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IFRS 15 Revenue from Contracts with Customers-(Practicals Included)

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LIST OF THE PRESENT APPLICABLE AND EFFECTIVE ACCOUNTING STANDARDS:
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Highlights of this IFRS course:
How can you learn IFRS 15?

IFRS 15 Revenue from Contracts with Customers THEORY (SURFACE)

Some important definition to know of IFRS 15?
What is the scope of IFRS 15?
What is the objective of IFRS 15?
What all Standards IFRS 15 tend to replace ?
How does IFRS 15 impact revenue recognition?
What is a particular note on the development on IFRS 15?
What does revenue mean and what are its types ?
What is the core principle towards Revenue Recognitioin embeded into 5 steps?
When shall an entity account for a contract ?
How would you define a csutomer ?
What understanding can show on the contract aspect?
Does IFRS 15 apply to non-monetary exchanges between entities in the same line of business ?
What is a point to note in case of Performance Obligation ?
What would a promised goods or services may include ?
When goods and services are to be said to be disctinct ?
When an entity shall recognize revenue ?
How goods & services are assets?
What is the technical point to note with the Transfer of control
Which all standard stood on withdrawal upon issuance of IFRS 15 ?
How important is Identifying performance obligations ?
When can A good or service that is promised to a customer is distinct ?
What if a promised good or service is not distinct ?
When shall an entity recognize revenue ?
What do you understand by a Control of an asset ?
When is a contract modification accounted for as a separate (and additional) contract ?
What is the approach followed towards modification of the contract ?
What are the timings associated with Performance obligation fullfilment ?
What is the aspect to consider in terms of combined contracts ?
When should an entity account contract modification as a separate contract ?
How can entity identify a performance obligation ?
When An entity shall recognise revenue ?
What does a Control of an asset refer to ?
What are the Indicators that control has passed ?
What does Performance obligations satisfied over time refer to ?
What are the methods for measuring performance staisfied over time ?
When is the performance obligation considered settled at a point in time ?
What does Incremental costs of obtaining a contract refer to ?
How does the warranties get accounted?
What are the Disclosures associated with IFRS 15 ?
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IFRS 15 Revenue from Contracts with Customers THEORY (DEPTH)

Discuss the five-step model of IFRS 15 in detail and provide examples of how it would be applied in various business contexts.
How does IFRS 15 change the revenue recognition landscape for entities with long-term contracts, such as construction companies? Discuss with examples.
In what situations does IFRS 15 require revenue to be recognized over time? Illustrate your answer with specific industry examples.
Under IFRS 15, how should a company account for a significant financing component present in a contract? Provide examples to support your answer.
How are sales with a right of return treated under IFRS 15? How does this compare with the previous standard?
What considerations does IFRS 15 require for contracts that can be cancelled, renewed or modified? Discuss with examples.
How should companies handle the transition to IFRS 15 from the previous standards, keeping in mind the retrospective approach? Discuss potential difficulties and solutions.
How does IFRS 15 define 'control' and what are the indicators of the transfer of control over a good or service to a customer?
Discuss the implications of IFRS 15 on financial reporting and disclosure. How does it impact the key financial ratios?
Under IFRS 15, how should an entity account for non-cash consideration in a contract? Discuss with examples.
How does IFRS 15 affect the treatment of customer loyalty programs and other deferred revenue situations?
Discuss how IFRS 15 would impact the revenue recognition for a software-as-a-service (SaaS) company.
Under IFRS 15, when would a performance obligation be recognized separately and when would it be bundled? Discuss with examples.
Explain how variable consideration is estimated and constrained under IFRS 15, and discuss the impact on revenue recognition.
How should entities handle contract costs under IFRS 15? Discuss the conditions for capitalizing such costs and subsequent amortization.
How does IFRS 15 approach the principal versus agent issue in revenue recognition?
How does IFRS 15 affect the revenue recognition for contracts with multiple performance obligations? Discuss with examples.
Discuss the treatment of warranties under IFRS 15 and how it differs based on the type of warranty.
What are the unique challenges in implementing IFRS 15 in industries like real estate, construction, telecommunications, etc.?
How has IFRS 15 improved the consistency and comparability of revenue recognition across industries and international borders?

IFRS: AS AN AUDITOR!

What you need to know about IFRS 15 as an auditor?
What are the key considerations for auditors in relation to IFRS 15?

IFRS & ACCOUNTING RATIOS:

What all Accounting Ratios does IFRS 15 connects which may get affected?
Examples of how the application of IFRS 15 can impact various accounting ratios:
Table summarizing how the application of IFRS 15 can impact various accounting ratios:

IAS INTERACTION WITH OTHER ACCOUNTING STANDARDS!

What do you understand by interaction of accounting standards and why are they important to be understood in general?
How IFRS 15 does interacts with other accounting standards?
What do you understand by interaction of accounting standards and why are they important to be understood?
How can one approach towards understanding the interaction between accounting standards?
What if one fails to understand the interaction of accounting standards? How does it impact financial reporting?
Interaction of IFRS 15 with other accounting standards: TABULATION!

CLIMATE IMPACT: IFRS

Discuss the possible climate impact on IFRS 15:
How can the climate impact on IFRS 15 be mitigated?

Test your understanding: - IFRS 15 Revenue from Contracts with Customers-

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IFRS 15 Revenue from Contracts with Customers THEORY (REVISION)

What is the core principle of IFRS 15?
Explain the five-step model proposed by IFRS 15 for revenue recognition. What is the purpose of each step?
What are the major changes brought about by IFRS 15 in comparison to the previous standards?
How does IFRS 15 define a contract? What are the criteria that must be met for an entity to account for a contract under IFRS 15?
How does IFRS 15 define a performance obligation? When is a performance obligation considered distinct?
What is meant by transaction price in IFRS 15? How is the transaction price allocated to performance obligations in a contract?
How and when is revenue recognized under IFRS 15?.
What does 'transfer of control' mean in the context of IFRS 15? What are the indicators that control has been transferred?
How does IFRS 15 deal with contract modifications?
How does IFRS 15 treat the costs of obtaining and fulfilling a contract?
Explain the concept of variable consideration and how it is treated under IFRS 15.
Discuss how IFRS 15 treats warranties.
How does IFRS 15 define a customer?
Explain how IFRS 15 deals with performance obligations satisfied over time.
What are the disclosure requirements under IFRS 15?
Discuss how IFRS 15 impacts the timing of revenue recognition.
How does IFRS 15 treat principal vs agent considerations?
Discuss the implications of IFRS 15 for different industries such as telecommunications, real estate, and software.
How might the implementation of IFRS 15 affect a company's financial statements?
What are the challenges companies might face when transitioning to IFRS 15? How might these challenges be overcome?

Practical example towards Conceptual understanding !

Telecommunications operator XYZC Corp. entered into a contract with Jack on Jan 1, 20Xx. Under the contract, Jack subscribes to XYZ's monthly tariff for 12 months and in return receives a free cell phone froM XYZ Corp. Jack will pay a monthly fee of $100. JACK will receive the cell phone immediately after signing the contract. XYZ sells the same phones for $ 300 and the same monthly plans for $ 80/month without handset. How should XYZ recognize revenue from the contract with Jack in 20Xx in accordance with IFRS 15?

IFRS 15 Revenue from Contracts with Customers - PRACTICAL ILLUSTRATIONS !

