Solution

Under IFRS 15, a contract might have a significant financing component if the timing of payments agreed upon by the parties to the contract provides either the customer or the vendor with a substantial financing benefit.

In this scenario, Company Z is to be paid for its incurred costs near the time it incurs them, and the $100 million award fee will be paid upon the successful completion and test fire of a missile, scheduled to occur 16 months from the time the contract is executed. This means there's a period where Company Z will perform work (and thus transfer control of that work to the customer) but won't receive all the consideration for it until the successful completion and testing of a missile.

This setup creates a financing component, as Company Z effectively finances the customer's use of the work during the period between when the work is performed and when the final award fee is received. This may be deemed significant if the timing of the transfer of the promised goods or services is significantly different from the timing of the payment, and if the interest to be recognized on the award fee is significant in the context of the contract.

However, an important point in IFRS 15 is that when the period between the transfer of the promised goods or services and the payment by the customer is expected to be less than one year, the entity need not adjust the promised amount of consideration for the effects of a significant financing component.

If the time between when the contractor transfers control of the work and when it receives the final award fee is over a year, then it may be significant, and the transaction price would be adjusted to reflect this. If the period is less than a year, then it may not be considered significant, and no adjustment is required.

As always, specific conditions and interpretations may vary, so it is recommended to consult with a finance professional or advisor.