APPLIED FINANCIAL ACCOUNTING STUDY PACK – 2024

CHARTERED ACCOUNTANTS ACADEMY

FINANCIAL ACCOUNTING & REPORTING DEPARTMENT

CERTIFICATE OF THEORY IN ACCOUNTING

STUDY UNIT - IFRS 15

REVENUE FROM CONTRACTS WITH CUSTOMERS

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Contents
1. Introduction .................................................................................................................................... 3
2. Objectives of IFRS 15 ...................................................................................................................... 3
3. Study Material ................................................................................................................................ 3
4. Scope .............................................................................................................................................. 3
5. Competence Framework Expectation ............................................................................................ 4
6. Examination Possibilities & Areas of Integration ............................................................................ 5
7. Assumed Knowledge....................................................................................................................... 5
8. IFRS 15 Study Material .................................................................................................................... 6
8.1. Key Definitions ....................................................................................................................... 6
Recognition ......................................................................................................................................... 6
8.2. Five Step Model ..................................................................................................................... 6
8.2.1. Step 1: Identify the contract with a customer................................................................... 7
8.2.2. Step 2 Identify the performance obligations................................................................... 12
8.2.3. Step 3 Determine the transaction price (para 47)........................................................... 16
8.2.4. Step 4 Allocate the transaction price to the performance obligations (para 74) ............ 18
8.2.5. Step 5 Recognise revenue ............................................................................................... 20
8.3. Incremental Cost of obtaining a contract (par 91-94) ......................................................... 22
8.4. Costs to fulfil a contract (para 95) ....................................................................................... 22
8.5. Loyalty Points ....................................................................................................................... 23
8.6. Determining whether a customer obtains control .............................................................. 23
8.7. Classification, recognition and measurement of a forward or call option .......................... 24
Classification, recognition and measurement of a put option ......................................................... 28
9. IFRS 15 QUESTIONS ...................................................................................................................... 30
9.1. Question 1 25 Marks ............................................................................................ 30
9.2. Question 2 5 Marks .............................................................................................. 34
9.3. Question 3 10 Marks ........................................................................................... 35
9.4. Question 4 29 Marks ............................................................................................ 36
9.5. Question 5 35 Marks .............................................................................................. 47
9.6. Question 6 16 Marks ............................................................................................ 52
9.7. Question 7 14 Marks ........................................................................................... 57

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1. Introduction

REVENUE is income arising in the course of an entity’s ordinary

activities. The core principle is that a vendor should recognise
revenue to depict the transfer of promised goods or services to
customers in an amount that reflects the consideration to
which the vendor expects to be entitled in exchange for those
goods or services. Revenue will now be recognised by a vendor
when or as control over the goods or services is transferred to
the customer. The aim of this study unit is therefore to help
students in understanding the accounting of
Revenue in accordance with IFRS 15. IFRS 15 should be familiar
to you from your earlier studies, as should the mechanics of
using the 5-step model. This topic is highly examinable.
2. Objectives of IFRS 15
After you have studied this topic, you should be able to do the following:

• Identify the revenue transactions governed by IFRS 15

• Apply the five-step model in the recognition of revenue
• Recognise revenue from the sale of goods and rendering of services.

3. Study Material
The following material should be used to complement this study unit:

1. IFRS 15 Revenue From Contracts With Customers

2. Descriptive Accounting 21st Edition

4. Scope
IFRS 15 supersedes:

(a) IAS 11 Construction Contracts

(b) IAS 18 Revenue

(c) IFRS 13 Customer Loyalty Programmes

(d) IFRIC 15 Agreements for the Construction Estate

(e) IFRIC 18 Transfer of Assets from Customers

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(f) SIC 31 Revenue- Barter Transactions Involving Advertising Services

An entity shall apply IFRS 15 to all contracts with customers, except the following: (a)
lease contracts within the scope of IAS 17 Leases;

(b) insurance contracts within the scope of IFRS 4 Insurance Contracts;

(c) financial instruments and other contractual rights or obligations within the scope
of IFRS 9 Financial Instruments, IFRS 10 Consolidated Financial Statements, IFRS 11
Joint Arrangements, IAS 27 Separate Financial Statements and IAS 28 Investments in
Associates and Joint Ventures; and

(d) non-monetary exchanges between entities in the same line of business to facilitate
sales to customers or potential customers. For example, this Standard would not
apply to a contract between two oil companies that agree to an exchange of oil to
fulfil demand from their customers in different specified locations on a timely basis.

IFRS 15.7: A contract may be partially covered by IFRS 15 and other standards as follows:

• Entity applies other std/s first if it (other std) specifies how to separate and/or
initially measure one or more parts of the contract- and then apply IFRS15.73-86
to the part covered by IFRS 15
• Entity apply IFRS 15 if no other standard/s specifies how to separate and/or
initially measure one or more parts of the contract.

5. Competence Framework Expectation

5.1. Ethical Behaviour
5.2. Personal Attributes
5.3. Professional Skills
5.4. Technical competences

Refer to competence framework section of this module for expectations on Ethical

behaviour, personal attributes and professional skills competences.

KEY:
Level 2 - Awareness
Level 1- Initiates Task
Level 3 - Completes the Task

1 The Competencies Level

III-2 Conducts external financial reporting

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III-2.1 Develops or evaluates accounting policies in accordance with IFRS

• Selecting accounting policies. (Advanced)
III-2.2 Accounts for the entity’s routine transactions 3
• 5 step model (Advanced)
• Recognition (Advanced)
• Measurement (Advanced)
• Tax implications (Advanced)
III-2.3 Accounts for the entity’s non-routine transactions 3
• Customer Loyal points (Advanced)
• Repurchase Agreements Advanced
• Accounting for warranties (Advanced)
• Contract Modifications (Advanced)
• Bill and Hold (Awareness)
III-2.4 Prepares financial statements using IFRS 3
• Presentation (Advanced)
III-2.5 Prepares or evaluates financial statement note disclosure 3
• IFRS 15 disclosures (Advanced)
III-2.6 Explains the financial statement results and balances to stakeholders. You
should be able to: 3
• Evaluate,
• Review,
• Critique,
• Explain,
• Discuss
Revenue and related sections in the financial statement for sound decisions
to be made.
III-2.7 Maintains awareness of key ideas and principles of proposed financial
reporting standards changes. A
III-2.8 Considers the integrity of financial information in the integrated report
A
6. Examination Possibilities & Areas of Integration
The topic is highly examinable in both theory, journal entry and preparation of financial
statements form. The topic is usually examined integrated with other topics such as IFRS 16,
IFRS 5, IFRS 3, IFRS 10, IFRS 9 ,IAS 12, IAS 7 etc.