QUESTION 1 Illustration 1 New way limited decides to enter a new market that is currently experiencing economic difficulty and expects that in future economy will improve. New way enters into an arrangement with a customer in the new region for networking products for promised consideration of $ 1,250,000. At contract inception, New way expects that it may not be able to collect the full amount from the customer. Determine how new way will recognizes this transaction?
QUESTION 2 Illustration 2 A gymnasium enters into a contract with a new member to provide access to its gym for a 12-month period at $ 4,500 per month. The member can cancel his or her membership without penalty after three months. Specify the contract term
QUESTION 3 Illustration 3 Manufacturer of airplanes for the air force negotiates a contract to design and manufacture new fighter planes for a Kashmir air base. At the same meeting, the manufacturer enters into a separate contract to supply parts for existing planes at other bases. Would these contracts be combined?
QUESTION 4 Illustration 4 An entity promises to sell 120 products to a customer for $ 120,000 ($ 1,000 per product). The products are transferred to the customer over a six-month period. The entity transfers control of each product at a point in time. After the entity has transferred control of 60 products to the customer, the contract is modified to require the delivery of an additional 30 products (a total of 150 identical products) to the customer at a price of $ 950 per product which is the standalone selling price for such additional products at the time of placing this additional order. The additional 30 products were not included in the initial contract. It is assumed that additional products are contracted for a price that reflects the stand-alone selling price. Determine the accounting for the modified contract.
QUESTION 5 Illustration 5 On 1 April 2018, KLC Limited enters into a contract with Mr. K to provide a) A machine for $ 2.5 million b) One year of maintenance services for $ 55,000 per month On 1 October 2018, KLC Limited and Mr. K agree to modify the contract to reduce the amount of services from $ 55,000 per month to $ 45,000 per month. Determine the effect of change in the contract.
QUESTION 6 Illustration 6 Growth Limited enters into an arrangement with a customer for infrastructure outsourcing deal. Based on its experience, Growth Limited determines that customizing the infrastructure will take approximately 200 hours in total to complete the project and charges $ 150 per hour. After incurring 100 hours of time, Growth Limited and the customer agree to change an aspect of the project and increases the estimate of labour hours by 50 hours at the rate of $ 100 per hour. Determine how contract modification will be accounted as per IFRS 15.
QUESTION 7 Illustration 7 A construction services company enters into a contract with a customer to build a water purification plant. The company is responsible for all aspects of the plant including overall project management, engineering and design services, site preparation, physical construction of the plant, procurement of pumps and equipment for measuring and testing flow volumes and water quality, and the integration of all components. Determine whether the company has a single or multiple performance obligations under the contract.
QUESTION 8 Illustration 8 An entity provides broadband services to its customers along with voice call service. Customer buys modem from the entity. However, customer can also get the connection from the entity and modem from any other vendor. The installation activity requires limited effort and the cost involved is almost insignificant. It has various plans where it provides either broadband services or voice call services or both. Are the performance obligations under the contract distinct?
QUESTION 9 Illustration 9 An entity enters into a contract to build a power plant for a customer. The entity will be responsible for the overall management of the project including services to be provided like engineering, site clearance, foundation, procurement and construction of the structure, piping and wiring, installation of equipment and finishing. Determine how many performance obligations does the entity have.
QUESTION 10 Illustration 10 Could the series requirement apply to hotel management services where day to day activities vary, involve employee management, procurement, accounting, etc.
QUESTION 11 Illustration 11 Entity A, a specialty construction firm, enters into a contract with Entity B to design and construct a multi-level shopping center with a customer car parking facility located in sub-levels underneath the shopping center. Entity B solicited bids from multiple firms on both phases of the project — design and construction. The design and construction of the shopping center and parking facility involves multiple goods and services from architectural consultation and engineering through procurement and installation of all of the materials. Several of these goods and services could be considered separate performance obligations because Entity A frequently sells the services, such as architectural consulting and engineering services, as well as standalone construction services based on third party design, separately. Entity A may require to continually alter the design of the shopping center and parking facility during construction as well as continually assess the propriety of the materials initially selected for the project. Determine how many performance obligations does the entity A have?
QUESTION 12 Illustration 12 An entity, a software developer, enters into a contract with a customer to transfer a software license, perform an installation service and provide unspecified software updates and technical support (online and telephone) for a two-year period. The entity sells the license, installation service and technical support separately. The installation service includes changing the web screen for each type of user (for example, marketing, inventory management and information technology). The installation service is routinely performed by other entities and therefore it does not significantly modify the software. The software remains functional without the updates and the technical support. Determine as to how many performance obligations does the entity have.
QUESTION 13 Illustration 13: Significant customization The promised goods and services are the same as in the above Illustration, except that the contract specifies that, as part of the installation service, the software is to be substantially customized to add significant new functionality to enable the software to interface with other customized software applications used by the customer. The customized installation service can be provided by other entities. Determine how many performance obligations does the entity have.
QUESTION 14 Illustration 14 An entity enters into a contract for the sale of Product A for $ 1,000. As part of the contract, the entity gives the customer a 40% discount voucher for any future purchases up to $ 1,000 in the next 30 days. The entity intends to offer a 10% discount on all sales during the next 30 days as part of a seasonal promotion. The 10% discount cannot be used in addition to the 40% discount voucher. The entity believes there is 80% likelihood that a customer will redeem the voucher and on an average, a customer will purchase $ 500 of additional products. Determine how many performance obligations does the entity have and their stand-alone selling price and allocated transaction price?
QUESTION 15 Illustration 15 A cable company provides television services for a fixed rate fee of $ 800 per month for a period of 3 years. Cable services is satisfied overtime because customer consumes and receives benefit from services as it is provided i.e. Customer generally benefits each day that they have access to cable service. Determine how many performance obligations does the cable company have.
QUESTION 16 Illustration 16 Manufacturer M enters into a 60-day consignment contract to ship 1,000 dresses to Retailer A’s stores. Retailer A is obligated to pay Manufacturer M $ 20 per dress when the dress is sold to an end customer. During the consignment period, Manufacturer M has the contractual right to require Retailer A to either return the dresses or transfer them to another retailer. Manufacturer M is also required to accept the return of the inventory. State when the control is transferred.
QUESTION 17 Illustration 17 An entity negotiates with major airlines to purchase tickets at reduced rates compared with the price of tickets sold directly by the airlines to the public. The entity agrees to buy a specific number of tickets and will pay for those tickets even if it is not able to resell them. The reduced rate paid by the entity for each ticket purchased is negotiated and agreed in advance. The entity determines the prices at which the airline tickets will be sold to its customers. The entity sells the tickets and collects the consideration from customers when the tickets are purchased; therefore, there is no credit risk. The entity also assists the customers in resolving complaints with the service provided by airlines. However, each airline is responsible for fulfilling obligations associated with the ticket, including remedies to a customer for dissatisfaction with the service. Determine whether the entity is a principal or an agent.
QUESTION 18 Illustration 18 Customer buy a new data connection from the telecom entity. It pays one-time registration and activation fees at the time of purchase of new connection. The customer will be charged based on the usage of the data services of the connection on monthly basis. Are the performance obligations under the contract distinct?
QUESTION 19 Illustration 19–Estimating variable consideration XYZ Limited enters into a contract with a customer to build a sophisticated machinery. The promise to transfer the asset is a performance obligation that is satisfied over time. The promised consideration is $ 2.5 Million, but that amount will be reduced or increased depending on the timing of completion of the asset. Specifically, for each day after 31 March 2018 that the asset is incomplete, the promised consideration is reduced by $ 1 Lakh. For each day before 31 March 2018 that the asset is complete, the promised consideration increases by $ 1 Lakh. In addition, upon completion of the asset, a third party will inspect the asset and assign a rating based on metrics that are defined in the contract. If the asset receives a specified rating, the entity will be entitled to an incentive bonus of $ 15 Lakhs. Determine the transaction price.
QUESTION 20 Illustration 20–Estimating variable consideration AST Limited enters into a contract with a customer to build a manufacturing facility. The entity determines that the contract contains one performance obligation satisfied over time. Construction is scheduled to be completed by the end of the 36th month for an agreed-upon price of $ 25 Million. The entity has the opportunity to earn a performance bonus for early completion as follows: • 15 percent bonus of the contract price if completed by the 30th month (25% likelihood) • 10 percent bonus if completed by the 32nd month (40% likelihood) • 5 percent bonus if completed by the 34th month (15% likelihood) In addition to the potential performance bonus for early completion, AST Limited is entitled to a quality bonus of $ 2 million if a health and safety inspector assigns the facility a gold star rating as defined by the agency in the terms of the contract. AST Limited concludes that it is 60% likely that it will receive the quality bonus. Determine the transaction price.
QUESTION 21 Illustration 21–Volume discount incentive HT Limited enters into a contract with a customer on 1 April 2018 to sell Product X for $ 1,000 per unit. If the customer purchases more than 100 units of Product A in a financial year, the contract specifies that the price per unit is retrospectively reduced to $ 900 per unit. Consequently, the consideration in the contract is variable. For the first quarter ended 30 June 2018, the entity sells 10 units of Product A to the customer. The entity estimates that the customer's purchases will not exceed the 100-unit threshold required for the volume discount in the financial year. HT Limited determines that it has significant experience with this product and with the purchasing pattern of the customer. Thus, HT Limited concludes that it is highly probable that a significant reversal in the cumulative amount of revenue recognized (i.e. $ 1,000 per unit) will not occur when the uncertainty is resolved (i.e. when the total amount of purchases is known). Further, in May 2018, the customer acquires another company and in the second quarter ended 30 September 2018, the entity sells an additional 50 units of Product A to the customer. In the light of the new fact, the entity estimates that the customer's purchases will exceed the 100 unit threshold for the financial year and therefore it will be required to retrospectively reduce the price per unit to $ 900. Determine the amount of revenue to be recognize by HT Limited for the quarter ended 30 June 2018 and 30 September 2018.
QUESTION 22 Illustration 22–Measurement Evaluate the impact of changes in variable consideration when cost incurred
QUESTION 23 Illustration 23–Management fees subject to the constraint On 1 April 2017, an entity enters into a contract with a client to provide asset management services for five years. The entity receives a two per cent quarterly management fee based on the client's assets under management at the end of each quarter. At 31 March 2018, the client's assets under management are $ 100 million. In addition, the entity receives a performance-based incentive fee of 20 per cent of the fund's return in excess of the return of an observable market index over the five-year period. Consequently, both the management fee and the performance fee in the contract are variable consideration. Analyze the revenue to be recognized on 31 March 2018.
QUESTION 24 Illustration 24–Right of return An entity enters into 1,000 contracts with customers. Each contract includes the sale of one product for $ 50 (1,000 total products × $ 50 = $ 50,000 total consideration). Cash is received when control of a product transfers. The entity's customary business practice is to allow a customer to return any unused product within 30 days and receive a full refund. The entity's cost of each product is $ 30. The entity applies the requirements in IFRS 15 to the portfolio of 1,000 contracts because it reasonably expects that, in accordance with paragraph 4, the effects on the financial statements from applying these requirements to the portfolio would not differ materially from applying the requirements to the individual contracts within the portfolio. Since the contract allows a customer to return the products, the consideration received from the customer is variable. To estimate the variable consideration to which the entity will be entitled, the entity decides to use the expected value method (see paragraph 53(a) of IFRS 15) because it is the method that the entity expects to better predict the amount of consideration to which it will be entitled. Using the expected value method, the entity estimates that 970 products will not be returned. The entity estimates that the costs of recovering the products will be immaterial and expects that the returned products can be resold at a profit. Determine the amount of revenue, refund liability and the asset to be recognized by the entity for the said contracts.
QUESTION 25 Illustration 25–Financing component: significant or insignificant? A commercial airplane component supplier enters into a contract with a customer for promised consideration of $ 7,000,000. Based on an evaluation of the facts and circumstances, the supplier concluded that $ 140,000 represented an insignificant financing component because of an advance payment received in excess of a year before the transfer of control of the product. State whether company needs to make any adjustment in determining the transaction price. What if the advance payment was larger and received further in advance, such that the entity concluded that $ 1,400,000 represented the financing component based on an analysis of the facts and circumstances.
QUESTION 26 Illustration 26–Accounting for significant financing component NKT Limited sells a product to a customer for $ 121,000 that is payable 24 months after delivery. The customer obtains control of the product at contract inception. The contract permits the customer to return the product within 90 days. The product is new and the entity has no relevant historical evidence of product returns or other available market evidence. The cash selling price of the product is $ 100,000 which represents the amount that the customer would pay upon delivery for the same product sold under otherwise identical terms and conditions as at contract inception. The entity's cost of the product is $ 80,000.The contract includes an implicit interest rate of 10 per cent (i.e. the interest rate that over 24 months discounts the promised consideration of $ 121,000 to the cash selling price of $ 100,000). Analyze the above transaction with respect to its financing component.
QUESTION 27 Illustration 27–Determining the discount rate VT Limited enters into a contract with a customer to sell equipment. Control of the equipment transfers to the customer when the contract is signed. The price stated in the contract is $ 10 Million plus a 10% contractual rate of interest, payable in 60 monthly instalments of $ 212,470. Determine the discounting rate and the transaction price when Case A: Contractual discount rate reflects the rate in a separate financing transaction Case B: Contractual discount rate does not reflect the rate in a separate financing transaction i.e. 14%.
QUESTION 28 Illustration 28–Advance payment and assessment of discount rate ST Limited enters into a contract with a customer to sell an asset. Control of the asset will transfer to the customer in two years (i.e. the performance obligation will be satisfied at a point in time). The contract includes two alternative payment options: 1) Payment of $ 5,000 in two years when the customer obtains control of the asset or 2) Payment of $ 4,000 when the contract is signed. The customer elects to pay $ 4,000 when the contract is signed. ST Limited concludes that the contract contains a significant financing component because of the length of time between when the customer pays for the asset and when the entity transfers the asset to the customer, as well as the prevailing interest rates in the market. The interest rate implicit in the transaction is 11.8 per cent, which is the interest rate necessary to make the two alternative payment options economically equivalent. However, the entity determines that, the rate that should be used in adjusting the promised consideration is 6%, which is the entity's incremental borrowing rate. Pass journal entries showing how the entity would account for the significant financing component
QUESTION 29 Illustration 29–Withheld payments on a long-term contract ABC Limited enters into a contract for the construction of a power plant that includes scheduled milestone payments for the performance by ABC Limited throughout the contract term of three years. The performance obligation will be satisfied over time and the milestone payments are scheduled to coincide with the expected performance by ABC Limited. The contract provides that a specified percentage of each milestone payment is to be withheld as retention money by the customer throughout the arrangement and paid to the entity only when the building is complete. Analyze whether the contract contains any financing component.
QUESTION 30 Illustration 30–Advance payment XYZ Limited, a personal computer (PC) manufacturer, enters into a contract with a customer to provide global PC support and repair coverage for three years along with its PC. The customer purchases this support service at the time of buying the product. Consideration for the service is an additional $ 3,000. Customers electing to buy this service must pay for it upfront (i.e. a monthly payment option is not available). Analyze whether there is any significant financing component in the contract or not.
QUESTION 31 Illustration 31–Advance payment A computer hardware vendor enters into a three-year arrangement with a customer to provide support services. For customers with low credit ratings, the vendor requires the customer to pay for the entire arrangement in advance of the provision of service. Other customers pay over time. Analyze whether there is any significant financing component in the contract or not.
QUESTION 32 Illustration 32 –Sales based royalty A software vendor enters into a contract with a customer to provide a license solely in exchange for a sales-based royalty. Analyze whether there is any significant financing component in the contract or not.
QUESTION 33 Illustration 33 –Payment in arrears An EPC contractor enters into a two-year contract to develop customized machine for a customer. The contractor concludes that the goods and services in this contract constitute a single performance obligation. Based on the terms of the contract, the contractor determines that it transfers control over time, and recognizes revenue based on an input method best reflecting the transfer of control to the customer. The customer agrees to provide the contractor monthly progress payments, with the final 25 percent payment (holdback payment) due upon contract completion. As a result of the holdback payment, there is a gap between when control transfers and when consideration is received, creating a financing component. Analyze whether there is any significant financing component in the contract or not.
QUESTION 34 Illustration 34–Payment in arrears Company Z is a developer and manufacturer of defense systems that is primarily a Tier-II supplier of parts and integrated systems to original equipment manufacturers (OEMs) in the commercial markets. Company Z enters into a contract with Company X for the development and delivery of 5,000 highly technical, specialized missiles for use in one of Company X’s platforms. As a part of the contract, Company X has agreed to pay Company Z for their cost plus an award fee up to $ 100 million. The consideration will be paid by the customer related to costs incurred near the time Company Z incurs such costs. However, the $ 100 million award fee is awarded upon successful completion of the development and test fire of a missile to occur in 16 months from the time the contract is executed. The contract specifies Company Z will earn up to $ 100 million based on Company X’s assessment of Company Z’s ability to develop and manufacture a missile that achieves multiple factors, including final weight, velocity and accuracy. Partial award fees may be awarded based on a pre-determined scale based on their success. Assume Company Z has assessed the contract under IFRS 15 and determined the award fee represents variable consideration. Based on their assessment, Company Z has estimated a total of $ 80 million in the transaction price related to the variable consideration pursuant to guidance within IFRS 15. Further, the entity has concluded it should recognize revenue over time for a single performance obligation using a cost-to-cost input method. Analyze whether there is any significant financing component in the contract or not.
QUESTION 35 Illustration 35–Applying practical expedient Company H enters into a two-year contract to develop customized software for Company C. Company H concludes that the goods and services in this contract constitute a single performance obligation. Based on the terms of the contract, Company H determines that it transfers control over time, and recognizes revenue based on an input method best reflecting the transfer of control to Company C. Company C agrees to provide Company H monthly progress payments. Based on the expectation of the timing of costs to be incurred, Company H concludes that progress payments are being made such that the timing between the transfer of control and payment is never expected to exceed one year. Analyze whether there is any significant financing component in the contract or not.
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?
QUESTION 37 Illust 37 FV of non-cash consideration varies for reasons other than the form of the consideration RT Limited enters into a contract to build an office building for AT Limited over an 18-month period. AT Limited agrees to pay the construction entity $ 350 million for the project. RT Limited will receive a bonus of 10 Lakhs equity shares of AT Limited if it completes construction of the office building within one year. Assume a fair value of $ 100 per share at contract inception. Determine the transaction price.
QUESTION 38 Illustration 38–Customer-provided goods or services MS Limited is a manufacturer of cars. It has a supplier of steering systems – SK Limited. MS Limited places an order of 10,000 steering systems on SK Limited. It also agrees to pay $ 25,000 per steering system and contributes tooling to be used in SK’s production process. The tooling has a fair value of $ 2 million at contract inception. SK Limited determines that each steering system represents a single performance obligation and that control of the steering system transfers to MS Limited upon delivery. SK Limited may use the tooling for other projects and determines that it obtains control of the tooling. Determine the transaction price.
QUESTION 39 Illustration 39–Consideration payable to a customer An entity that manufactures consumer goods enters into a one-year contract to sell goods to a customer that is a large global chain of retail stores. The customer commits to buy at least $ 15 Million of products during the year. The contract also requires the entity to make a non-refundable payment of $ 1.5 Million to the customer at the inception of the contract. The $ 1.5 Million payment will compensate the customer for the changes it needs to make to its shelving to accommodate the entity's products. The entity does not obtain control of any rights to the customer's shelves. Determine the transaction price.
QUESTION 40 Illustration 40–Allocation Estimatimation of the stand-alone selling prices !
QUESTION 41 Illustration 41– Allocation of the transaction price
QUESTION 42 Illustration 42–Allocation of variable consideration An entity enters into a contract with a customer for two intellectual property licenses (Licenses A and B), which the entity determines to represent two performance obligations each satisfied at a point in time. The stand-alone selling prices of Licenses A and B are $ 1,600,000 and $ 2,000,000, respectively. The entity transfers License B at inception of the contract and transfers License A one month later. Case A: Variable consideration allocated entirely to one performance obligation. The price stated in the contract for License A is a fixed amount of $ 1,600,000 and for License B the consideration is three per cent of the customer's future sales of products that use License B. For purposes of allocation, the entity estimates its sales-based royalties (i.e. the variable consideration) to be $ 2,000,000. Allocate the transaction price. Case B: Variable consideration allocated on the basis of stand-alone selling prices. The price stated in the contract for Licence A is a fixed amount of $ 600,000 and for License B the consideration is five per cent of the customer's future sales of products that use Licence B. The entity's estimate of the sales-based royalties (i.e. the variable consideration) is $ 3,000,000. Allocate the transaction price and determine the revenue to be recognized for each licence and the contract liability, if any.
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.
QUESTION 44 Illustration 44 Minitek Limited is a payroll processing company. Minitek Limited enters into a contract to provide monthly payroll processing services to ABC limited for one year. Determine how entity will recognize the revenue.
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.
QUESTION 46 Illustration 46 AFS Limited is a risk advisory firm and enters into a contract with a company – WBC Limited to provide audit services that results in AFS issuing an audit opinion to the Company. The professional opinion relates to facts and circumstances that are specific to the company. If the Company was to terminate the consulting contract for reasons other than the entity's failure to perform promised, the contract requires the Company to compensate the risk advisory firm for its costs incurred plus a 15 per cent margin. The 15 per cent margin approximates the profit margin that the entity earns from similar contracts. Whether risk advisory firm’s performance obligation is met over period of time.
QUESTION 47 Illustration 47 Space Limited enters into an arrangement with a government agency for construction of a space satellite. Although Space Limited is in this business for building such satellites for various customers across the world, however the specifications for each satellite may vary based on technology that is incorporated in the satellite. In the event of termination, Company has right to enforce payment for work completed to date. Evaluate if contract will qualify for satisfaction of performance obligation over a period of time.
QUESTION 48 Illustration 48: Measuring progress on straight line basis An entity, an owner and manager of health clubs, enters into a contract with a customer for one year of access to any of its health clubs. The customer has unlimited use of the health clubs and promises to pay CU100 per month. The entity’s promise to the customer is to provide a service of making the health clubs available for the customer to use as and when the customer wishes. Evaluate if contract will qualify for satisfaction of performance obligation over a period of time. If yes, how should an entity measure its progress of service provided
QUESTION 49 Illustration 49: Uninstalled materials -How will the Company recognize revenue, if performance obligation is met over a period of time?
QUESTION 50 Illustration 50 An entity enters into a contract with a customer for the sale of a tangible asset on 1 January 2018 for $ 1 million. The contract includes a call option that gives the entity the right to repurchase the asset for $ 1.1 million on or before December 31, 2018. How would the entity account for this transaction?
QUESTION 51 Illustration 51 An entity enters into a contract with a customer for the sale of a tangible asset on 1 January 2018 for $ 1,000,000. The contract includes a put option that gives the customer the right to sell the asset for $ 900,000 on or before December 31, 2018. The market price for such goods is expected to be $ 750,000. How would the entity account for this transaction?
QUESTION 52 Illustration 52 An entity enters into a contract with a customer on 1 April 2016 for the sale of a machine and spare parts. The manufacturing lead time for the machine and spare parts is two years. Upon completion of manufacturing, the entity demonstrates that the machine and spare parts meet the agreed-upon specifications in the contract. The promises to transfer the machine and spare parts are distinct and result in two performance obligations that each will be satisfied at a point in time. On 31 March 2018, the customer pays for the machine and spare parts, but only takes physical possession of the machine. Although the customer inspects and accepts the spare parts, the customer requests that the spare parts be stored at the entity's warehouse because of its close proximity to the customer's factory. The customer has legal title to the spare parts and the parts can be identified as belonging to the customer. Furthermore, the entity stores the spare parts in a separate section of its warehouse and the parts are ready for immediate shipment at the customer's request. The entity expects to hold the spare parts for two to four years and the entity does not have the ability to use the spare parts or direct them to another customer. How will the Company recognize revenue for sale of machine and spare parts? Is there any other performance obligation attached to this sale of goods?
QUESTION 53 Illustration 53 -How should such costs be treated?
QUESTION 54 Illustration 54: Amortization An entity enters into a service contract with a customer and incurs incremental costs to obtain the contract and costs to fulfil the contract. These costs are capitalized as assets in accordance with IFRS 15. The initial term of the contract is five years but it can be renewed for subsequent one-year periods up to a maximum of 10 years. The average contract term for similar contracts entered into by entity is seven years. Determine appropriate method of amortization.
QUESTION 55 Illustration 55 A Limited is in the business of the infrastructure and has two divisions under the same; I) Toll Roads and II) Wind Power. The brief details of these business and underlying project details are as follows: I. Bhilwara-Jabalpur Toll Project - The Company has commenced the construction of the project in the current year and has incurred total expenses aggregating to $ 50 million as on 31st December 2018. Under IGAAP, the Company has 'recorded such expenses as Intangible Assets in the books of account. The brief details of the Concession Agreement are as follows: • Total Expenses estimated to be incurred on the project $ 100 million; • Fair Value of the construction services is $ 110 million; • Total Cash Flow guaranteed by the Government under the concession agreement is $ 200 million; • Finance revenue over the period of operation phase is $ 15 million: • Other income relates to the services provided during the operation phase. II. Kolhapur-Nagpur Expressway -The Company has also entered into another concession agreement with Government of Maharashtra in the current year. The construction cost for the said project will be $ 110 million. The fair value of such construction cost is approximately $ 200 million. The said concession agreement is Toll based project and the Company needs to collect the toll from the users of the expressway. Under IGAAP, A Limited has recorded the expenses incurred on the said project as an Intangible Asset. Required a) What would be the classification of Bhilwara-Jabalpur Toll Project as per applicable IFRS? Give brief reasoning for your choice. b) What would be the classification of Kolhapur-Nagpur Expressway Toll Project as per applicable IFRS? Give brief reasoning for your choice. c) Also, suggest suitable accounting treatment for preparation of financial statements as per IFRS for the above 2 projects
QUESTION 56 IllUSTRATION 56. Q TV released an advertisement in Deshabandhu, a vernacular daily. Instead of paying for the same, Q TV allowed Deshabandhu a free advertisement spot, which was duly utilized by Deshabandhu. How revenue for these non-monetary transactions in the area of advertising will be recognized and measured?
QUESTION 57 ILLUSTRATION 57. A Limited a telecommunication company, entered into an agreement with B Limited which is engaged in generation and supply of power. The agreement provided that A Limited will provide 1,00,000 minutes of talk time to employees of B Limited in exchange for getting power equivalent to 20,000 units. A Limited normally charges Re.0.50
QUESTION 58 ILLUSTRATION 58 Company X enters into an agreement on January 1, 2018 with a customer for renovation of hospital and install new air-conditioners for total consideration of $ 50,00,000. The promised renovation service, including the installation of new air-conditioners is a single performance obligation satisfied over time. Total expected costs are $ 40,00,000 including $ 10,00,000 for the air conditioners. Company X determines that it acts as a principal in accordance with paragraphs B34-B38 of IFRS 15 because it obtains control of the air conditioners before they are transferred to the customer. The customer obtains control of the air conditioners when they are delivered to the hospital premises. Company X uses an input method based on costs incurred to measure its progress towards complete satisfaction of the performance obligation. As at March 31, 2018, other costs incurred excluding the air conditioners are $ 6,00,000. Whether Company X should include cost of the air-conditioners in measure of its progress of performance obligation. How should revenue be recognized for the year ended March 2018.
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IFRS 15 Revenue from Contracts with Customers - PRACTICAL PROBLEMS !

