QUESTION 4 When the contract modification for the additional 50 units was being negotiated, the vendor agreed to a price reduction of $ 10 for each of the additional units, to compensate the customer for poor service. Some of the first 50 units that had been delivered were faulty and the vendor had been slow in rectifying the position. What is the implication as per IFRS 15?
ANSWER 4
Under IFRS 15, a contract modification that results in a price reduction for additional distinct goods or services, due to a reason such as poor service, is not treated as a separate contract. Rather, it is seen as a modification of the original contract.
In this scenario, the reduction in price for the additional 50 units to $65 per unit is a modification of the terms of the original contract. The vendor needs to adjust the transaction price for the original contract to reflect this change. This adjusted price will then be allocated to the remaining performance obligations in the contract.
Here is how it looks in a table:
Please note:
- The total revenue of $19,250 is now recognized as the revenue from the original contract, adjusted for the contract modification.
- The total units of 250 is the combination of the units from the original contract and the additional units from the contract modification.
- The price reduction for the additional 50 units is due to the poor service provided in the original contract, so it is seen as an adjustment to the transaction price of the original contract. This change in the transaction price is then allocated to the remaining performance obligations in the contract.