7. Assumed Knowledge
The following is regarded as assumed knowledge for IIFRS 15 purposes:

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• The definition of a contract

• Identifying a contract

• Preparing the Trading A/C in the Statement of Profit or Loss

8. IFRS 15 Study Material

8.1. Key Definitions
• Income – Increases in economic benefits during the accounting period in the form of
inflows or enhancements of assets or decreases of liabilities that result in an increase
in equity, other than those relating to contributions from equity participants.
• Revenue – Income arising in the course of an entity’s ordinary activities.
• Contract– An agreement between two or more parties that creates enforceable
rights and obligations.
• Contract asset – An entity’s right to consideration in exchange for goods or services
that the entity has transferred to a customer when that right is conditioned on
something other than the passage of time (for example the entity’s future
performance).
• Contract liability – An entity’s obligation to transfer goods or services to a customer
for which the entity has received consideration (or the amount is due) from the
customer.
• Customer– A party that has contracted with an entity to obtain goods or services that
are an output of the entity’s ordinary activities in exchange for consideration.
• Performance obligation– A promise in a contract with a customer to transfer to the
customer either:
• a good or service (or a bundle of goods or services) that is distinct; or
• a series of distinct goods or services that are substantially the same ad that have the
same pattern of transfer to the customer.
• Stand-alone selling price– The price at which an entity would sell a promised good or
service separately to a customer.
• Transaction price– The amount of consideration to which an entity expects to be
entitled in exchange for transferring promised goods or services to a customer,
excluding amounts collected on behalf of third parties. (IFRS 15)

Recognition
Generally, revenue is recognised when the entity has transferred promised goods or services
to the customer. IFRS 15 sets out five steps for the recognition process.

8.2. Five Step Model

1. Identify the contract (para-9-21)

2. Identify the performance obligations Para (22-46)

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3. Determine the transaction price para (47-72)

4. Allocate the transaction price to the performance obligations para 73-90

5. Recognise revenue

8.2.1. Step 1: Identify the contract with a customer

The first step in the revenue model is to determine whether a contract with a customer
exists. A contract is an agreement between two or more parties that creates enforceable
rights and obligations. A contract with a customer can be written, oral or implied by the
entity’s customary business practices.

The following criteria must be met for a contract to be accounted for (para 9):

• the parties must have approved the contract and are committed to perform;
• the entity must be able to identify each party’s rights regarding the goods or
services to be transferred;
• the entity must be able to identify the payment terms of those goods or services
to be transferred;
• the contract must have commercial substance; and
• it is probable that the entity will collect the consideration. The entity shall
consider the customer’s ability and intention to pay.

NB**- It is important to note that a contract does not exist if each party has the unilateral
enforceable right to terminate a wholly unperformed contract without compensation (i.e.
paying a penalty) to the other party.

Example 1 – Identifying a Contract

C-Bay Ltd provides online shopping services to customers remotely via the internet. C-Bay
Ltd will package a customer’s order and deliver for a price of $150. When a customer calls to
place an order the following process is followed:

• C-Bay Ltd describes to the customer the services it can provide and the price for
those services. All telephonic conversations with customers are recorded.
• When the customer agrees to the terms stated by C-Bay Ltd representatives, a
payment is made over the telephone via the customer`s credit card.
• After a successful payment has been made by the customer, C-Bay Ltd gives the
customer an access code for C-Bay Ltd.’s website in order to track its order.

Required

Discuss if the online shopping services provided by C-Bay Ltd is a contract with a customer in
accordance to IFRS 15.

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Example Analysis

A contract with a customer is in the scope of IFRS 15 if it meets the following five criteria (IFRS
15.9):

• The parties to the contract have approved the contract and are committed to
perform their respective obligations.
• The rights of each party regarding the goods or services can be identified.
• The payment terms are identified
• The contract has commercial substance
• It is probable that the entity will collect the consideration to which it is entitled
to.

The online shopping services meet the criteria for a contract with a customer since:

• C-Bay Ltd and the customer enter into an oral agreement which is legally
enforceable. In terms of the agreement C-Bay Ltd will deliver online shopping
services and delivery in return for a specified amount of $150, immediately
payable by the customer with a credit card
• The payment terms are therefore clear and collection of consideration for the
services is probable since payment by the customer is immediate. Thus the rights
of each party can be identified.
• After payment the customer receives an access code which gives him/her the right
to trace their order until goods are received.
• In light of the above, the contract with the customer has commercial substance.
• As such, this agreement would be a contract within the scope of IFRS 15 at the
time of the receipt of payment during the telephone conversation.

Types of Contracts

There are 3 types of contracts;

1. Single contract (Just one contract with a single customer)

2. Combined Contracts (two or more contracts combined as one) (excluded from CTA
level 1)

3. Modified Contracts (A contract whose terms has been changed) (Excluded from CTA
Level 1)

Combination of contracts (Excluded from CTA Level1)

An entity may sometimes wish to combine two or more contracts and just account them as
one. IFRS 15 allows entities to combine two or more contracts and account for them as a single
contract if they are entered into at or near the same time with the same customer and meet
one or more of the following criteria:

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• the contracts are negotiated as a package with a single commercial objective;

• the amount of consideration paid under one contract is dependent on the price
or performance under another contract; or
• the goods or services promised under the contracts constitute a single
performance obligation.

Contract modifications (para 15-21)

A contract modification occurs when the parties to a contract agree on a change in the scope
and/ or the price of a contract. It creates new (or changes existing) enforceable rights and
obligations of the parties to the contract. Like a contract, a contract modification can be
approved in writing, orally, or implied by customary business practice

A contract modification may either result in a separate new contract being formed or the
original contract remains in force.
Modifications that result in a separate contract

A modification results in a separate contract if both the following conditions are present:

• scope: increases because of additional promised goods or services that are

distinct; and
• price: increases by an amount of consideration that reflects the stand-alone
selling price of these goods and services, and any appropriate adjustments to that
price to reflect the circumstances of the contract.

Distinct (para 27): A good or service is distinct if both the following criteria are met:

1) The customer can benefit from the good or service either on its own or together
with other resources that are readily available to the customer.
2) The entity’s promise to transfer the good or service to the customer is separately
identifiable from other promises in the contract.
3) 3)A stand-alone selling price is the price at which an entity would sell a promised
good or service separately to a customer.

Factors that indicate that an entity’s promise is separately identifiable include (para 29)
but are not limited to:

1) The entity does not provide a significant service of integrating the good or service
with other goods or services promised in the contract into a bundle that represents
the combined output for which the customer has contracted.
2) The good or service does not significantly modify or customise another good or
service promised in the contract.

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3) The good or service is not highly dependent on, or highly interrelated with, other
goods or services promised in the contract.

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Example 2

On 1 January 20.15, Musa Ltd enters into a contract with a customer to sell 100 products to
a customer over a period of six months. The transaction price for the 100 products amounts
to

$150 000 ($1 500 per product). The products are transferred to the customer at various points
in time over a six-month period.

On 1 April 20.15, the contract with the customer is modified by both parties. On the date of
the modification, Musa Ltd had already delivered 70 products to the customer. In terms of
the modification agreement, the entity will deliver an additional 20 products for an
additional consideration of $28 000 ($1 400 per product). The pricing for the additional
products reflects the stand-alone selling price of the products at the time of the contract
modification. In addition, the additional products are distinct from the original products,
because Musa Ltd regularly sells the products separately.

Example 2 Analysis

The contract modification results in a separate and new contract to deliver an additional 20
products, since the promised goods and services are distinct and their pricing reflects the
stand-alone selling price. The modification does not affect the accounting of the existing
contract to deliver the remaining 30 products. Consequently, the amounts recognised as
revenue when the remaining products are transferred consist of $45 000 ($1 500 × 30) from
the original agreement and $28 000 ($1 400 × 20) under the new and separate agreement.
A change in revenue is not recognised for changes in stand-alone prices of goods or services
after contract inception.