QUESTION 1 A vendor sells 1,000 units of a product to a customer in return for a contractually agreed amount of $ 1 million. This is the vendor’s first sale to a customer in the geographic region, and the region is experiencing significant economic difficulty. The vendor believes that economic conditions will improve in future, and that by establishing a trading relationship now with the customer sales volumes in future will be enhanced. However, for this first contract, the vendor does not expect that the customer will be able to pay the full amount of the contractually agreed price. Consequently, the vendor determines that it expects to offer a 50% discount to its customer. Having considered the customer’s intention and ability to pay, taking into account the current poor economic conditions, it is concluded that it is probable that the estimated amount of $ 500,000 will be collected. Is it as per IFRS 15?
QUESTION 2 A vendor enters into a contract with a customer to sell 200 units of a product for $ 16,000 ($ 80 per unit). These are to be supplied evenly to the customer over a four-month period (50 units per month) and control over each unit passes to the customer on delivery. After 150 units have been delivered, the contract is modified to require the delivery of an additional 50 units. At the point at which the contract is modified, the stand-alone selling price of one unit of the product has declined to $ 75. What is the effect as per IFRS 15?
QUESTION 3 In continuation to question no. 2, if the selling price of the additional units is the stand-alone price at the date of contract modification. Consequently, the additional units are accounted for as being sold under a new and separate contract from the units to be delivered under the terms of the original contract. Is it as per IFRS 15?
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?
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?
QUESTION 6 A building contractor (the vendor) enters into a contract to build a new office block for a customer. The vendor is responsible for the entire project, including procuring the construction materials, project management and associated services. The project involves site clearance, foundations, construction, piping and wiring, equipment installation and finishing. Whether it is a distinct contract?
QUESTION 7 A vendor enters into a contract with a customer to supply a licence for a standard ‘off the shelf’ software package, install the software, and to provide unspecified software updates and technical support for a period of two years. The vendor sells the licence and technical support separately, and the installation service is routinely provided by a number of other unrelated vendors. The software will remain functional without the software updates and technical support. Whether it is a distinct contact?
QUESTION 8 The vendor’s contract with its customer is the same as in question 7, except that as part of the installation service the software is to be substantially customized in order to add significant new functionality to enable the software to interface with other software already being used by the customer. The customized installation service can be provided by a number of unrelated vendors. Whether it is a distinct contact?
QUESTION 9 The vendor’s contract with its customer is the same as in question 8, except that: • The vendor is the only supplier that is capable of carrying out the customized installation service • The software updates and technical support are essential to ensure that the software continues to operate satisfactorily, and the customer’s employees continue to be able to operate the related IT systems. No other entity is capable of providing the software updates or the technical support. Whether it is a distinct contact?
QUESTION 10 On 1 January 2018, a vendor enters into a contract with a customer to build an item of specialized equipment, for delivery on 31 March 2018. The amount of consideration specified in the contract is $ 2 million, but that amount will be increased or decreased by $ 10,000 for each day that the actual delivery date is either before or after 31 March 2018. What is the revenue recognition as per IFRS 15?
QUESTION 11 A vendor enters into a contract with a customer to construct a building for $ 1 million. The terms of the contract include a penalty of $ 100,000 if the building has not been completed by a specified date. Suggest the way out as per provision of IFRS 15.
QUESTION 12 On 1 January 2018, a vendor sells 1,000 identical goods to a distributor, which sells them to its own customers. The vendor’s selling price is $ 100 per unit, and payment is due from the distributor to the vendor when the distributor sells each of the goods to its own customers. Typically, those onward sales take place 90 days after the goods have been obtained by the distributor. Control of the goods transfers to the distributor on 1 January 2018. What is revenue recognition as per IFRS 15?
QUESTION 13 The vendor has substantial past experience of selling the goods and, historically, has granted a subsequent price concession of approximately 20% of the original sales price. Current market conditions indicate that a similar reduction in price will be applied to the contract entered into on 1 January 2018 as per question 12. What is the implication as per IFRS 15?
QUESTION 14 Although the vendor has experience of selling similar goods, these goods (including the goods being sold in this transaction) have a high risk of obsolescence and the ultimate pricing is very volatile. Historically, the vendor has offered subsequent price concessions of 20-60% from the sales price for similar goods, and current market information indicates that a range of 15-50% might apply to the current transaction. What is the implication as per IFRS 15?
QUESTION 15 A vendor (a construction company) enters into a contract with a customer to supply a new building. Control over the completed building will pass to the customer in two years’ time (the vendor’s performance obligation will be satisfied at a point in time). The contract contains two payment options. Either the customer can pay $ 5 million in two years’ time when it obtains control of the building, or the customer can pay $ 4 million on inception of the contract. The customer decides to pay $ 4 million on inception. State the implication on revenue recognition.
QUESTION 16 A vendor that manufactures retails goods enters into a contract to sell goods to a customer (a large supermarket group) for a period of one year. The customer is required to purchase at least $ 20 million of goods during the year. The contract requires the customer to make changes to the shelving and display cabinets at the stores from which the retail goods will be sold. On the date on which the contract is entered into, the vendor makes a non-refundable payment of $ 2 million to the customer to compensate for the related costs. How this is recognised as per IFRS 15?
QUESTION 17 A vendor sells three products (A, B and C) to a customer for $ 100. Each product will be transferred to the customer at a different time. Product A is regularly sold separately for $ 50; products B and C are not sold separately, and their estimated stand-alone selling prices are $ 25 and $ 75 respectively. How would you treat the above?
QUESTION 18 Assume the same fact pattern as question 17, except that products B and C are regularly sold together for consideration of $ 50, the total amount payable by the customer is $ 90 and product A is regularly sold for amounts between $ 35 and $ 50. Because the vendor has evidence that a discount of $ 50 is regularly applied to products B and C, the selling price attributed to those products is determined first with a residual amount being attributed to product A. How would you treat this?
QUESTION 19 A vendor enters into a contract with a customer for two licences of intellectual property (licences A and B). It is determined that each licence represents a separate performance obligation, which is satisfied at a point in time (the transfer of each of the licences to the customer). The stand-alone selling prices of the licences are $ 1,200 (licence A) and $ 1,500 (licence B). How would you treat it as per IFRS 15? The prices included in the contract are as follows: • Licence A: a fixed amount of $ 1,200, payable 30 days from the transfer of the licence to the customer • Licence B: a royalty payment of 5% of the selling price of the customer’s future sales of products that use licence B. The vendor estimates that the amount of sales-based royalties that it will receive in respect of licence B will be approximately $ 1,500. The vendor then determines the allocation of the transaction price to each of the two licences. It is concluded that the allocation should be as follows: • Licence A: $ 1,200 • Licence B: the variable royalty payment. This allocation is made because both of the following conditions apply: • The variable payment relates solely to the transfer of licence B (the subsequent royalty payments); and • The fixed amount of licence A, and the estimated amount of sales-based royalties for licence B, are equivalent to their stand-alone selling prices. How would you treat the above?
QUESTION 20 Assume the same example as question 19 above, except that the prices included in the contract are: • Licence A: a fixed amount of $ 450 • Licence B: a royalty payment of 7.5% of the selling price of the customer’s future sales of products that use licence B. The vendor estimates that the amount of sales-based royalties that it will receive in respect of licence B will be approximately $ 2,250. In this case, although the variable payments relate solely to the transfer of licence B (the subsequent royalty payments), allocating the variable consideration only to licence B would be inappropriate. This is because allocating $ 450 to licence A and $ 2,250 to licence B would not reflect a reasonable allocation based on the stand-alone selling prices of those two licences. Instead, the fixed amount receivable in respect of licence A is allocated to the two licences on the basis of their stand-alone selling prices. This allocation is calculated as: • Licence A: (1,200 / 2,700) x $ 450 = $ 200 • Licence B: (1,500 / 2,700) x $ 450 = $ 250 How would you treat the above?
QUESTION 21 On 1 January 2018, a vendor (a retailer) sells 100 identical goods to different customers, at a sales price of $ 100 (total $ 10,000). The cost of each good is $ 60. Revenue is recognised at the point at which a customer buys one of the goods, and customers have a right to return the good for a period of 30 days from the original purchase, in return for a full refund. The right of return gives rise to variable consideration. Based on substantial historic experience with the good, and on future expectations, the vendor estimates that three of the goods will be returned. The amount and quality of evidence available means that the vendor is able to conclude that it is highly probable that there will not be a significant reversal of revenue if it recognizes revenue attributable to the 97 goods that it does not expect to be returned. Explain the revenue recognition.
QUESTION 22 A vendor grants a franchise licence to a customer, which provides the right to use the vendor’s trade name and sell its products for a period of 10 years. During this period, the vendor will undertake activities that will affect the franchise licence, including analyzing changes in customer preferences, implementing product improvements, and undertaking marketing campaigns. The nature of the vendor’s promise to its customer is to provide access to the vendor’s intellectual property in its form as exists throughout the licence period and not only as it exists at the start of the licence period. Consequently, the performance obligation is satisfied over time. Discuss the implication.
QUESTION 23 A vendor (a music record label) licenses a specified recording of a Beethoven symphony to a customer for a period of two years. The customer has the right to use the recording in all types of advertising campaigns (including television, radio and online media) in a specified country. The contract is non-cancellable and the customer is required to pay $ 10,000 per month. The nature of the vendor’s promise to its customer is to provide access to the recording in its condition as at the start of the licence period. Consequently, the customer’s rights to the intellectual property are static and the vendor’s performance obligation is satisfied at a point in time. The vendor recognizes all of the revenue (adjusted for a significant financing component, if appropriate) at the point at which the customer is able to use, and obtain substantially all the benefits, of the licensed intellectual property. Discuss the implication.
QUESTION 24 Distinction between revenue and income A car dealership has cars available that can be used by potential customers for test drives (“demonstration cars”). The cars are used for more than one year and then sold as used cars. The dealership sells both new and used cars. Is the sale of a demonstration car accounted for as revenue or as a gain?
QUESTION 25 Scope — exchange of products to facilitate a sale to another party Salter is a supplier of road salt. Adverse weather events can lead to a sudden increase in demand, and Salter does not always have a sufficient supply of road salt to meet this demand on short notice. Salter enters into a contract with Salt Co, a supplier of road salt in another region, such that each party will provide road salt to the other during local adverse weather events as they are rarely affected at the same time. No other consideration is provided by the parties. Is the contract in the scope of the revenue standard?
QUESTION 26 Identifying the customer — collaborative arrangement Biotech signs an agreement with Pharma to share equally in the development of a specific drug candidate. Is the arrangement in the scope of the revenue standard?
QUESTION 27 Identifying the contract — product delivered without a written contract Seller’s practice is to obtain written and customer-signed sales agreements. Seller delivers a product to a customer without a signed agreement based on a request by the customer to fill an urgent need. Can an enforceable contract exist if Seller has not obtained a signed agreement consistent with its customary business practice?
QUESTION 28 Identifying the contract — contract extensions Service Provider has a 12-month agreement to provide Customer with services for which Customer pays $ 1,000 per month. The agreement does not include any provisions for automatic extensions, and it expires on November 30, 2016. The two parties sign a new agreement on February 28, 2017 that requires Customer to pay $ 1,250 per month in fees, retroactive to December 1, 2016. Customer continued to pay $ 1,000 per month during December, January, and February, and Service Provider continued to provide services during that period. There are no performance issues being disputed between the parties in the expired period, only negotiation of rates under the new contract. Does a contract exist in December, January, and February (prior to the new agreement being signed)?
QUESTION 29 Identifying the contract — assessing collectability for a portfolio of contracts Wholesaler sells sunglasses to a large volume of customers under similar contracts. Before accepting a new customer, Wholesaler performs customer acceptance and credit check procedures designed to ensure that it is probable the customer will pay the amounts owed. Wholesaler will not accept a new customer that does not meet its customer acceptance criteria. In January 2018, Wholesaler delivers sunglasses to multiple customers in exchange for consideration totaling $ 100,000. Wholesaler concludes that control of the sunglasses has transferred to the customers and there are no remaining performance obligations. Wholesaler’s concludes, based on its procedures, that collection is probable for each customer; however, historical experience indicates that, on average, Wholesaler will collect only 95% of the amounts billed. Wholesaler believes its historical experience reflects its expectations about the future. Wholesaler intends to pursue full payment from customers and does not expect to provide any price concessions. How much revenue should Wholesaler recognize?
QUESTION 30 Determining the contract term — both parties can terminate without penalty Service Provider enters into a contract with a customer to provide monthly services for a three-year period. Each party can terminate the contract at the end of any month for any reason without compensating the other party (that is, there is no penalty for terminating the contract early). What is the contract term for purposes of applying the revenue standard?
QUESTION 31 Determining the contract term — only the customer can terminate without penalty Assume the same facts as in question 30 except only the customer can terminate the contract early. The customer does not have to pay any compensation to Service Provider to terminate the contract. What is the contract term for purposes of applying the revenue standard?
QUESTION 32 Determining the contract term — impact of termination penalty Assume the same facts as in Example 31, except the customer must pay a termination penalty if the customer terminates the contract during the first twelve months. What is the contract term for purposes of applying the revenue standard?
QUESTION 33 Contract modifications — unpriced change order Contractor enters into a contract with a customer to construct a warehouse. Contractor discovers environmental issues during site preparation that must be remediated before construction can begin. Contractor obtains approval from the customer to perform the remediation efforts, but the price for the services will be agreed to in the future (that is, it is an unpriced change order). Contractor completes the remediation and invoices the customer $2 million, based on the costs incurred plus a profit margin consistent with the overall expected margin on the project. The invoice exceeds the amount the customer expected to pay, so the customer challenges the charge. Based on consultation with external counsel and the Contractor’s customary business practices, Contractor concludes that performance of the remediation services gives rise to enforceable rights and that the amount charged is reasonable for the services performed. Is the contract modification approving such that Contractor can account for the modification?
QUESTION 34 Contract modifications — sale of additional goods Manufacturer enters into an arrangement with a customer to sell 100 goods for $10,000 ($100 per good). The goods are distinct and are transferred to the customer over a six-month period. The parties modify the contract in the fourth month to sell an additional 20 goods for $95 each. The price of the additional goods represents the standalone selling price on the modification date. Should Manufacturer account for the modification as a separate contract?
QUESTION 35 Contract modifications — modification accounted for prospectively Serve Co enters into a three-year service contract with Customer for $ 450,000 ($ 150,000 per year). The standalone selling price for one year of service at inception of the contract is $ 150,000 per year. Serve Co accounts for the contract as a series of distinct services. At the end of the second year, the parties agree to modify the contract as follows: 1) the fee for the third year is reduced to $ 120,000; and 2) Customer agrees to extend the contract for another three years for $300,000 ($ 100,000 per year). The standalone selling price for one year of service at the time of modification is $ 120,000. How should Serve Co account for the modification?
QUESTION 36 Contract modifications — cumulative catch-up adjustment Builder enters into a two-year arrangement with Customer to build a manufacturing facility for $ 300,000. The construction of the facility is a single performance obligation. Builder and Customer agree to modify the original floor plan at the end of the first year, which will increase the transaction price and expected cost by approximately $ 100,000 and $ 75,000, respectively. How should Builder account for the modification?
QUESTION 37 Distinct goods or services — customer benefits from the good or service Manufacturer enters into a contract with a customer to sell a custom tool and replacement parts manufactured for the custom tool. Manufacturer only sells custom tools and replacement parts together, and no other entity sells either product. The customer can use the tool without the replacement parts, but the replacement parts have no use without the custom tool. How many performance obligations are in the contract?
