounted for separately. The activation fee is recognized when the service is activated, and the revenue from data services is recognized monthly as the service is provided.