Modifications that do not result in a separate contract

If a contract modification does not result in a separate contract, an entity accounts for the
promised goods and services not yet transferred at the date of the modification in one of the
following ways:

Accounting Treatment

1. Remaining goods or services are distinct from those transferred on or before

modification date Treat the modification as a termination of the original contract
and the creation of a new contract.

Prospectively adjust price by calculating new average price.

See Example 3

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1. Remaining goods or services are not distinct and are part of a single performance obligation
that is partially satisfied at the modification date Treat the modification

as if it were part of the existing contract. A retrospective effect of the modification to

revenue should be determined and adjusted to revenue in the current period.

See Example 4

NB**-The determining factor on whether the modification is accounted for prospectively

or retrospectively rest on whether the remaining goods or services to be delivered after
modification are distinct from those provided prior to modification.

8.2.2. Step 2 Identify the performance obligations

A contract includes promises to provide goods or services to a customer. Those promises are
called performance obligations. At inception of the contract, an entity shall assess the goods
or services promised in the contract and shall identify the performance obligations. An entity
shall account for a performance obligation separately only if the promised good or service is
distinct (para 22).

A good or service that is promised to a customer is distinct if both of the following criteria are
met (para 27):

a) the customer can benefit from the good or service either on its own or
together with other resources that are readily available to the customer
(i.e. the good or service is capable of being distinct);
b) the entity’s promise to transfer the good or service to the customer is
separately identifiable from other promises in the contract (i.e. the good
or service is distinct within the context of the contract).

Factors that indicate that an entity’s promise to transfer a good or service to a customer is

separately identifiable (para 27(b)) include, but are not limited to, the following:

a) the entity does not provide a significant service of integrating the good or
service with other goods or services promised in the contract into a bundle of goods
or services that represent the combined output for which the customer has
contracted. In other words, the entity is not using the good or service as an input
to produce or deliver the combined output specified by the customer.

b) the good or service does not significantly modify or customise another good
or service promised in the contract.

c) the good or service is not highly dependent on, or highly interrelated with,
other goods or services promised in the contract. For example, the fact that a
customer could decide to not purchase the good or service without significantly
affecting the other promised goods or services in the contract might indicate that the

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good or service is not highly dependent on, or highly interrelated with, those other
promised goods or services.

NB**- A performance obligation is a promise in a contract with a customer to transfer to

the customer either:

(a) a good or service (or bundle thereof) that is distinct, e.g. sale of a car; or
(b) a series of distinct goods or services that are substantially the same and that have the
same pattern of transfer to the customer e.g. provision of internet services.

A series of distinct goods or services has the same pattern of transfer to the customer if both
the following criteria are met (para 23):

a) each distinct good or service in the series that the entity promises to transfer to
the customer would meet the criteria to be a performance satisfied over time;
and
b) the same method would be used to measure the entity’s progress toward
complete satisfaction of the performance obligation to transfer each distinct
good or service in the series to the customer.

A good or service that is not distinct should be combined with other goods or services until
the entity identifies a bundle of goods or services that are distinct.

Performance obligations do not include activities that an entity must undertake to fulfil a
contract unless the entity transfers goods or services to the customer as those activities occur
(para 25). For example, a services provider may need to perform various administrative tasks
to set up a contract. The performance of those tasks does not transfer a service to the
customer as the tasks are performed. Therefore, those setup activities are not a performance
obligation.

Example 3

Remaining goods are distinct from those transferred on or before modification date

On 1 January 20.15, Musa Ltd enters into a contract with a customer to sell 100 products to a
customer over a period of six months. The transaction price for the 100 products amounts to

$150 000 ($1 500 per product). The products are transferred to the customer at various points
in time over a six-month period.

On 1 April 20.15, the contract with the customer is modified by both parties. On the date of
the modification, Musa Ltd had already delivered 70 products. In terms of the modification
agreement, the entity will deliver an additional 20 products for an additional consideration of
$28 000 ($1 400 per product). The pricing for the additional products does not reflect the
stand-alone selling price of the products at the time of the contract modification. The

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additional products are distinct from the original products, because A Ltd regularly sells the
products separately.

Example 3 Analysis

Treat the modification as a termination of the original contract and the creation of a new
con- tract. Consequently, the amount recognised as revenue for remaining products (30 +
20) would be a “blended” price of $1 460 per product calculated as follows:

Products not yet transferred under the original contract (1 500 × 30) $45 000

Products to be transferred due to the modification (1 400 × 20) $28 000

Remaining products to be transferred: $73 000

Revenue per remaining product (73 000/50) 1 460

The amount of revenue recognised is prospectively adjusted to include the effect of the
modification.

Example 4:

Remaining goods or services are not distinct and are part of a single performance obligation

On 1 January 20.15, Telenet Ltd enters into a contract to provide optic fibre network for a
customer to be delivered on 31 December 20.16. The contract is a single performance
obligation. The contract may be modified and customised for Telenet Ltd to fulfil it.

At inception of the contract, Telenet Ltd expects the following:

Transaction price in terms of the contract 1 500 000

Expected costs (1 200 000)

Expected profit (20%)

(1200000*20%) = 300 000

On 31 December 20.15, the parties to the contract agreed to change the network bridges to
be used in the network project. As a result, the contract revenue and expected costs increased
by $80 000 and $60 000, respectively. Telenet Ltd concludes that the remaining goods and
services to be provided under the modified contract are not distinct because the entity
provides a significant service of integrating the goods and services into the combined item
(the optic fibre network) for which the customer has contracted. In addition, providing the
computer network requires Telenet Ltd to significantly modify the promised goods and
services.

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On the modification date, Telnet Ltd had satisfied 60% of its performance obligation based
on costs incurred ($720 000) relative to total expected costs ($1 200 000). Telenet Ltd has a
31 December year end.

Progress [720 000/(1 200 000 + 60 000)] 57%

Revenue to be adjusted:

Modified transaction price (1 500 000 + 80 000) 1 580 000

Revenue to be recognised to date based on adjusted progress and adjusted

transaction price (57% × 1 580 000) 900 600

Actual revenue recognised to date under the original contract

(1 500 000 × 60%) (900 000)

Additional revenue (catch up amount) 600

Example 5

Separate performance obligations do not exist

CA Academy sells licensed accounting software to an Audit firms for a total consideration of
$5 000. In addition, CA Academy promises to provide consulting services to significantly
customise the software to the customer’s business environment.

Example 5 Analysis

The contract with the customer is single contract since the contract was negotiated as a
package with a single commercial objective. However, the contract requires CA Academy to
provide a significant integration of goods and services (software and consulting services). In
addition, the software is significantly modified by CA Academy in accordance with the
specifications negotiated with the customer. Consequently, A Ltd should account for the
licensed software and consulting services together, as one performance obligation.

Example 6

Separate performance obligations exist

Cloverleaf Ltd enters into an agreement with customer A for the sale of a motor vehicle along
with three years of services for a total of $95 000.