QUESTION 38 Optional purchases — sale of equipment and consumables Device Co, a medical device company, sells a highly complex surgical instrument and consumables that are used in conjunction with the instrument. Device Co sells the instrument for $ 100,000 and the consumables for $ 100 per unit. A customer purchases the instrument, but does not commit to any specific level of consumable purchases. The customer cannot operate the instrument without the consumables and cannot purchase the consumables from any other vendor. Device Co expects that the customer will purchase 1,000 consumables each year throughout the estimated life of the instrument. Device Co concludes that the instrument and the consumables are distinct. Should Device Co include the estimated consumable purchases as a performance obligation in the current contract?
QUESTION 40 Identifying performance obligations — activities Cartoon Co is the creator of a new animated television show. It grants a three-year term license to Retail Co for use of the characters’ likenesses on consumer products. Retail Co is required to use the latest image of the characters from the television show. There are no other goods or services provided to Retail Co in the arrangement. When entering into the license agreement, Retail Co reasonably expects Cartoon Co to continue to produce the show, develop the characters, and perform marketing to enhance awareness of the characters. Retail Co may start selling consumer products with the characters’ likenesses once the show first airs on television. How many performance obligations are in the arrangement?
QUESTION 39 Identifying performance obligations — activities Fit Cooperates health clubs. Fit Co enters into contracts with customers for one year of access to any of its health clubs for $ 300. Fit Co also charges a $50 nonrefundable joining fee to compensate, in part, for the initial activities of registering the customer. How many performance obligations are in the contract?
QUESTION 41 Identifying performance obligations — shipping and handling services Manufacturer enters into a contract with a customer to sell five flat screen televisions. The customer requests that Manufacturer arrange for delivery of the televisions. The delivery terms state that legal title and risk of loss passes to the customer when the televisions are given to the carrier. The customer obtains control of the televisions at the time they are shipped and can sell them to another party. Manufacturer is precluded from selling the televisions to another customer (for example, redirecting the shipment) once the televisions are picked up by the carrier at Manufacturer’s shipping dock. Assume Manufacturer does not elect to treat shipping and handling activities as a fulfillment cost under US GAAP. How many performance obligations are in the arrangement?
QUESTION 42 Estimating variable consideration — performance bonus with multiple outcomes Contractor enters into a contract with Widget Inc to build an asset for $100,000 with a performance bonus of $ 50,000 that will be paid based on the timing of completion. The amount of the performance bonus decreases by 10% per week for every week beyond the agreed-upon completion date. The contract requirements are similar to contracts Contractor has performed previously, and management believes that such experience is predictive for this contract. Contractor concludes that the expected value method is most predictive in this case. Contractor estimates that there is a 60% probability that the contract will be completed by the agreed-upon completion date, a 30% probability that it will be completed one week late, and a 10% probability that it will be completed two weeks late. How should Contractor determine the transaction price?
QUESTION 43 Estimating variable consideration — performance bonus with two outcomes Contractor enters into a contract to construct a manufacturing facility for Auto Manufacturer. The contract price is $ 250 million plus a $ 25 million award fee if the facility is completed by a specified date. The contract is expected to take three years to complete. Contractor has a long history of constructing similar facilities. The award fee is binary (that is, there are only two possible outcomes) and is payable in full upon completion of the facility. Contractor will receive none of the $ 25 million fee if the facility is not completed by the specified date. Contractor believes, based on its experience, that it is 95% likely that the contract will be completed successfully and in advance of the target date. How should Contractor determine the transaction price?
QUESTION 44 Variable consideration — consideration is constrained Land Owner sells land to Developer for $1 million. Land Owner is also entitled to receive 5% of any future sales price of the land in excess of $5 million. Land Owner determines that its experience with similar contracts is of little predictive value, because the future performance of the real estate market will cause the amount of variable consideration to be highly susceptible to factors outside of the entity’s influence. Additionally, the uncertainty is not expected to be resolved in a short period of time because Developer does not have current plans to sell the land. Should Land Owner include variable consideration in the transaction price?
QUESTION 45 Variable consideration — subsequent reassessment Assume the same facts as question 44, with the following additional information known to Land Owner two years after contract inception: • Land prices have significantly appreciated in the market • Land Owner estimates that it is probable (US GAAP) or highly probable (IFRS) that a significant reversal of cumulative revenue recognized will not occur related to $ 100,000 of variable consideration based on sales of comparable land in the area • Developer is actively marketing the land for sale How should Land Owner account for the change in circumstances?
QUESTION 46 Variable consideration — multiple forms of variable consideration Construction Inc. contracts to build a production facility for Manufacturer for $ 10 million. The arrangement includes two performance bonuses as follows: • Bonus A: $ 2 million if the facility is completed within six months • Bonus B: $ 1 million if the facility receives a stipulated environmental certification upon completion Construction Inc. believes that the facility will take at least eight months to complete but that it is probable (US GAAP) or highly probable (IFRS) it will receive the environmental certification, as it has received the required certification on other similar projects. How should Construction Inc. determine the transaction price?
QUESTION 47 Variable consideration — determining a minimum amount Service Inc contracts with Manufacture Co to refurbish Manufacture Co’s heating, ventilation, and air conditioning (HVAC) system. Manufacture Co pays Service Inc fixed consideration of $ 200,000 plus an additional $ 5,000 for every 10% reduction in annual costs during the first year following the refurbishment. Service Inc estimates that it will be able to reduce Manufacture Co’s costs by 20%. Service Inc, however, considers the constraint on variable consideration and concludes that it is probable (US GAAP) or highly probable (IFRS) that estimating a 10% reduction in costs will not result in a significant reversal of cumulative revenue recognized. This assessment is based on Service Inc’s experience achieving at least that level of cost reduction in comparable contracts. Service Inc has achieved levels of 20% or above, but not consistently. How should Service Inc determine the transaction price?
QUESTION 48 Variable consideration — price concessions Machine Co sells a piece of machinery to Customer for $2 million payable in 90 days. Machine Co is aware at contract inception that Customer may not pay the full contract price. Machine Co estimates that Customer will pay at least $ 1.75 million, which is sufficient to cover Machine Co’s cost of sales ($ 1.5 million), and which Machine Co is willing to accept because it wants to grow its presence in this market. Machine Co has granted similar price concessions in comparable contracts. Machine Co concludes it is probable (US GAAP) or highly probable (IFRS) it will collect $ 1.75 million, and such amount is not constrained under the variable consideration guidance. What is the transaction price in this arrangement?
QUESTION 49 Variable consideration — volume discounts How should Chemical Co determine the transaction price?
QUESTION 50 Variable consideration — reassessment of estimated volume discounts Assume the same facts as question 49 with the following additional information: • Chemical Co sells 800,000 containers of chemicals during the second reporting period ended June 30, 2018. • Municipality commences a new water treatment project during the second quarter of the year, which increased its need for chemical supplies. • In light of this new project, Chemical Co increases its estimate of total sales volume to 3.1 million containers at the end of the second reporting period. As a result, Chemical Co will be required to retroactively reduce the price per container to $ 85. How should Chemical Co account for the change in estimate?
QUESTION 51 Variable consideration — customer rebates Shave Co sells electric razors to retailers for $50 per unit. A rebate coupon is included inside the electric razor package that can be redeemed by the end consumers for $10 per unit. Shave Co estimates that 20% to 25% of eligible rebates will be redeemed based on its experience with similar programs and rebate redemption rates available in the marketplace for similar programs. Shave Co concludes that the transaction price should incorporate an assumption of 25% rebate redemption as this is the amount for which it is probable (US GAAP) or highly probable (IFRS) that a significant reversal of cumulative revenue will not occur if estimates of the rebates change. How should Shave Co determine the transaction price?
QUESTION 52 Variable consideration — price protection guarantees Manufacturer enters into a contract to sell goods to Retailer for $ 1,000. Manufacturer also offers price protection where it will reimburse Retailer for any difference between the sale price and the lowest price offered to any customer during the following six months. This clause is consistent with other price protection clauses offered in the past, and Manufacturer believes it has experience that is predictive for this contract. Management expects that it will offer a price decrease of 5% during the price protection period. Management concludes it is probable (US GAAP) or highly probable (IFRS) that a significant reversal of cumulative revenue will not occur if estimates change. How should Manufacturer determine the transaction price?
QUESTION 53 Variable consideration — profit margin guarantee Clothes Co sells a line of summer clothing to Department Store for $ 1 million. Clothes Co has a practice of providing refunds of a portion of its sales prices at the end of each season to ensure its department store customers meet minimum sales margins. Based on its experience, Clothes Co refunds on average approximately 10% of the invoiced amount. Clothes Co has also concluded that variable consideration is not constrained in these circumstances. What is the transaction price in this arrangement?
QUESTION 54 Significant financing component — prepayment with intent other than to provide financing Distiller Co produces a rare whiskey that is released once a year prior to the holidays. Retailer agrees to pay Distiller Co in November 2014 to secure supply for the December 2015 release. Distiller Co requires payment at the time the order is placed; otherwise, it is not willing to guarantee production levels. Distiller Co does not offer discounts for early payments. The advance payment allows Retailer to communicate its supply to customers and Distiller Co to manage its production levels. Is there a significant financing component in the arrangement between Distiller Co and Retailer?
QUESTION 55 Significant financing component — determining the appropriate discount rate Furniture Co enters into an arrangement with Customer for financing of a new sofa purchase. Furniture Co is running a promotion that offers all customers 1% financing. The 1% contractual interest rate is significantly lower than the 10% interest rate that would otherwise be available to Customer at contract inception (that is, the contractual rate does not reflect the credit risk of the customer). Furniture Co concludes that there is a significant financing component present in the contract. What discount rate should Furniture Co use to determine the transaction price?
QUESTION 56 Significant financing component — payment prior to performance Gym Inc enters into an agreement with Customer to provide a five-year gym membership. Upfront consideration paid by Customer is $ 5,000. Gym Inc also offers an alternative payment plan with monthly billings of $100 (total consideration of $ 6,000 over the five-year membership term). The membership is a single performance obligation that Gym Inc satisfies ratably over the five-year membership period. Gym Inc determines that the difference between the cash selling price and the monthly payment plan (payment over the performance period) indicates a significant financing component exists in the contract with Customer. Gym Inc concludes that the discount rate that would be reflected in a separate transaction between the two parties at contract inception is 5%. What is the transaction price in this arrangement?
QUESTION 57 Noncash consideration — determining the transaction price Security Inc enters into a contract to provide security services to Manufacturer over a six-month period in exchange for 12,000 shares of Manufacturer’s common stock. The contract is signed and work commences on January 1, 2011. The performance is satisfied over time and Security Inc will receive the shares at the end of the six-month contract. For purposes of this example, assume that the arrangement does not include a derivative. How should Security Inc determine the transaction price?
QUESTION 58 Noncash consideration — variable for reasons other than the form of the consideration Machine Co enters into a contract to build a machine for Manufacturer and is entitled to a bonus in the form of 10,000 shares of Manufacturer common stock if the machine is delivered within six months. Machine Co has not built similar machines in the past and cannot conclude that it is probable (US GAAP) or highly probable (IFRS) that a significant reversal in the amount of cumulative revenue recognized will not occur. For purposes of this example, assume that the arrangement does not include a derivative. How should Machine Co account for the noncash bonus?
QUESTION 59 Noncash consideration — materials provided by customer to facilitate fulfillment Manufacture Co enters into a contract with Technology Co to build a machine. Technology Co pays Manufacture Co $ 1 million and contributes materials to be used in the development of the machine. The materials have a fair value of $ 500,000. Technology Co will deliver the materials to Manufacture Co approximately three months after development of the machine begins. Manufacture Co concludes that it obtains control of the materials upon delivery by Technology Co and could elect to use the materials for other projects. How should Manufacture Co determine the transaction price?
QUESTION 60 Consideration payable to customers — payment to reseller’s customer Electronics Co sells televisions to Retailer that Retailer sells to end customers. Electronics Co runs a promotion during which it will pay a rebate to end customers that purchase a television from Retailer. How should Electronics Co account for the rebate payment to the end customer?
QUESTION 61 Consideration payable to customers — agent’s payment to end consumer Travel Co sells airline tickets to end consumers on behalf of Airline. Travel Co concludes that it is acting as an agent in the airline ticket sale transactions (refer to RR 10 for further discussion on principal versus agent considerations). Travel Co offers a $ 10 coupon to end consumers in order to increase the volume of airline ticket sales on which it earns a commission. How should Travel Co account for the coupons offered to end consumers?
QUESTION 62 Consideration payable to customers — no distinct good or service received (slotting fees) Producer sells energy drinks to Retailer, a convenience store. Producer also pays Retailer a fee to ensure that its products receive prominent placement on store shelves (that is, a slotting fee). The fee is negotiated as part of the contract for sale of the energy drinks. How should Producer account for the slotting fees paid to Retailer?
QUESTION 63 Consideration payable to customers — payment for a distinct service Mobile Co. sells 1,000 phones to Retailer for $100,000. The contract includes an advertising arrangement that requires Mobile Co to pay $10,000 toward a specific advertising promotion that Retailer will provide. Retailer will provide the advertising on strategically located billboards and in local advertisements. Mobile Co could have elected to engage a third party to provide similar advertising services at a cost of $10,000. How should Mobile Co. account for the payment to Retailer for advertising?
QUESTION 64 Consideration payable to customers — implied promise to pay consideration Coffee Co sells coffee products to Retailer. On December 1, 2011, Coffee Co decides that it will issue coupons directly to end consumers that provide a $1 discount on each bag of coffee purchased. Coffee Co has a history of providing similar coupons. Coffee Co delivers a shipment of coffee to Retailer on December 28, 2011 and recognizes revenue. The coupon is offered to end consumers on January 2, 2012 and Coffee Co reasonably expects that the coupons will be used to purchase products already shipped to Retailer. Coffee Co will reimburse Retailer for any coupons redeemed by end consumers. When should Coffee Co record the revenue reduction for estimated coupon redemptions?
QUESTION 65 Allocating transaction price — standalone selling prices are directly observable Marine sells boats and provides mooring facilities for its customers. Marine sells the boats for $30,000 each and provides mooring facilities for $ 5,000 per year. Marine concludes that the goods and services are distinct and accounts for them as separate performance obligations. Marine enters into a contract to sell a boat and one year of mooring services to a customer for $ 32,500. How should Marine allocate the transaction price of $ 32,500 to the performance obligations?
QUESTION 66 Allocating transaction price — use of a range when estimating standalone selling prices Assume the same facts as in question 65, except that Marine sells the boats on a standalone basis for $ 29,000 – $32,000 each. As a result, Marine determines that the standalone selling price for the boat is a range between $29,000 and $ 32,000. Marine enters into a contract to sell a boat and one year of mooring services to a customer. The stated contract prices for the boat and the mooring services are $ 31,000 and $ 1,500, respectively. How should Marine allocate the total transaction price of $32,500 to each performance obligation?
QUESTION 67 Allocating transaction price – standalone selling prices are not directly observable Biotech enters into an arrangement to provide a license and research services to Pharma. The license and the services are each distinct and therefore accounted for as separate performance obligations, and neither is sold individually. What factors might Biotech consider when estimating the standalone selling prices for these items?
QUESTION 68 Estimating standalone selling price – residual approach Seller enters into a contract with a customer to sell Products A, B, and C for a total transaction price of $ 100,000. Seller regularly sells Product A for $25,000 and Product B for $ 45,000 on a standalone basis. Product C is a new product that has not been sold previously, has no established price, and is not sold by competitors in the market. Products A and B are not regularly sold together at a discounted price. Product C is delivered on March 1, and Products A and B are delivered on April 1. How should Seller determine the standalone selling price of Product C?
