QUESTION 5 The selling price of the additional units is taken as $ 60 not the stand-alone price at the date of contract modification. Consequently, for accounting purposes, the original contract is considered to be terminated at the point of contract modification. The remaining units to be sold that were covered by the original contract, together with the additional units from the contract modification, are accounted for as being sold under a new contract. What is the effect as per IFRS 15?
ANSWER 5
Under IFRS 15, if the selling price of the additional goods or services is below the standalone selling price, and the price reduction is not due to the entity's customary business practices (like quantity discounts), then it may be an indication that the contract modification is a termination of the original contract and the creation of a new contract.
In this scenario, the selling price of the additional units being set at $60, which is below the standalone selling price, would likely be interpreted as a termination of the original contract. The remaining units yet to be sold from the original contract, along with the additional units from the contract modification, would be accounted for as a new contract.
Here is how it would look in a table:
Please note:
- The total revenue of $6,000 is recognized as the revenue from the new contract, which includes the remaining units from the original contract and the additional units from the contract modification.
- The total units of 100 in the new contract include the remaining 50 units from the original contract and the additional 50 units from the contract modification.
- The price reduction for the additional units and remaining units from the original contract is treated as an indication of a termination of the original contract and the creation of a new contract.