Practice Activity 13.36 Determination of the customer’s simultaneous collection and consumption of t

Practice Activity 13.36 Determination of the customer’s simultaneous collection and consumption of the benefits provided by the reporting entity’s performance

Altenergy Limited signs a contract with a customer to provide consultancy services. The consultancy service is to provide a professional opinion to the customer. There are specific facts and circumstances about the customer that will influence the opinion. Based on the contract, if the customer were to terminate the consulting contract for any reason other than the contractor’s failure to perform its obligation, the customer will compensate the contractor for the costs incurred plus a 15% margin. This margin is the approximate value of the profit that the contractor earns from similar contracts.

Assume that the entity is unable to satisfy its obligation and the customer had to hire another consulting company to provide the professional opinion.

Determine whether the customer simultaneously receives and consumes the benefits provided by the entity’s performance.

See the suggested solution to practice activity 13.36 here.

Suggested solution to practice activity 13.36

The other consulting company will need to substantially re-perform the work that the previous entity completed to date. This is because it will not be privy to work-in-progress performed by the previous entity.

The nature of the professional opinion is that the customer will receive the benefits of the entity’s performance only when the customer receives the professional opinion. The entity concludes that the criterion in paragraph 35(a) of IFRS 15 is not met.

The contractor’s performance obligation meets the criteria in paragraph 35(c) of IFRS 15 and is a performance obligation fulfilled over time because:

i. According to IASB (2014, IFRS 15, paragraphs 36 and B6-88), the creation of the professional opinion does not result in an asset that can be used differently by the contractor because the opinion relates to facts and circumstances that are specific to the customer. The contractor is constrained in directing the asset to another customer.

ii. According to IASB (2014, IFRS 15, paragraphs 37 and B9-B13), the contractor has an enforceable right to payment for its performance completed to date for costs expended plus a reasonable margin. This margin is the approximate value of the profit that the contractor earns from similar contracts.

Hence, the contractor recognises revenue over time by measuring its progress towards the complete fulfillment of the obligation based on paragraphs 39 to 45 and B14 to B19 of IFRS 15.