QUESTION 69 Allocating transaction price – allocating a discount Retailer enters into an arrangement with its customer to sell a chair, a couch, and a table for $ 5,400. Retailer regularly sells each product on a standalone basis: the chair for $ 2,000, the couch for $3,000, and the table for $ 1,000. The customer receives a $ 600 discount ($ 6,000 sum of standalone selling prices less $5,400 transaction price) for buying the bundle of products. The chair and couch will be delivered on March 28 and the table on April 3. Retailer regularly sells the chair and couch together as a bundle for $ 4,400 (that is, at a $ 600 discount to the standalone selling prices of the two items). The table is not normally discounted. How should Retailer allocate the transaction price to the products?
QUESTION 70 Allocating transaction price – allocating a discount and applying the residual approach Assume the same facts as question 69, except Products A and B are regularly sold as a bundle for $ 60,000 (that is, at a $ 10,000 discount). Seller concludes the residual approach is appropriate for determining the standalone selling price of Product C. How should Seller allocate the transaction price between Products A, B, and C?
QUESTION 71 Allocating variable consideration – distinct goods or services that form a single performance obligation Air Inc enters into a three-year contract to provide air conditioning to the operator of an office building using its proprietary geothermal heating and cooling system. Air Inc is entitled to a semiannual performance bonus if the customer’s cost to heat and cool the building is decreased by at least 10% compared to its prior cost. The comparison of current cost to prior cost is made semi-annually, using the average of the most recent six-months compared to the same six-month period in the prior year. Air Inc accounts for the series of distinct services provided over the three-year contract as a single performance obligation satisfied over time. Air Inc has not previously used its systems for buildings in this region. Air Inc therefore does not include any variable consideration related to the performance bonus in the transaction price during the first six months of providing service, as it does not believe that it is probable (US GAAP) or highly probable (IFRS) that a significant reversal of cumulative revenue recognized will not occur if its estimate of customer cost savings changes. At the end of the first six months, the customer’s costs have decreased by 12% over the prior comparative period and Air Inc becomes entitled to the performance bonus. How should Air Inc account for the performance bonus?
QUESTION 72 Allocating variable consideration to a series – pricing varies based on usage Transaction Processor (TP) enters into a two-year contract with a customer whereby TP will process all transactions on behalf of the customer. The customer is obligated to use TP’s system to process all of its transactions; however, the ultimate quantity of transactions is unknown. TP charges the customer a monthly fee calculated as $ 0.03 per transaction processed during the month. TP concludes that the nature of its promise is a series of distinct monthly processing services and accounts for the two-year contract as a single performance obligation. How should TP allocate the variable consideration in this arrangement?
QUESTION 73 Allocating transaction price – change in transaction price How should Contractor account for the change in estimated bonus as of December 31?
QUESTION 74 Recognizing revenue — simultaneously receiving and consuming benefits Railroad Co is a freight railway entity that enters into a contract with Shipper to transport goods from location A to location B for $ 1,000. Shipper has an unconditional obligation to pay for the service when the goods reach point B. When should Railroad Co recognize revenue from this contract?
QUESTION 75 Recognizing revenue — customer controls work in process Contractor enters into a contract with Refiner to build an oil refinery on land Refiner owns. The contract has the following characteristics: • The oil refinery is built to Refiner’s specifications and Refiner can make changes to these specifications over the contract term. • Progress payments are made by Refiner throughout construction. • Refiner can cancel the contract at any time (with a termination penalty); any work in process is the property of Refiner. The goods and services in the contract are not distinct, so the arrangement is accounted for as a single performance obligation. When should Contractor recognize revenue from this contract?
QUESTION 76 Recognizing revenue — customer does not control work in process Carpenter enters into a contract to manufacture several desks for Office Co. The contract has the following characteristics: • Office Co can cancel the contract at any time (with a termination penalty), and any work in process remains the property of Carpenter. • The work in process can be completed and sold to another customer if the contract is cancelled. • Physical possession and title do not pass until completion of the contract. • A deposit is collected at the outset of the transaction, but the majority of the payments are due after the products have been delivered. When should Carpenter recognize revenue from this contract?
QUESTION 77 Recognizing revenue — asset with an alternative use Manufacturer enters into a contract to manufacture an automobile for Car Driver. Car Driver specifies certain options such as color, trim, electronics, etc. Car Driver makes a nonrefundable deposit to secure the automobile, but does not control the work in process. Manufacturer could choose at any time to redirect the automobile to another customer and begin production on another automobile for Car Driver with the same specifications. How should Manufacturer recognize revenue from this contract?
QUESTION 78 Recognizing revenue — highly specialized asset without an alternative use Cruise Builders enters into a contract to manufacture a cruise ship for Cruise Line. The ship is designed and manufactured to Cruise Line’s specifications. Cruise Builders could redirect the ship to another customer, but only if Cruise Builders incurs significant cost to reconfigure the ship. Assume the following additional facts: • Cruise Line does not take physical possession of the ship as it is being built. • The contract contains one performance obligation as the goods and services to be provided are not distinct. • Cruise Line is obligated to pay Cruise Builder an amount equal to the costs incurred plus an agreed profit margin if Cruise Line cancels the contract. How should Cruise Builder recognize revenue from this contract?
QUESTION 79 Recognizing revenue — right to payment Design Inc enters into a contract with Equip Co to deliver the next piece of specialized equipment produced. Equip Co can terminate the contract at any time. Equip Co makes a nonrefundable deposit at contract inception to cover the cost of materials that Design Inc will procure to produce the specialized equipment. The contract precludes Design Inc from redirecting the equipment to another customer. Equip Co does not control the equipment as it is produced. How should Design Inc recognize revenue for this contract?
QUESTION 80 Recognizing revenue — no right to payment for standard components Machine Co enters into a contract to build a large, customized piece of equipment for Manufacturer. Because of the unique customer specifications, Machine Co cannot redeploy the equipment to other customers or otherwise modify the design and functionality of the equipment without incurring a substantial amount of rework. Machine Co purchases or manufactures various standard components used to construct the equipment. Machine Co is entitled to payment for costs incurred plus a reasonable margin if Manufacturer terminates the contract early. Machine Co is not entitled to payment for standard components until they have been integrated into the customized equipment that will delivered to the customer. This is because Machine Co can use those components in other projects before they are integrated into the customized equipment. Does Machine Co have an enforceable right to payment for performance completed to date?
QUESTION 81 Measuring progress — output method Construction Co lays railroad track and enters into a contract with Railroad to replace a stretch of track for a fixed fee of $ 100,000. All work in process is the property of Railroad. Construction Co has replaced 75 units of track of 100 total units of track to be replaced through year end. The effort required of Construction Co is consistent across each of the 100 units of track to be replaced. Construction Co determines that the performance obligation is satisfied over time as Railroad controls the work in process asset being created. How should Construction Co recognize revenue?
QUESTION 82 Measuring progress — “cost-to-cost” method Contractor enters into a contract with Government to build an aircraft carrier for a fixed price of $4 billion. The contract contains a single performance obligation that is satisfied over time. Additional contract characteristics are: • Total estimated contract costs are $3.6 billion, excluding costs related to wasted labor and materials. • Cost incurred in year one is $ 740 million, including $20 million of wasted labor and materials. Contractor concludes that the performance obligation is satisfied over time as Government controls the aircraft carrier as it is created. Contractor also concludes that an input method using costs incurred to total cost expected to be incurred is an appropriate measure of progress toward satisfying the performance obligation. How much revenue and cost should Contractor recognize as of the end of year one?
QUESTION 83 Measuring progress — uninstalled materials Contractor enters into a contract to build a power plant for Utility Co. The contract specifies a particular type of turbine to be procured and installed in the plant. The contract price is $200 million. Contractor estimates that the total costs to build the plant are $160 million, including costs of $50 million for the turbine. Contractor procures and obtains control of the turbine and delivers it to the building site. Utility Co has control over any work in process. Contractor has determined that the contract is one performance obligation that is satisfied over time as the power plant is constructed, and that it is the principal in the arrangement. How much revenue should Contractor recognize upon delivery of the turbine?
QUESTION 84 Measuring progress — stand-ready obligation Software Co enters into a contract with a customer to provide a software license and unlimited access to its call center for a one-year period. Software Co determines that the software license and support services are separate performance obligations. Customers typically utilize the call center throughout the one-year term of the contract. How should Software Co recognize revenue for the unlimited support services?
QUESTION 85 Measuring progress — obligation to provide a specified quantity of services Assume the same facts as in question 84, except that Software Co promises to provide 100 hours of call center support during the one-year period, rather than unlimited support. Software Co monitors customer usage of support hours to determine when the hours have been utilized. Customers are charged an additional fee for call center usage beyond 100 hours. Customers frequently use more than 100 hours of support.
QUESTION 86 Measuring progress — partial satisfaction of performance obligations prior to obtaining a contract Manufacturer enters into a long-term contract with a customer to manufacture a highly customized good. The customer issues purchase orders for 60 days of supply on a rolling calendar basis (that is, every 60 days a new purchase order is issued). Purchase orders are non-cancellable and Manufacturer has a contractual right to payment for all work in process for goods once an order is received. Manufacturer pre-assembles some goods in order to meet the anticipated demand from the customer based on a non-binding forecast provided by the customer. At the time the customer issues a purchase order, Manufacturer typically has some goods on hand that are completed and others that are partially completed. Manufacturer has determined that each customized good represents a performance obligation satisfied over time. That is, the customized goods have no alternative use and Manufacturer has an enforceable right to payment once it receives the purchase order. On January 1, 20X6, Manufacturer receives a purchase order from the customer for 100 goods. At that time, Manufacturer has completed 30 of the goods and partially completed 20 goods based on the forecast previously provided by the customer. Manufacturer determines that the 20 partially completed goods are 50% complete based on a cost-to-cost input method of measuring progress. The transaction price is $ 200 per unit and the contract includes no other promised goods or services. How should Manufacturer account for its progress completed to date when it receives the purchase order from the customer?
QUESTION 87 Recognizing revenue — legal title retained as a protective right Equipment Dealer enters into a contract to deliver construction equipment to Landscaping Inc. Equipment Dealer operates in a country where it is common to retain title to construction equipment and other heavy machinery as protection against nonpayment by a buyer. Equipment Dealer’s normal practice is to retain title to the equipment until the buyer pays for it in full. Retaining title enables Equipment Dealer to more easily recover the equipment if the buyer defaults on payment. Equipment Dealer concludes that there is one performance obligation in the contract that is satisfied at a point in time when control transfers. Landscaping Inc has the ability to use the equipment and move it between various work locations once it is delivered. Normal payment and credit terms apply. When should Equipment Dealer recognize revenue for the sale of the equipment?
QUESTION 88 Customer options – option that does not provide a material right Manufacturer enters into an arrangement to provide machinery and 200 hours of consulting services to Retailer for $ 300,000. The standalone selling price is $ 275,000 for the machinery and $ 250 per hour for the consulting services. The machinery and consulting services are distinct and accounted for as separate performance obligations. Manufacturer also provides Retailer an option to purchase ten additional hours of consulting services at a rate of $ 225 per hour during the next 14 days, a 10% discount off the standalone selling price. Manufacturer offers a similar 10% discount on consulting services as part of a promotional campaign during the same period. Does the option to purchase additional consulting services provide a material right to the customer?
QUESTION 89 Customer options — option that provides a material right Retailer has a loyalty program that awards its customers one loyalty point for every $ 10 spent in Retailer’s store. Program members can exchange their accumulated points for free product sold by Retailer. Based on historical data, customers frequently accumulate enough points to receive free product. Customer purchases a product from Retailer for $ 50 and earns five loyalty points. Retailer estimates a standalone selling price of $ 0.20 per point (a total of $ 1 for the five points earned) on the basis of the likelihood of redemption. Do the loyalty points provide a material right?
QUESTION 90 Customer options — option that provides a material right Retailer sells goods to customers for a contract price of $ 1,000. Retailer also provides customers a coupon for a 60% discount off of a future purchase during the next 90 days as part of the transaction. Retailer intends to offer a 10% discount to all other customers as part of a promotional campaign during the same period. Retailer estimates that 75% of customers that receive the coupon will exercise the option for the purchase of, on average, $ 400 of discounted additional product. How should Retailer account for the option provided by the coupon?
QUESTION 91 Customer options — exercise of an option How should Serve Co account for the exercise of the option to purchase Service B?
QUESTION 92 Customer options — loyalty points redeemable by another party Retailer participates in a customer loyalty program in partnership with Airline that awards one air travel point for each dollar a customer spends on goods purchased from Retailer. Program members can only redeem the points for air travel with Airline. The transaction price allocated to each point based on its relative estimated standalone selling price is $ 0.01. Retailer pays Airline $.009 for each point redeemed. Retailer sells goods totaling $ 1 million and grants one million points during the period. Retailer allocates $ 10,000 of the transaction price to the points, calculated as the number of points issued (one million) multiplied by the allocated transaction price per point ($ 0.01). Retailer concludes that it is an agent in this transaction in accordance with the guidance in the revenue standard (refer to RR 10). How should Retailer account for points issued to its customers?
QUESTION 93 Customer options — loyalty points redeemable by multiple parties Retailer offers a customer loyalty program in partnership with Hotel whereby Retailer awards one customer loyalty point for each dollar a customer spends on goods purchased from Retailer. Program members can redeem the points for accommodation with Hotel or discounts on future purchases with Retailer. The transaction price allocated to each point based on its relative estimated standalone selling price is $ 0.01. Retailer sells goods totaling $1 million and grants one million points during the period. Retailer allocates $10,000 of the transaction price to the points, calculated as the number of points issued (one million) multiplied by the allocated transaction price per point ($0.01). Retailer concludes that it has not satisfied its performance obligation as it must stand ready to transfer goods or services if the customer elects not to redeem points with Hotel. How should Retailer account for points issued to its customers?
QUESTION 94 Customer options — change in incentives offered to customer Electronics Co sells televisions to Retailer. Electronics Co provides Retailer a free Bluray player to be given to customers that purchase the television to help stimulate sales. Retailer then sells the televisions with the free Blu-ray player to end customers. Control transfers and revenue is recognized when the televisions and Blu-ray players are delivered to Retailer. Electronics Co subsequently adds a $200 rebate to the end customer to assist Retailer with selling the televisions in its inventory in the weeks leading up to a popular sporting event. The promotion applies to all televisions sold during the week prior to the event. Electronics Co has not offered a customer rebate previously and had no expectation of doing so when the televisions were sold to Retailer. How should Electronics Co account for the offer of the additional $200 rebate?
QUESTION 95 Customer options — renewal option that provides a material right Spa Maker enters into an arrangement with Retailer to sell an unlimited number of hot tubs for $ 3,000 per hot tub for 12 months. Retailer has the option to renew the contract at the end of the year for an additional 12 months. The contract renewal will be for the same products and under the same terms as the original contract. Spa Maker typically increases its prices 15% each year. How should Spa Maker account for the renewal option?
QUESTION 96 Breakage — sale of gift cards Restaurant Inc sells 1,000 gift cards in 2011, each with a face value of $ 50, that are redeemable at any of its locations. Any unused gift card balances are not subject to escheatment to a government entity. Restaurant Inc expects breakage of 10%, or $ 5,000 of the face value of the cards, based on history with similar gift cards. Customers redeem $ 22,500 worth of gift cards during 2012. How should Restaurant Inc account for the gift cards redeemed during 2012?
QUESTION 97 Breakage — customer loyalty points How should Hotel Inc account for the points redeemed during 20X2?
QUESTION 98 Breakage — customer loyalty points, reassessment of breakage estimate Assume the same facts as question 97, with the following additional information: • Hotel Inc increases its estimate of total points to be redeemed from 60,000 to 70,000 • Customers redeem 20,000 points during 2013 How should Hotel Inc account for the points redeemed during 2013?
