A customer approached Firm Constructs Limited for the construction of a standard 5-bedroom duplex, a security house and a fence wall with a gate on the client’s land. Both parties signed the contract in the presence of their lawyers. The contractor usually provides the three products as a bundle for ₦93,267.
The customer is expected to pay the consideration as follows:
18 April 2017 ₦36,789
17 August 2017 ₦15,678
13 January 2018 ₦21,400
4 May 2018 ₦12,400
The contract is scheduled to commence on 18 April 2017. Firm Constructs Limited is expected to deliver the duplex, security house, and fence wall with a gate in 20 months from the date the contract commenced. Firm Constructs Limited prepares its financial statements to 31 December annually.
Explain the factors to be considered in ascertaining whether the reporting entity should use IFRS 15 model for revenue recognition.
See a suggested answer to practice activity 13.2 here.
Practice activity 13.2 seeks to explain the revenue recognition model prescribed in IFRS 15. The model should be applied by a reporting entity or contractor. So, it is alright to note that the Standard is applied by a reporting entity in accounting for revenue from contracts with customers.
Suggested answer to practice activity 13.2
First, Firm Constructs Limited must ascertain whether the contract meets the requirements for applicability using IFRS 15. The Company must determine how to measure and recognise revenue if IFRS 15 does not apply. The contract is within the scope of IFRS 15 because the parties to the contract have approved the contract in writing.
Firm Constructs Limited can identify each party’s rights pertaining the goods or services to be transferred to the customer by 18 December 2018 (that is, 20 months from the commencement of the contract).
The contractor can identify the payment terms for the goods or services to be transferred. Also, the contract has commercial substance. The risk, timing and amount of the entity’s future cash flows are expected to change as a result of the contract. It is probable that the entity will collect the consideration it expects to be entitled in exchange for the standard 5-bedroom duplex, a security house, a fence wall with a gate.
Second, Firm Constructs Limited must identify whether the contract comprises a sole or separate/distinct performance obligations (promises). The construction of the luxury 5-bedroom duplex, the security house and a fence wall with a gate constitute a single performance obligation.
Third, Firm Constructs Limited is to ascertain or calculate the transaction price. A critical issue is to determine whether this price needs to be adjusted for time value of money. Another critical issue is to ascertain the variable consideration in the transaction price.
The fourth step is for the entity to allocate the transaction price to the promises. A critical issue is to determine whether the transaction price should be allocated to a bundled or the separate performance obligations. Based on the contract, the transaction price should be allocated to a bundled promise.
The fifth step is for the entity to recognise revenue when the reporting entity fulfills its obligation by performing the transfer of the goods (duplex, security house, and fence wall with a gate) to the client. A critical issue is to ascertain whether the promises are satisfied overtime or on a single date in the accounting period. The promise is to be delivered in 20 months from 18 April 2017. Twenty months from 18 April 2017 is on 18 December 2018. Based on the contract, revenue is recognised on 18 December 2018. Firm Constructs Limited fulfills the performance obligation is on a particular date (18 December 2018). The revenue is shown in the financial statements of Firm Constructs Limited for the year ended 31 December 2018.
Practice activity 13.2 seeks to explain the revenue recognition model prescribed in IFRS 15. The model should be applied by a reporting entity or contractor. So, it is alright to note that the Standard is applied by a reporting entity in accounting for revenue from contracts with customers.
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