A customer may also acquire a motor vehicle from Cloverleaf Ltd without a services plan.
Cloverleaf Ltd regularly sells a three-year service plan to customers on a stand-alone basis.
Example 6 Analysis

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The contract with customer A is a single contract, since it was negotiated as a package with a
single commercial objective.

In terms of the contract with customer A, two performance obligations exist; i.e.

a. the delivery of a motor vehicle and

b. the delivery of services.

In order for performance obligations to be accounted for separately, the entity first has to
determine if the goods and services are distinct.

The motor vehicle, as well as the service contract, is regularly sold separately by Clover Leaf
Ltd, and the customer can benefit from the goods (motor vehicle) or service plan either on its
own or with other resources readily available to the customer.

The goods or services are not highly interrelated with other promised goods or services in the
contract and significant integration of goods and services is not required (the motor vehicle
as well as the service plan can be sold and used separately by customers) and no significant
modification to the performance obligations are required to fulfil the contract.

Consequently, the two performance obligations (the motor vehicle and the service plan) are
accounted for separately for revenue purposes.

8.2.3. Step 3 Determine the transaction price (para 47)

The transaction price is the amount of consideration a company expects to be entitled to from
the customer in exchange for transferring goods or services, excluding amounts received on
behalf of third parties e.g. VAT.

The consideration promised in a contract with a customer may include fixed amounts, variable
amounts, or both.
8.2.3.1. Variable Consideration
The amount of consideration received under a contract can vary due to discounts, rebates,
refunds, credits, incentives, performance bonuses, penalties, contingencies, price concessions
(including concessions due to doubts about the collectability from the customer’s credit risk)
and other similar items.

An entity estimates an amount of variable consideration by using either:

a) the expected value (probability weighted method) or

b) the most likely amount (single most likely amount in a range), depending on whichever
has the better predictive value.

The entity must apply one method consistently throughout the contract.

Example 7

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Roads Ltd enters into a contract with G5 to construct a cement and tar mixing plant. Contract
lists a $100,000 base fee. However, adjusted by 10% decrease for every week completion
extends beyond agreed-upon completion date. Management estimates 60% probability of on-
time completion, 30% probability of one week late, and 10% probability of two weeks late.
Roads Ltd concludes that the expected value method is most predictive in this case.

Rebate Probability Calculation

$100,000 60% $60,000

$90,000 30% $27,000

$80,000 10% $8,000
Expected value = $95,000 Limitations of revenue recognised

Variable consideration is only included in the transaction price if, and to the extent that, it is
highly probable that its inclusion will not result in a significant revenue reversal in the future
as result of a re-estimation. The likelihood as well as magnitude of the revenue reversal should
be considered.
8.2.3.2. Time value of money
The promised amount of consideration must reflect the time value of money if the contract
includes a significant financing component. Revenue should be recognised at an amount that
reflects the price that a customer would have paid for the goods and services if the customer
had paid cash when the goods and services transfer to the customer.

The effects of financing (interest) shall be presented separately from revenue in the statement
of profit or loss and other comprehensive income as time unwinds.

Example 8

Example 8 Financing Component

G5 enters into a 3-year agreement with ZINARA to resurface the Harare- Mutare road. ZINARA
paid an upfront consideration of $100,000 to finance the work in progress.

Discount rate that would be reflected in a separate financing transaction between parties =
9.7%.

What is the accounting journals that must be posted?

Year 0 Year 1 Year 2 Year 3 Total

Bank 100,000 - - -

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Deferred -100,000 -69,700 -36,460 -

revenue

Revenue - -40,000 -40,000 -40,000 -120,000

Interest paid - 9,700 6,760 3,540 20,000

- -30,300 -33,240 -36,460 -100,000

8.2.3.3. Non-cash consideration

Customers may promise consideration in a form other than cash. An entity shall measure the
non-cash consideration (or promise of non-cash consideration) at fair value. If an entity cannot
reasonably estimate the fair value of the non-cash consideration, it shall measure the
consideration indirectly by reference to the stand-alone selling price of the goods or services
promised to the customer.

8.2.4. Step 4 Allocate the transaction price to the performance obligations (para 74)

Where a contract contains more than one distinct performance obligation, a company
allocates the transaction price to all separate performance obligations in proportion to the
stand-alone selling price of the good or service underlying each performance obligation. If the
good or service is not sold separately, the company would have to estimate its standalone
selling price.

If any entity sells a bundle of goods and/or services which it also supplies unbundled, the
separate performance obligations in the contract should be priced in the same proportion as
the unbundled prices. This would apply to mobile phone contracts where the handset is
supplied ‘free’. The entity must look at the stand-alone price of such a handset and some of
the consideration for the contract should be allocated to the handset.

If the actual selling price is not directly observable, an estimate should be made. The following
are suitable estimation methods for determining the stand-alone selling prices:

1. Market prices similar good/service - The estimation is based on the prices of similar
products in the market and adjusted for the entity’s cost and margin structure.
2. Cost plus reasonable margin - an entity could forecast its expected costs of satisfying
a performance obligation and then add an appropriate margin for that good or service.
3. Residual approach—an entity may estimate the stand-alone selling price by reference
to the total transaction price less the sum of the observable stand-alone selling prices
of other goods or services promised in the contract. However, an entity may use a
residual approach to estimate the stand-alone selling price of a good or service only if
one of the following criteria is met:
I. the entity sells the same good or service to different customers (at or near
the same time) for a broad range of amounts (i.e. the selling price is highly

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variable because a representative stand-alone selling price is not discernible

from past transactions or other observable evidence); or
II. the entity has not yet established a price for that good or service and the
good or service has not previously been sold on a stand-alone basis (i.e. the
selling price is uncertain)

Example 9
Example 9
Cloverleaf sells a vehicle with a 3-year service plan for $100,000. The stand-alone selling price of vehicle
and service plan is $100,000 and $25,000 respectively.
Step 3 and 4
Step 2
Determine &
Performance
allocate
obligations
transaction price

80,000
Vehicle
100,000/125,000 x 100,000

Service 20,000
Plan* 25,000/125,0000 x 100,000

8.2.4.1. Allocation of a discount (para 81)

Except when an entity has observable evidence as per para 82 that the entire discount relates
to only one or more, but not all, performance obligations in a contract, the entity shall allocate
a discount proportionately to all performance obligations in the contract.

Para 82 allows an entity to allocate a discount entirely to one or more, but not all, performance
obligations in the contract if all of the following criteria are met:

a) the entity regularly sells each distinct good or service (or each bundle of distinct
goods or services) in the contract on a stand-alone basis;
b) the entity also regularly sells on a stand-alone basis a bundle (or bundles) of some
of those distinct goods or services at a discount to the stand-alone selling prices of
the goods or services in each bundle; and
c) the discount attributable to each bundle of goods or services is substantially the
same as the discount in the contract and an analysis of the goods or services in

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each bundle provides observable evidence of the performance obligation (or

performance obligations) to which the entire discount in the contract belongs

8.2.5. Step 5 Recognise revenue

The entity satisfies a performance obligation by transferring control of a promised good or
service to the customer. (para 31)

The customer obtains control of the asset if:

1. The customer has the ability to direct the use of the asset and

2. The customer has the ability to receive substantially all the remaining benefits from
the asset.

Control can also include the ability to prevent other entities from directing the use of, and
obtaining the benefits from an asset.

