QUESTION 43 Illustration 43 allocating a change in transaction price On 1 April 2018, a consultant enters into an arrangement to provide due diligence, valuation and software implementation services to a customer for $ 20 Million. The consultant can earn $ 20 Lakhs bonus if it completes the software implementation by 30 September 2018 or $ 10 Lakhs bonus if it completes the software implementation by 31 December 2018. The due diligence, valuation and software implementation services are distinct and therefore are accounted for as separate performance obligations. The consultant allocates the transaction price, disregarding the potential bonus, on a relative stand-alone selling price basis as follows: • Due diligence – $ 80 Lakhs • Valuation – $ 20 Lakhs • Software implementation – $ 10 Million At contract inception, the consultant believes it will complete the software implementation by 30 January 2019. After considering the factors in IFRS 15, the consultant cannot conclude that a significant reversal in the cumulative amount of revenue recognized would not occur when the uncertainty is resolved since the consultant lacks experience in completing similar projects. As a result, the consultant does not include the amount of the early completion bonus in its estimated transaction price at contract inception. On 1 July 2018, the consultant notes that the project has progressed better than expected and believes that implementation will be completed by 30 September 2018 based on a revised forecast. As a result, the consultant updates its estimated transaction price to reflect a bonus of $ 20 Lakhs. After reviewing its progress as of 1 July 2018, the consultant determines that it is 100 percent complete in satisfying its performance obligations for due diligence and valuation and 60 percent complete in satisfying its performance obligation for software implementation. Determine the transaction price.

Solution

The initial transaction price in the contract is $20 Million, divided among the performance obligations based on their relative stand-alone selling prices:

  • Due diligence: $80 Lakhs
  • Valuation: $20 Lakhs
  • Software implementation: $10 Million

This totals to $10.1 Million, while the total contract price is $20 Million. The difference might be due to the figures being in different currencies or a typo in the question. However, I will proceed with the given figures.

On July 1, 2018, the consultant updates the transaction price to include the bonus of $20 Lakhs, as it now believes it will meet the conditions for this bonus. The revised transaction price would be:

  • Due diligence: $80 Lakhs
  • Valuation: $20 Lakhs
  • Software implementation: $10 Million
  • Bonus: $20 Lakhs

The total revised transaction price would thus be $10.3 Million (or $20.2 Million, depending on the correct currency or figures for the contract).

At this point in time, the consultant has completed 100% of the due diligence and valuation services, and 60% of the software implementation. The transaction price of the due diligence and valuation services is thus fully recognized as revenue, while 60% of the software implementation price and 60% of the bonus is also recognized as revenue.

The remainder of the software implementation price and bonus would be recognized as revenue upon completion of the software implementation. If the software implementation is not completed by September 30, 2018, the transaction price would need to be updated again to reflect the lower bonus.

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