QUESTION 45 Illustration 45 T&L Limited (‘T&L’) is a logistics company that provides inland and sea transportation services. A customer –Horizon Limited (‘Horizon’) enters into a contract with T&L for transportation of its goods from India to Sri Lanka through sea. The voyage is expected to take 20 days Mumbai to Colombo. T&L is responsible for shipping the goods from Mumbai port to Colombo port. Whether T&L’s performance obligation is met over period of time.

Solution

According to IFRS 15, a performance obligation is satisfied over time if it meets one or more of the following criteria:

  1. The customer simultaneously receives and consumes the benefits provided by the entity's performance as the entity performs.
  2. The entity's performance creates or enhances an asset that the customer controls as the asset is created or enhanced.
  3. The entity's performance does not create an asset with an alternative use to the entity, and the entity has an enforceable right to payment for performance completed to date.

In this case, T&L Limited's performance obligation of transporting goods from Mumbai to Colombo would be considered as being satisfied over time, as it fits into the first criterion. As T&L Limited performs its transportation service, Horizon Limited simultaneously receives and consumes the benefits of this service. The transportation service cannot be retracted or redirected to another customer once the journey has started. The value of the service is progressively transferred to Horizon Limited as the goods are moved closer to the destination, Sri Lanka.

Therefore, T&L would recognize revenue for this contract over time, most likely using a method that best depicts the transfer of services to the customer. For instance, this could be done based on the number of days of voyage completed relative to the total expected days of voyage (20 days).

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