QUESTION 99 Right of return – sale of products to a distributor Producer utilizes a distributor network to supply its product to end consumers. Producer allows distributors to return any products for up to 120 days after the distributor has obtained control of the products. Producer has no further obligations with respect to the products and distributors have no further return rights after the 120-day period. Producer is uncertain about the level of returns for a new product that it is selling through the distributor network. How should Producer recognize revenue in this arrangement?
QUESTION 100 Right of return – refund obligation and return asset Game Co sells 1,000 video games to Distributor for $50 each. Distributor has the right to return the video games for a full refund for any reason within 180 days of purchase. The cost of each game is $ 10. Game Co estimates, based on the expected value method, that 6% of sales of the video games will be returned and it is probable (US GAAP) or highly probable (IFRS) that returns will not be higher than 6%. Game Co has no further obligations after transferring control of the video games. How should Game Co record this transaction?
QUESTION 101 Warranty – assessing whether a warranty is a performance obligation Telecom enters into a contract with Customer to sell a smart phone and provide a one-year warranty against both manufacturing defects and customer-inflicted damages (for example, dropping the phone into water). The warranty cannot be purchased separately. How should Telecom account for the warranty?
QUESTION 102 Upfront fee allocated to separate performance obligations Biotech enters into a contract with Pharma for the license and development of a drug compound. The contract requires Biotech to perform research and development (R&D) services to get the drug compound through regulatory approval. Biotech receives an upfront fee of $50 million, fees for R&D services, and milestone-based payments upon the achievement of specified acts. Biotech concludes that the arrangement includes two separate performance obligations: (1) license of the intellectual property and (2) R&D services. There are no other performance obligations in the arrangement. How should Biotech allocate the consideration in the arrangement, including the $50 million upfront fee?
QUESTION 103 Upfront fee – health club joining fees FitCo operates health clubs. FitCo enters into contracts with customers for one year of access to any of its health clubs. The entity charges an annual membership fee of $60 as well as a $ 150 nonrefundable joining fee. The joining fee is to compensate, in part, for the initial activities of registering the customer. Customers can renew the contract each year and are charged the annual membership fee of $60 without paying the joining fee again. If customers allow their membership to lapse, they are required to pay a new joining fee. How should FitCo account for the nonrefundable joining fees?
QUESTION 104 Bill-and-hold arrangement – industrial products industry Drill Co orders a drilling pipe from Steel Producer. Drill Co requests the arrangement be on a bill-and-hold basis because of the frequent changes to the timeline for developing remote gas fields and the long lead times needed for delivery of the drilling equipment and supplies. Steel Producer has a history of bill-and-hold transactions with Drill Co and has established standard terms for such arrangements. The pipe, which is separately warehoused by Steel Producer, is complete and ready for shipment. Steel Producer cannot utilize the pipe or direct the pipe to another customer once the pipe is in the warehouse. The terms of the arrangement require Drill Co to remit payment within 30 days of the pipe being placed into Steel Producer’s warehouse. Drill Co will request and take delivery of the pipe when it is needed.
QUESTION 105 Bill-and-hold arrangement – retail and consumer industry Game Maker enters into a contract during 20X6 to supply 100,000 video game consoles to Retailer. The contract contains specific instructions from Retailer about where the consoles should be delivered. Game Maker must deliver the consoles in 20X7 at a date to be specified by Retailer. Retailer expects to have sufficient shelf space at the time of delivery. As of December 31, 20X6, Game Maker has inventory of 120,000 game consoles, including the 100,000 relating to the contract with Retailer. The 100,000 consoles are stored with the other 20,000 game consoles, which are all interchangeable products; however, Game Maker will not deplete its inventory below 100,000 units. When should Game Maker recognize revenue for the 100,000 units to be delivered to Retailer?
QUESTION 106 Consignment arrangement – retail and consumer industry Manufacturer provides household products to Retailer on a consignment basis. Retailer does not take title to the products until they are scanned at the register and has no obligation to pay Manufacturer until they are sold to the consumer, unless the goods are lost or damaged while in Retailer’s possession. Any unsold products, excluding those that are lost or damaged, can be returned to Manufacturer, and Manufacturer has discretion to call products back or transfer products to another customer. When should Manufacturer recognize revenue?
QUESTION 107 Consignment arrangement – industrial products industry Steel Co develops a new type of cold-rolled steel sheet that is significantly stronger than existing products, providing increased durability. The newly developed product is not yet widely used. Manufacturer enters into an arrangement with Steel Co whereby Steel Co will provide 50 rolled coils of the steel on a consignment basis. Manufacturer must pay a deposit upon receipt of the coils. Title transfers to Manufacturer upon shipment and the remaining payment is due when Manufacturer consumes the coils in the manufacturing process. Each month, both parties agree on the amount consumed by Manufacturer. Manufacturer can return, and Steel Co can demand return of, unused products at any time. When should Steel Co recognize revenue?
QUESTION 108 Repurchase rights – call option accounted for as lease Machine Co sells machinery to Manufacturer for $ 200,000. The arrangement includes a call option that gives Machine Co the right to repurchase the machinery in five years for $ 150,000. The arrangement is not part of a sale-leaseback (US GAAP). Should Machine Co account for this transaction as a lease or a financing transaction?
QUESTION 109 Repurchase rights – put option accounted for as a right of return Machine Co sells machinery to Manufacturer for $ 200,000. Manufacturer can require Machine Co to repurchase the machinery in five years for $ 75,000. The market value of the machinery at the repurchase date is expected to be greater than $75,000. Machine Co offers Manufacturer the put option because an overhaul is typically required after five years. Machine Co can overhaul the equipment, sell the refurbished equipment to a customer, and receive a significant margin on the refurbished goods. Assume the time value of money would not affect the overall conclusion. Should Machine Co account for this transaction as a sale with a return right, a lease, or a financing transaction?
QUESTION 110 Repurchase rights – put option accounted for as lease Machine Co sells machinery to Manufacturer for $ 200,000 and stipulates that Manufacturer can require Machine Co to repurchase the machinery in five years for $ 150,000. The repurchase price is expected to significantly exceed the market value at the date of the repurchase. Assume the time value of money would not affect the overall conclusion. Should Manufacturer account for this transaction as a sale with a return right, a lease, or a financing transaction?
QUESTION 111 License that is not distinct Biotech licenses IP to an early-stage drug compound to Pharma. Biotech also provides research and development (“R&D”) services as part of the arrangement. Biotech is the only vendor able to provide the R&D services based on its specialized knowledge of the technology. Is the license in this arrangement distinct?
QUESTION 112 License that is distinct Software Co provides a perpetual software license to Engineer. Software Co will also install the software as part of the arrangement. Software Co offers the software license to its customers with or without installation services, and Engineer could select a different vendor for installation. The installation does not result in significant customization or modification of the software. Is the license in this arrangement distinct?
QUESTION 113 License restrictions – restrictions are an attribute of the license Producer licenses to Cable Co the right to broadcast a television series. The license stipulates that Cable Co must show the episodes of the television series in sequential order. Producer transfers all of the content of the television series to Cable Co at the same time. The contract does not include any other goods or services. What is the impact of the contractual provisions that restrict the use of the IP in this arrangement?
QUESTION 114 License restrictions – contract includes multiple licenses Pharma licenses to Customer its patent rights to an approved drug compound for eight years beginning on January 1, 2010. Customer can only utilize the IP to sell products in the United States for the first year of the license. Customer can utilize the IP to sell products in Europe beginning on January 1, 2011. The contract does not include any other goods or services. Pharma concludes that the contract includes two distinct licenses: a right to use the IP in the United States and a right to use the IP in Europe. What is the impact of the contractual provisions that restrict the use of IP in this arrangement?
QUESTION 115 Sales- or usage-based royalties – license of IP is predominant Pharma licenses to Customer its patent rights to an approved drug compound for eight years. The drug is a mature product. Pharma also promises to provide training and transition services related to the manufacturing of the drug for a period not to exceed three months. The manufacturing process is not unique or specialized, and the services are intended to help Customer maximize the efficiency of its manufacturing process. Pharma concludes that both the license of IP and the services are distinct. The only compensation for Pharma in this arrangement is a percentage of Customer’s commercial sales of the product. Do the sales- or usage-based royalty exception apply to this arrangement?
QUESTION 116 Sales- or usage-based royalties – milestone payments Tech Co licenses IP to Manufacturer that Manufacturer will utilize in products it sells to its customers over the license period. Tech Co will receive a fixed payment of $ 10 million in exchange for the license and milestone payments as follows: • An additional $ 5 million payment if Manufacturer’s cumulative sales exceed $ 100 million over the license period • An additional $ 10 million payment if Manufacturer’s cumulative sales exceed $ 200 million over the license period Tech Co. concludes that the license is a right to use IP. There are no other promises included in the contract. Does the sales-or usage-based royalty exception apply to the milestone payments?
QUESTION 117 Sales- or usage-based royalties – claw back of upfront payment Assume the same facts as question 116, except that the upfront payment is $ 20 million and the contract provides for claw-back of $5 million in the event Manufacturer’s cumulative sales do not exceed $ 100 million over the license period. Tech Co concludes it is probable that Manufacturer’s cumulative sales will exceed the target. Do the sales-or-usage-based royalty exception apply to this arrangement?
QUESTION 118 Principal versus agent – entity is an agent Web Co, operates a website that sells books. Web Co enters into a contract with Bookstore to sell Bookstore’s books on line. Web Co’s website facilitates payments between Bookstore and the customer. The sales price is established by Bookstore and Web Co earns a commission equal to 5% of the sales price. Bookstore ships the books directly to the customer; however, the customer returns the books to Web Co if they are dissatisfied. Web Co has the right to return books to Bookstore without penalty if they are returned by the customer. Is Web Co the principal or agent for the sale of books to the customer?
QUESTION 119 Principal versus agent – entity is the principal Travel Co negotiates with major airlines to obtain access to airline tickets at reduced rates and sells the tickets to its customers through its website. Travel Co contracts with the airlines to buy a specific number of tickets at agreed-upon rates and must pay for those tickets regardless of whether it is able to resell them. Customers visiting Travel Co’s website search Travel Co’s available tickets. Travel Co has discretion in establishing the prices for the tickets it sells to its customers. Travel Co is responsible for delivering the ticket to the customer. Travel Co will also assist the customer in resolving complaints with the service provided by the airlines. The airline is responsible for fulfilling all other obligations associated with the ticket, including the air travel and related services (that is, the flight), and remedies for service dissatisfaction. Is Travel Co the principal or agent for the sale of airline tickets to customers?
QUESTION 120 Principal versus agent – shipping and handling Toy Co. operates retail stores and a website where customers can purchase toys. Customers that make online purchases can choose to pick their order up at the retail store for no additional cost or have the order delivered to their home for a fee. Toys can be delivered via standard delivery or overnight delivery with a specified delivery company. The customer is charged for the cost of the delivery (as established by the delivery company) and given a tracking number so it can track the status of the delivery and contact the delivery company with any questions or concerns. Control of the toys’ transfers to the customer when the order leaves the warehouse. Toy Co has not elected to account for shipping and handling activities as a fulfillment cost under US GAAP. Toy Co concludes that shipping the toys is a promise in the contract and a distinct service. Should Toy Co recognize the shipping fees it charges to its customers gross (as revenue and expense) or net of the amount paid to the shipping provider?
QUESTION 121 Incremental costs of obtaining a contract — construction industry Construction Co incurs costs in connection with winning a successful bid on a contract to build a bridge. The costs were incurred during the proposal and contract negotiations, and include the initial bridge design. How should Construction Co account for the costs?
QUESTION 122 Incremental costs of obtaining a contract — telecommunications industry Telecom sells wireless mobile phone and other telecom service plans from a retail store. Sales agents employed at the store signed 120 customers to two-year service contracts in a particular month. Telecom pays its sales agents’ commissions for the sale of service contracts in addition to their salaries. Salaries paid to sales agents during the month were $ 12,000, and commissions paid were $ 2,400. The retail store also incurred $ 2,000 in advertising costs during the month. How should Telecom account for the costs?
QUESTION 123 Set-up costs — technology industry Tech Co enters into a contract with a customer to track and monitor payment activities for a five-year period. A prepayment is required from the customer at contract inception. Tech Co incurs costs at the outset of the contract consisting of uploading data and payment information from existing systems. The ongoing tracking and monitoring are automated after customer set up. There are no refund rights in the contract. How should Tech Co account for the set-up costs?
QUESTION 124 Costs to fulfill a contract — construction industry Construction Co enters into a contract with a customer to build an office building. Construction Co incurs directly related mobilization costs to bring heavy equipment to the location of the site. During the build phase of the contract, Construction Co incurs direct costs related to supplies, equipment, material, and labour. Construction Co also incurs some abnormal costs related to wasted materials that were purchased in connection with the contract. Construction Co expects to recover all incurred costs under the contract. How should Construction Co account for the costs?
QUESTION 125 Amortization of contract cost assets — renewal periods without additional commission Telecom sells prepaid wireless services to a customer. The customer purchases up to 1,000 minutes of voice services and any unused minutes expire at the end of the month. The customer can purchase an additional 1,000 minutes of voice services at the end of the month or once all the voice minutes are used. Telecom pays commissions to sales agents for initial sales of prepaid wireless services, but does not pay a commission for subsequent renewals. Telecom concludes the commission payment is an incremental cost of obtaining the contract and recognizes an asset. The contract is a one-month contract and Telecom expects the customer, based on the customer’s demographics (for example, geography, type of plan, and age), to renew for 16 additional months. What period should Telecom use to amortize the commission costs?
QUESTION 126 Amortization of contract cost assets — renewal periods with separate commission Assume the same facts as in question 125, except Telecom also pays commissions to sales agents for renewals. What period should Telecom use to amortize the commission costs?
QUESTION 127 Amortization of contract cost assets –amortization method Construction Co enters into a construction contract to build an oil refinery. Construction Co concludes that its performance creates an asset that the customer controls and that control is transferred over time. Construction Co also concludes that “cost-to-cost” is a reasonable method for measuring its progress toward satisfying its performance obligation. Construction Co pays commissions totaling $ 100,000 to its sales agent for securing the oil refinery contract. Construction Co concludes that the commission is an incremental cost of obtaining the contract and recognizes an asset. As of the end of the first year, Construction Co estimates its performance is 50% complete and recognizes 50% of the transaction price as revenue. How much of the contract asset should be amortized as of the end of the first year?
QUESTION 128 Equip Co enters into a contract with a customer to sell a piece of industrial equipment for $ 75,000 and provide two years of maintenance services for the equipment for $ 25,000. Equip Co concludes that the promises to transfer equipment and perform maintenance are distinct and, therefore, represent separate performance obligations. The contract price represents standalone selling price of the equipment and services. Equip Co recognizes revenue for the sale of equipment when control of the asset transfers to the customer upon delivery. Revenue from the maintenance services is recognized ratably over two years consistent with the period during which the customer receives and consumes the maintenance services. Equip Co pays a single commission of $ 10,000 to its sales agent equal to 10% of the total contract price of $ 100,000. Equip Co concludes that the commission is an incremental cost of obtaining the contract and recognizes an asset. What pattern of amortization should Equip Co use for the capitalized costs?
QUESTION 129 Impairment of contract cost assets Data Co enters into a two-year contract with a customer to build a data center in exchange for consideration of $ 1,000,000. Data Co incurs incremental costs to obtain the contract and costs to fulfill the contract that are recognized as assets and amortized over the expected period of benefit. The economy subsequently deteriorates and the parties agree to renegotiate the pricing in the contract, resulting in a modification of the contract terms. The remaining amount of consideration to which Data Co expects to be entitled is $ 650,000. The carrying value of the asset recognized for contract costs is $ 600,000. An expected cost of $ 150,000 would be required to complete the data center. How should Data Co account for the asset after the contract modification?
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IFRS 15 Revenue from Contracts with Customers - PRACTICALS PROBLEM WITH CALCULATION !