A performance obligation can be satisfied at a point in time, such as when goods are delivered
to the customer, or over time.

Satisfied at a point in time Indicators

of control include:

• Present right to payment

• Legal title

• Physical possession

• Risks & rewards of ownership

• Customer acceptance

Satisfied Overtime
An obligation satisfied over time will meet one of the following criteria:

a. The customer simultaneously receives and consumes the benefits as the

performance takes place.
b. The entity’s performance creates or enhances an asset that the customer controls
as the asset is created or enhanced.
c. The entity’s performance does not create an asset with an alternative use to the
entity and the entity has an enforceable right to payment for performance
completed to date.

The amount of revenue recognised is the amount allocated to that performance obligation in
Step 4. Once it is determined that the performance obligation is indeed satisfied over time,
the entity recognises revenue over time by measuring the progress towards complete
satisfaction of that performance obligation.

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An entity must be able to reasonably measure the outcome of a performance obligation

before the related revenue can be recognised.

In some circumstances where it may not be possible to reasonably measure the outcome of
a performance obligation, but the entity expects to recover the costs incurred, revenue is
recognised only to the extent of costs incurred. In order to determine the entity’s performance
and measure of progress, either the output method or the input method is applied, depending
on which one depicts the entity’s performance:

1) Output method: Revenue recognition is based on the goods or services

produced up to date (e.g. results of appraisals, milestones reached, or units
produced).
2) Input methods: Revenue recognition is based upon the entity’s efforts or
inputs (e.g. resources consumed, labour hours expended, costs incurred, or
time lapsed).

A single method should be applied for each performance obligation and should be applied
consistently to similar performance obligations and in similar circumstances.

Example 10

ZPCo has the following contract in progress:

Example 10
ZPCo has the following contract in progress:
$m
Total contract price 750
Costs incurred to date 225
Estimated costs to completion 340
Payments invoiced and received 290
Required
Calculate the amounts to be recognised for the contract in the statement of profit or loss
and statement of financial position assuming the amount of performance obligation
satisfied is calculated using the proportion of costs incurred method.

Example Analysis
Percentage Completion
Cost incurred = 225
Total Cost (225+340) 565
Stage completed 40%
P/L
Revenue (40%*750) 300
Cost of Sales (225)

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Profit 75
B/S
Amount charged for completed work 300
Amount received (290)
Contract Asset (Receivable) 10

8.3. Incremental Cost of obtaining a contract (par 91-94)

The incremental costs of obtaining a contract are those costs that an entity incurs to obtain a
contract with a customer that it would not have incurred if the contract had not been obtained
(for example, a sales commission).

An entity shall recognise as an asset the incremental costs of obtaining a contract with a
customer if the entity expects to recover those costs.

Costs to obtain a contract that would have been incurred regardless of whether the contract
was obtained shall be recognised as an expense when incurred, unless those costs are
explicitly chargeable to the customer regardless of whether the contract is obtained.

As a practical expedient, an entity may recognise the incremental costs of obtaining a contract
as an expense when incurred if the amortisation period of the asset that the entity otherwise
would have recognised is one year or less.

8.4. Costs to fulfil a contract (para 95)

If the costs incurred in fulfilling a contract with a customer are in the scope of another IFRS
(e.g. IAS 16, Property, Plant and Equipment or IAS 38 Intangible Assets), an entity accounts for
the costs of fulfilling the contract in accordance with those other IFRSs.

Otherwise, an entity shall recognise an asset from the costs incurred to fulfil a contract;
however, only if those costs meet all of the following criteria:

1) the costs are directly related to a contract (or a specific anticipated contract)
2) the costs generate or enhance resources of the entity that will be used in satisfying
the performance obligations; and

An entity expenses the following costs when incurred:

• general and administrative costs (unless these costs are explicitly chargeable to the
customer under the contract);
• costs of wasted material, labour or other resources;
• costs that relate to satisfied or partially satisfied performance obligations (i.e. costs that
relate to past performance); and costs for which the entity cannot distinguish whether
the costs relate to unsatisfied performance obligations or satisfied performance
obligations or partially satisfied performance obligations.

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Example 11

On 1 January 20.13, Info Ltd enters into a five-year contract to provide outsource services for
a customer’s information technology data. Info Ltd incurs selling commission costs of $33 000
to obtain the contract with the customer. Before providing the services, the entity designs and
builds a technology platform that interfaces with the customer’s systems. The initial costs
incurred to setup the technology platform are as follows:
$

Hardware costs 180 000

Software costs 50 000
Comment
• The $33 000 selling commission paid by Info Ltd is an incremental cost of obtaining the
contract, and is recognised as an asset since it cannot be capitalised in terms of another
IFRS. The asset is amortised over the term of the contract (5 years).
• The initial set-up costs of the technology platform relate primarily to activities to fulfil
the contract but do not transfer goods or services to the customer.
• The initial set-up costs of the technology platform are in the scope of other IFRSs and are
accounted for in accordance with the other IFRSs:
o Hardware costs – accounted for in accordance with IAS 16, Property, Plant and
Equipment.
Software costs – accounted for in accordance with IAS 38, Intangible Assets

8.5. Loyalty Points (Excluded from CTA level 1)

Revenue from the customer loyalty programme is measured based on the transaction price
allocated to that performance obligation (IFRS 15.46). Since the sales contract comprises more
than one performance obligation, the entity must allocate the transaction price to the goods
sold to customers and the points awarded to customers based on the relative stand- alone
selling price basis (IFRS 15.76). Consequently, Mugg and Chocolate Leisure Ltd should allocate
the amount received from the sales in the restaurant to revenue (a profit or loss item) and a
contract liability (a statement of financial position item) for the customer loyalty points
awarded from the sales. The contract liability for unredeemed points is reduced when revenue
is recognised from the redemption of the customer loyalty points.

8.6. Determining whether a customer obtains control

IFRS 15 Par 31 Revenue from Contracts with Customers requires that an entity recognises
revenue when the entity satisfies a performance obligation by transferring a promised good
or service to a customer. The fundamental principle in par 31 is that an asset is transferred
when the customer obtains control of that asset.

IFRS 15 Par 33 states that control of an asset refers to the ability to direct the use of and to
obtain substantially all of the remaining benefits from an asset. Control includes the ability to
prevent other entities from directing the use of and obtaining benefits from an asset.

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Something to think about are you able to identify the benefits that an entity can obtain from
controlling an asset?

IFRS 15 Par 34 requires that an entity must consider any repurchase agreements when
evaluating whether an entity obtains control of an asset. In addition, Par 38 c explains that
even though an entity may have transferred physical possession of an asset such physical
possession may not coincide with control of an asset. Examples provided are repurchase
agreements and consignment arrangements. Conversely in a bill and hold transaction the
customer may have control of an asset but the entity is still in possession of the asset
Something to do are you able to recognise and measure consignment and bill and hold
arrangements?

