QUESTION 36 Illustration 36–Entitlement to non-cash consideration An entity enters into a contract with a customer to provide a weekly service for one year. The contract is signed on 1st April 2018 and work begins immediately. The entity concludes that the service is a single performance obligation. This is because the entity is providing a series of distinct services that are substantially the same and have the same pattern of transfer (the services transfer to the customer over time and use the same method to measure progress — that is, a time-based measure of progress). In exchange for the service, the customer promises its 100 equity shares per week of service (a total of 5,200 shares for the contract). The terms in the contract require that the shares must be paid upon the successful completion of each week of service. How should the entity decide the transaction price?

Solution

The transaction price is the amount of consideration an entity expects to be entitled to in exchange for transferring promised goods or services to a customer.

When the consideration promised in a contract includes a variable amount, an entity shall estimate the amount of consideration to which it will be entitled in exchange for transferring the promised goods or services to a customer.

In this case, the consideration is non-cash and takes the form of equity shares. The entity should determine the fair value of these shares as a basis for measuring the transaction price. As the shares are to be paid on successful completion of each week of service, it would be appropriate to estimate the fair value of these shares on a weekly basis.

The fair value of non-cash consideration can fluctuate due to market conditions, and it should be assessed at the time of performance (at the end of each week in this case). Therefore, the entity should measure the fair value of the equity shares at the end of each week and update the transaction price accordingly.

Any changes in the fair value of the non-cash consideration before the entity fulfils the performance obligation do not change the transaction price, but rather would be accounted for in accordance with other Standards (such as IAS 39 Financial Instruments: Recognition and Measurement, IFRS 9 Financial Instruments or IAS 2 Inventories), depending on the nature of the consideration received.

However, it is important to note that the transaction price would be updated for any changes due to the form of the consideration (i.e., changes in the price of the shares) if those changes reflect circumstances that were not considered in determining the transaction price, such as unexpected changes in market conditions. The entity would then recognise any resulting gain or loss in profit or loss.


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