QUESTION 1 Find out estimated contract revenue and contract costs. Also, measure the contract profit or loss. Material inventory at the end of year 1 was $ 100 Thousand.
QUESTION 2 Using costs information available in Question 1, record the entries under the stage of completion of method.
QUESTION 3 The initial price of a construction contract is $ 900,000. The Contract is subject to material cost escalation. For this purpose, a material price index is applied, which was at 1,200 at the inception of the contract. It is estimated that the material component would be 50% of the contract price. It has been further estimated that material consumption would 40% during the Year 1, 40% during Year 2 and 20% during Year 3. Estimated contract completion time is 3 years. The contractor has incurred contract costs of $ 3,00,000 at the end of Year 1 of which material cost was $ 190,000. It has estimated that other costs to complete the contract (costs other than material costs) will be $ 200,000. At the end of Year 1, the contractor company was confused, as there was a substantial change in design for which it has worked out a variation charge of $ 100,000 mainly for labour costs. However, the negotiation was in progress. Moreover, it had claimed $ 50,000 for delay in work caused by the customer. It was not sure whether this claim would be accepted. So, if the contractor was not sure about further continuation of work as well. The customer has paid 10% of the initial contract price as signing price. It is highly probable that it will pay another instalment of 15% at the Year End inclusive of cost escalation. Material price Index at the Year End was 1,300. How should the contractor recognize contract revenue and costs?
QUESTION 4 In continuation of Question 3, now let us suppose that at the beginning of Year 2, the uncertainty has been removed. Both the parties agreed for a variation of $ 75,000 and a claim of $ 10,000. The contractor has incurred costs of $ 420,000 for year ended 2. Should it now apply stage of completion method for recognizing contract revenue? Meanwhile the customer has paid another $ 400,000. Estimated costs to complete the contract at the Year 3 end was $ 180,000. Material Index at the Year 2 end 1350 and it was expected to be at 1380 at the Year 3 end. a. How much of the revenue should be recognized at Year 2 end? b. How much profit should be recognized at Year 2 end? c. How much of the profit should be transferred to Contract Reserve? d. What was the Contract Receivables?
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IFRS 15 Revenue from Contracts with Customers - PRACTICALS PROBLEM BASED ON CONCEPTUAL UNDERSTANDING !