Definition

IFRS 15 Par B64 defines a repurchase agreement as a contract in which the entity sells an asset
and also promises or has the option (either in the same contract or in a different contract) to
repurchase the asset. The repurchased asset may be the asset that was originally sold to the
customer, an asset that is substantially the same as that asset, or another asset of which the
asset that was originally sold is a component.

Make sure that you are able to explain the contractual terms of a repurchase agreement in
your own words.

Do you know the fundamental difference between a contact with a customer to sell an asset
and a contact that contains a repurchase clause?

What is the difference between a sale and leaseback and a contract that includes a repurchase
clause?

An essential feature of a repurchase agreement is that the sale and repurchase agreement
are entered into simultaneously. An agreement in which an entity subsequently decides to
repurchase a good after transferring control of that good to a customer is not a repurchase
agreement because the customer is not obliged to resell that good to the entity as a result of
the initial contract.

8.7. Classification, recognition and measurement of a forward or call option

If an entity has an obligation (a forward) or the right (a call option) to repurchase an asset a
customer does not obtain control of the asset because the customer is limited in its ability to
direct the use of, and obtain substantially all the remaining benefits from the asset IFRS 15 par
B66. That is no revenue can be recognised from the contract because the customer cannot
consume the entire asset or sell the asset to a third party as the customer is obliged to or must
stand ready to return the asset to the seller. Therefore, an entity shall classify and account for
the repurchase contract as either a lease or a financing arrangement depending on the
relationship between the original purchase price and the repurchase amount. The likelihood

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of a call option being exercised is not considered because the existence of the call option
effectively limits the customer’s ability to control the asset. BC 427 states that a call option
should be ignored if it is non-substantive. For example if the option is exercisable towards the
end of the life of the asset, it would be difficult to argue that the customer has not obtained
control of the asset because of the timing of the option. By the time the option is exercisable
the customer most probably has consumed substantially all the remaining benefits of the
asset.

The repurchase contract is classified and recognised as a lease in accordance with IAS 17
Leases if the entity can or must repurchase the asset for an amount that is less than the
original selling price of an asset. When comparing the repurchase price with the selling price,
an entity shall consider the time value of money, Par B67.

Make sure that you can explain the economic reality of a contract to sell an asset which
contains an obligation or right for the seller to repurchase the asset for less than its original
selling price.

A repurchase contract is classified and recognised as a financing arrangement if the entity can
or must repurchase the asset for an amount that is equal to or more than the original selling
price of the asset. When comparing the repurchase price with the selling price, an entity shall
consider the time value of money, Par B67.

If the repurchase agreement is a finance agreement the entity shall continue to recognise the
asset and also recognise a financial liability for any consideration received from the customer.
The difference between the amount of the consideration received from the customer and the
amount of consideration to be paid to the customer is recognised as interest Par B68.

EXAMPLE 1: CALL OPTION RIGHT TO REPURCHASE AT AMOUNT THAT EQUALS OR IS

HIGHER THAN ORIGINAL SELLING PRICE (SEE EXAMPLE 62 CASE A)

On 2 January 20x16 Mda Ltd enters into a contract with a customer Vilikazi Enterprises for the
sale of 3 vehicles for $1 000 000. The cost of the vehicles is $750 000. The contract includes a
call option whereby Mda Ltd has the right to repurchase the cars for $1 100 000 on or before
the 31 December 20x16.

You are required to:

Classify the transaction from the perspective of Mda Ltd.

(a) Recognise the transaction in the financial records of Mda Ltd, assuming that the option
is exercised.
(b) What entry will be recognised in the financial records of Mda Ltd if the option is not
exercised by 31 December 20x16?
(c) Classify the transaction from the perspective of Vilikazi Enterprises.

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(d) Recognise the transaction in the financial records of Vilikazi Enterprises, assuming that
the option is exercised.
(e) What entry will be recognised in the financial records of Vilikazi Enterprises if the
option is not exercised by 31 December 20x16?

Solution
Financial Records of Mda Ltd

20x16 Jan 2 Bank 1 000 000

Financial liability 1 000 000
Repurchase agreement recognised as
financial liability

20x16 Dec 31 Finance Expense 100 000

Financial Liability 100 000
Interest recognised for year

Financial Liability 1 100 000

Bank 1 100 000
Asset repurchased

If option is not exercised

20x16 Dec 31

Financial Records of Vilikazi Motors

20x16 Jan 2 Financial Asset 1 000 000

Bank 1 000 000
Loan advanced

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20x16 Dec 31 Financial Asset 100 000

Finance Income 100 000
Finance income recognised

Bank 1 100 000

Financial Asset 1 100 000
Loan repaid

If option is not exercised

20x16 Dec 31

EXAMPLE 2: FORWARD CONTRACT TO REPURCHASE AT AMOUNT THAT IS LESS THAN

ORIGINAL SELLING PRICE

On 2 January 20x16 Mda Ltd enters into a contract with a customer Vilikazi Enterprises for the
sale of 3 vehicles for $1 000 000. The cost of the vehicles is $750 000. The contract includes a
forward contract whereby Mda Ltd is required to repurchase the cars for $900 000 on the 31
December 20x16. The market related rate of interest is 9.5%. Mda Ltd.’s financial year ends on
30 June 20x16.

You are required to:

Classify the transaction from the perspective of Mda Ltd.

Recognise the transaction in the financial records of Mda Ltd for the period of the lease.
Solution: Example 2

Financial Records of Mda Ltd

20x16 Jan 2 Bank 1 000 000
Financial Liability 821 918
Pre-paid lease payment 178 082
Repurchase agreement classified as a lease

20x16 June Finance Expense 39 041

30
Financial Liability 39 041

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Finance cost recognised for 6 months

Pre-paid lease payment 89 041

Operating lease income 89 041
Lease income recognised for 6 months
20x16 Dec 31 Finance Expense 39 041
Financial Liability 39 041
Finance cost recognised for 6 months

Pre-paid lease payment 89 041

Operating lease income 89 041
Lease income recognised for 6 months

Financial Liability 900 000

Bank 900 000
Vehicles repurchased

Classification, recognition and measurement of a put option

Unlike a forward or call option where the economic reality is that the customer does not
control the goods sold, an agreement that contains a clause that allows the customer to sell
the asset back to the seller does not prevent the customer from obtaining control because the
customer is neither obliged to return the asset or to stand ready to do so. However, if the
customer has a significant economic incentive to exercise the right, then the customer does
not obtain control of the asset because failure to do so would result in a loss to the customer.
IFRS 15 par B71 requires that a seller must determine whether a customer has a significant
economic incentive to exercise its right by considering various factors including the
relationship of the repurchase price and the expected market value of the asset at the date of
the repurchase and the amount of time till the right expires. For example if the repurchase
price significantly exceeds the market value of the asset this may indicate that the customer
has an economic incentive to exercise the put option.

If the customer does not have a significant economic incentive to exercise its right at a price
that is lower than the original selling price of an asset the transaction is accounted for as if it
were the sale of a product with a right of return per IFRS 15 B20-27. Similarly, if the repurchase
price is equal to or greater than the original selling price and is less than or equal to the
expected market value of the asset, the customer does not have a significant incentive to
exercise its right, par B 74, the transaction is accounted for as if it were the sale of a product
with a right of return.

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Put option that contains an economic incentive to exercise

If an entity has an obligation to repurchase the asset at the customer’s request at a price that
is lower than the original selling price of the asset, and the repurchase price is above the
expected market value, the customer is effectively paying for the right to use a specified asset
for a period of time and this is accounted for as a lease in terms of IAS 17, par B70.

SELLING PRICE EXAMPLE 3: PUT OPTION THAT OBLIGES THE SELLER TO REPURCHASE
ASSET AT LESS THAN BUT HIGHER THAN MARKET VALUE

On 2 January 20x16 Mda Ltd enters into a contract with a customer Vilikazi Enterprises for the
sale of 3 vehicles for $1 000 000. The contract includes a clause that obliges Mda Ltd to
repurchase the cars for $900 000 on the 31 December 20x16 if Vilikazi wishes to return the
vehicles. The expected market value of the cars at repurchase date is $750 000.

You are required to:

Classify the transaction from the perspective of Mda Ltd

Solution: Example 3

If the repurchase price of an asset is less than the original selling price and is more than the
expected market value of the asset, the contract is a lease and will be accounted for as a lease
as was the case for a forward or call option, par B 70. See Example 2 .

EXAMPLE 4: PRODUCT RETURNS

On 1 May 20x16 Mopane Dairies entered into a contract to sell long life milk products to
Shingwedzi Foods for $10 000, cash, subject to Shingwedzi having the right to return the
products to the supplier for a 10% discount to market value on or before 30 April 20x17. The
products have a three-year shelf life and the cost price of the products is $6 500. Return
patterns over the past year show that 10% of products are returned and the expected selling
price of the products on 30 April 20x17 is expected to remain at $10 000.

You are required to:

Recognise the transaction in the financial records of Mopane Dairies on 1 May 20x16.
Solution: Example 4

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20x16 May Cash 10 000

1
Refund liability 1000
Revenue 9000

Right to recover product –asset 650

Cost of sales 5 850
Inventory 6 500

9. IFRS 15 QUESTIONS
9.1. Question 1 25 Marks
Mr. Muchechetere has recently been appointed as the new financial manager of ABC Ltd. Even
though he held a financial position long ago, he has been working in the film industry for the
past 15 years. His knowledge of financial accounting is thus somewhat outdated, and he
approached you for advice on the correct accounting treatment for the products and services
offered by ABC Ltd. The company’s year-end is 31 December 20.14.

Software licences and software customisation

ABC Ltd licences accounting software to its customers. In addition, ABC Ltd also provides a
service to significantly customise the accounting software to the customer`s business
environment and information technology platform. The licence, including the customisation
of the software, is sold to customers at $3 500.

Outsourcing

ABC Ltd entered into a contract with Amtec Ltd in terms of which Amtec Ltd outsources its
information technology data centre to ABC Ltd for five years at an amount of $16 000 per
month. ABC Ltd incurred selling commission costs of $1 500 to obtain the contract with Amtec
Ltd. Before providing the services to Amtec Ltd, ABC Ltd designed and built a technology
platform that interfaces with Amtec Ltd.’s systems. The platform is not transferred to the
customer. The costs to set up the technology platform were as follows:

Hardware 8 000

Software 3 500

Design services 2 500

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Migration and testing of data centre 1 000

Total 15 000

The above initial set-up costs will be recovered by ABC Ltd through a portion of the monthly
outsourcing fee of $16 000. All the above costs are incurred by ABC Ltd to ensure that it is able
to meet its future obligations in terms of the outsourcing contract.

Laptops

ABC Ltd sells laptops to the public via its website. ABC Ltd only sells the Bell X1 and Bell X2
model laptops. The Bell X1 and Bell X2 are sold for $850 and $1 050 respectively.

Once the customers have paid for the laptop on ABC Ltd.’s online shop using his/her credit
card, the laptop is dispatched to the customer. ABC Ltd uses a third-party carrier to deliver
the laptops to its customers. ABC Ltd.’s delivery terms on its website stipulate that legal title
of the product passes to the customer when the laptop is handed over to the carrier.

Required

Advise Mr. Muchechetere on the following:

(a) If the software licences and software customisation are separate performance
obligations in a single contract. (9)

(b) The accounting treatment of the incremental costs and initial set-up costs of the
outsourcing contract with Amtec Ltd. (11)

(c) At what point should revenue from the laptops sold via the online shop be recognised by
ABC Ltd. (5)

Question 1 Suggested Solution

1. The contract to provide the licence and customisation is a single contract since it was
negotiated as a package with a single commercial objective (IFRS 15.17(a)). (1)
2. In terms of the contract ABC promises to deliver a software licence and the
customisation of software. For this good and service to be accounted for as separate
performance obligations, one has to determine if they are distinct. (IFRS15.22 (a)).
(1)
3. A good or service is distinct if both of the following criteria are met (IFRS 15.27):
a. The customer can benefit from the good or service on its own or together with
other resources readily available to the customer; and
b. The good or service to be transferred by the entity is separately identifiable
(1)
4. A good or service is separately identifiable (IFRS 15.29) if:

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a. The good or service is not provided by the entity as part of a significant service
of integration with other goods and/or services that represent the combined
output for which the customer has contracted; or
b. The good or service does not significantly modify/customise another good or
service promised in the contract; or
5. • The good or service is not highly dependent on or highly interrelated with other
goods or services in the contract. (1)
6. It is possible that a customer may benefit from the licence and the customisation of
the software on its own or together with its own resources (for instance a customer
may have the expertise to customise its own software). Therefore, the first criteria are
met for the good and service to be distinct. (1)

7. However, the second criteria for the good and service to be distinct is not met since
the licence and software customisation is not separately identifiable for the following
reasons: (1)
8. ABC Ltd is providing a significant service of integrating the goods and services (the
licence and the software customisation services) into a single combined output for
which the customer has contracted. (1)
9. In addition, the software is significantly customised by ABC Ltd in accordance with the
specifications negotiated with the customer. (1)
10. The licence and consulting services offered in a single contract to ABC Ltd.’s customers
are not distinct and are therefore not separate performance obligations. Hence, the
entity would account for the licence and software customisation services together as
one performance obligation. (1)

Total (9)

b) Incremental costs

For incremental costs to be recognised as an asset, those costs must be incurred to specifically
obtain the contract (IFRS 15.92). Costs that are incurred regardless of whether a contract was
obtained are not recognised as an asset but as an expense. (IFRS 15.93). (1) In this case ABC
Ltd should recognise the selling commission costs of $1 500 as an asset since it was
specifically incurred in order to obtain the outsourcing contract and is thus deemed as
incremental costs. (1)

The asset for the incremental costs is amortised over the term of the contract. (1) Initial

set-up costs

The first test is to determine if the initial set-up costs are within the scope of another Standard
(for example IAS 16 Property, Plant and Equipment). If the costs are not within the scope of

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another Standard those costs may only be recognised as an asset if the following requirements
are met:

o The costs relate directly to the contract and are specifically identified; o
The costs generate or enhance resources of the entity that will be used in
satisfying performance obligations in the future; and
o The costs are expected to be recovered (IFRS15.95). (2)