QUESTION 1 XYZ AG, a German company, sold goods for € 100 million, which include € 5 million of value added tax. Should the company present €100 million as revenue?
QUESTION 2 ABC AG, German company, sold goods for € 100 million as a distribution agent in which as per agency agreement ABC earns 10% commission. Should the company present € 100 million as revenue?
QUESTION 3 Leella Ventures sold goods to its B2B customers at $ 4,000 million gross inclusive taxes $ 100 million and trade discounts and rebates $ 150 million. What should be the fair value of the transaction?
QUESTION 4 Leella Ventures sold goods to its customers at $ 4,000 million net. The customers have to make down payment of $ 1,000 million and balance are paid over 4 equal annual instalments. a) What is the fair value of revenue if interest rate is taken as 10%? b) If cash price of the goods is $ 3,350
QUESTION 5 Sometimes two or more suppliers swap products in different locations to expedite availability of goods to customers. ABC Inc has 10 tons of inventories of edible oil in Ahmedabad whereas XYZ Inc has 15 ton of the same inventory (in terms brand and quality) in Bhopal whereas ABC Inc needs 5 ton of inventory in Bhopal and XYZ needs the same quantity in Ahmedabad. The entities swap 5-ton inventory.
QUESTION 6 In continuation of question 5, should the swapping constitute sale if the transaction involves exchange dissimilar goods or service? If the answer is in affirmative, how should the fair value of revenue be measured? Suppose in swap of dissimilar goods ABC paid $ 5,000 to XYZ. Market price of inventory of ABC Inc $ 120,000 and that of XYZ Inc $ 127,000.
QUESTION 7 Sheely AG, machinery manufacturers, sold machinery to its customer with a free maintenance guarantee for 2 years. Price of each machine is € 10,000. The company has assessed that expense for maintenance of each machine is € 500 p.a. Marginal borrowing cost of the company is 10% p.a. How should the company recognize revenue?
QUESTION 8 ABC, machine manufacturer, sold machines to one of its B2B customer XYZ with a guarantee that if machines cannot be operated at 120% capacity over 4 years, it will replace the same. Normally, it provides 1 year on site guarantee for 120% capacity utilization.
QUESTION 9 XYZ, a wholesaler, sold merchandise to one of its customer C with a guarantee that if C cannot sell the goods 10% above the selling price, then it will pay the value after deducting 10% profit on cost of purchase.
QUESTION 10 ABC, machine manufacturer, sold machines to its B2B customers amounting to $ 2,000 million. As per terms of sales, the seller has to install the machines in the buyer place and demonstrate performance. Of the above sales 30% relate to sales in which cases both installation and trial run is pending and in another 10% of the cases only trial run is pending. Can ABC recognize revenue amounting to $ 2,000 Million
QUESTION 11 M has sold household machines to its B2B customers with a guarantee that the buyer can return the machine within two months from the date of purchase, if the performance is not satisfactory. The seller could not establish any pattern of the probability of return as the performance of the machines has the record of return of about 40%.
QUESTION 12 K, a wholesaler, has sold goods to retailer with an option to return within 15 days from the date of sale. It has assessed that only in 0.25% of cases the goods are actually returned by the customer therefore, it has deducted provision for return from the gross sales and the balance is recognized as revenue. Is the accounting policy of the company satisfying the test of Para 14 of IFRS-I5?
QUESTION 13 XYZ exported goods to a North African country. Immediately after the goods were delivered on FOB basis, the exporter got the news that the Government of that country has imposed temporary sanction on repatriation.
QUESTION 14 X Inc has sold goods to its customer. In some cases, the delivery of the ‘goods are delayed at the customers’ request as there is a strike in the port. The customers have already accepted the billing and made 10% usual down payment as per normal terms. Should X Inc recognize revenue in these ‘bill and hold’ cases? The company has long standing relationship with these customers and it is sure that they will take delivery. The identified goods are ready for dispatch.
QUESTION 15 X Inc sells goods to its consignment agent who resale the goods on commission basis. However, the consignment agent carries the risk of loss of goods in his warehouse and risk of collection from the buyer. Can X Inc treat that significant risks attached to the ownership have been passed to the agent?
QUESTION 16 X Inc had entered into a contract to render repair art-work of a damaged building at a total contract price of $ 100 million. It had originally estimated that its costs would be $ 60 million. Since accurate time estimation was not possible for the art work, it employs a surveyor at the year end and estimated that 60% of the work has been completed at a cost of $ 47 million. The party has made a progress payment of $ 50 million through a separate assessment of work completion. Can the entity recognize revenue applying stage of completion method?
QUESTION 17 X Inc had entered into a contract to render repair art-work of a damaged building at a total contract price of $ 100 million. It had originally estimated that its costs would be $ 60 million. Since accurate time estimation was not possible for the art work, it employs a surveyor at the year end and estimated that 60% of the work has been completed at a cost of $ 47 million. The party has made a progress payment of $ 50 million through a separate assessment of work completion. Can the entity recognize revenue applying stage of completion method?
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IFRS 15 Revenue from Contracts with Customers - IMPORTANT EXAM RELATED TECHNICAL POINTS

IMPORTANT EXAM RELATED TECHNICAL POINTS
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IFRS 15 Revenue from Contracts with Customers - PPT PRESENTATION AND COURSE NOTES

PPT PRESENTATION AND COURSE NOTES
A real-world example under IFRS 15:

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QUESTION 103 Upfront fee – health club joining fees FitCo operates health clubs. FitCo enters into contracts with customers for one year of access to any of its health clubs. The entity charges an annual membership fee of $60 as well as a $ 150 nonrefundable joining fee. The joining fee is to compensate, in part, for the initial activities of registering the customer. Customers can renew the contract each year and are charged the annual membership fee of $60 without paying the joining fee again. If customers allow their membership to lapse, they are required to pay a new joining fee. How should FitCo account for the nonrefundable joining fees?

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