Based on the above ABC Ltd accounts for the initial set-up costs as follows

• The hardware costs of $8 000 are within the scope of IAS 16 Property, Plant and
Equipment
• and should be accounted for in terms of this Standard. (1)
• The software costs of $3 500 are within the scope of IAS 38 Intangible Assets and
should be accounted for in terms of this Standard. (1)

• The costs of design of $2 500 and the migration service of $1 000 are not within the
scope of another Standard and should be considered for capitalisation in terms of IFRS
15.95. The design costs and migration services will be used to meet ABC Ltd.’s
obligations in terms of the contract, are related to and identified in the contract and
will be recovered through the monthly outsourcing fee. Therefore, the costs of design
of $2 500 and the migration services of $1 000 are recognised as an asset in terms of
IFRS 15 and are amortised over the term of the contract. (4)

Total (11)

c) An entity shall recognise revenue from a transaction when the entity satisfies a
performance obligation by transferring a good or service (an asset) to a customer (IFRS
15.31).
(½) An asset is transferred when the customer obtain control of that asset (IFRS 15.31). (½)

A performance obligation is performed over time or at a point in time (IFRS 15:32). (½)

In this case the performance obligation is satisfied at a point in time since the customer obtains
control of the product at the point of shipment for the following reasons: (1) Although the
customer does not have physical possession of the product at that point, it has legal title and
therefore can sell the product to (or exchange it with) another party. (1)

ABC Ltd is also precluded from selling the customer`s laptop to another customer at this point.
(1)

Hence revenue from the laptops should be recognised by ABC Ltd at the point of shipment
(i.e. when the product is handed over to the carrier). (½)

Total (5)

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9.2. Question 2 5 Marks

Chemco Ltd manufactures chemical products and is listed on the ZSE Limited. The financial
man- ager is currently on maternity leave and the group accountant was appointed as the
acting financial manager in the interim. The company’s financial year end is 31 December and
the acting financial manager is preparing for the 31 December 2015 year end reporting. The
profit before tax is $6 540 000. The financial manager is unsure of the application of
International Financial Reporting Standards (IFRS) in some instances and has approached you,
an IFRS expert, to assist her with the following matters:

The Board of directors of Chemco Ltd is considering the following two options to improve cash
flows and profitability:

a. Formally offering a 10% settlement discount to customers who pay within 30 days of
invoice, which is expected to lead to an annual increase in revenue of 5%. The company
estimates (based on historical information) that 20% of customers by revenue value
(after the expect- ed increase in revenue) would make use of the settlement discount;
and
b. Discontinuing the manufacture of Sulphate under licence from Sable Chemicals and
instead purchasing the Sulphate product directly from Sable Chemicals. Sable
Chemicals has indicated that it will grant Chemco Ltd payment terms of 30 days from
invoice.

REQUIRED

Discuss how Chemco Ltd should account for the 10% settlement discount that the Board of
directors is considering.

Communication skills: Logical flow and conclusion Please

note:

• Comparative amounts are not required.

• Round off all amounts to the nearest dollar.

• Your answers must comply with International Financial Reporting Standards (IFRS).

Question 2 Suggested Solution

Discuss how Chemco should account for the 10% settlement discount that the Board of
Directors is considering

If the consideration promised in a contract includes a variable amount, an entity shall estimate
the amount of consideration to which the entity will be entitled in exchange for transferring
the promised goods or services to a customer (IFRS15.50) (½)

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As there is no certainty as to the percentage of customers that will pay within 30 days and
there- fore receive the 10% settlement discount, the consideration to be received by Chemco
Ltd is variable. (½)

Chemco Ltd should estimate the amount of variable consideration by using either the
“expected value” or the “most likely amount” methods. (IFRS 15.53) (½)

As there are only two possible outcomes, being that a customer either pays within 30 days or
they do not pay within 30 days, the “most likely amount” will be the most appropriate
estimate to use in estimating the amount of variable consideration. (½)

Chemco Ltd shall include in the transaction price some or all an amount of variable
consideration only to the extent that it is highly probable that a significant reversal in the
amount of cumulative revenue recognised will not occur when the uncertainty associated with
the variable consideration is subsequently resolved. (IFRS 15.57) (½)

Management estimates, based on historical information, that 20% of customers by revenue

value would make use of the settlement discount. (½)

Conclusion:

Chemco Ltd should therefore account for “revenue” as being 80% of sales at the full
transaction price and 20% of sales at the discounted price.

The estimated discount value (10% settlement discount) should be accounted for as an
“allowance account for settlement discount”.

Total (4)

Communication skills: Logical flow and conclusion (1)

9.3. Question 3 10 Marks

Mugg and Chocolate restaurants are situated in the low-density suburbs of Borrowdale and
cater for high income earners. The décor and facilities are family orientated, and the
restaurants serve a wide variety of meals. Restaurants are open seven days a week for
breakfast, lunch and dinner.

Mugg and Chocolate introduced a customer loyalty programme for its customers in January
2016. Customers electing to join the loyalty programme are issued with loyalty cards (cards
with magnetic strips containing individuals‟ details). Customers are encouraged to present
loyalty cards to waitrons when paying for their purchases at the restaurants and these cards
are then swiped at the point-of-sale devices which records the amount spent and updates the
loyalty points balance. The loyalty reward is one point for each $1 spent at the restaurants
which can be redeemed for food and beverages at the restaurants (in full or partial payment
of bills). The estimated selling price of one customer loyalty point is $0.90.

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REQUIRED

Discuss, with reasons, the appropriate, recognition and measurement of the customer loyalty
programme of Mugg and Chocolate Ltd. Your discussion does not need to include any
calculations.

Question U.3 Suggested Solution

The customer loyalty programme is a contract with a customer since the customer loyalty
programme provides customers with a material right to points that will grant them a discount
in the future when purchasing goods at the restaurant (IFRS 15.10).

Mugg and Chocolate Leisure Lad’s promise to provide points to customers is a performance
obligation for the following reason:

The points promised to customers are distinct (IFRS 15.27) since it is Separately identifiable
from other goods offered in terms of the sales contract; and

Customer can benefit from the points on its own (i.e. the customer can redeem the points for
a discount on future purchases).

Mugg and Chocolate Ltd may only recognise revenue from the customer loyalty programme
once it has satisfied its performance obligation in terms of the contract (IFRS 15.31). Mugg
and Chocolate Ltd therefore recognises revenue from the customer loyalty programme once
the customers redeem their points that they have earned.

Revenue is not recognised for unredeemed points since the performance obligation has not
been satisfied. A contract liability is recognised for the unredeemed points at the end of the
financial year.

9.4. Question 4 29 Marks

Issue 1:

FIBRONIKS CONTRACT

Lux Ltd is considering acquisition of a technology company – OZL Ltd – however, this is a new
venture and the first investment of its kind. None of the Lux’s directors is knowledgeable of
how technology companies make their money and therefore needed help on how OZL
recognises its revenue.

OZL is one of Zimbabwe’s leading internet service providers and has recently launched the
Fibroniks Technology. Fribroniks is a groundbreaking internet service and this is what attracted
Lux Ltd to want to invest in OZL Ltd.

Fibroniks is available to both business and residential clients. Fibroniks is the OZL fibre solution
with speeds of up to 100mbps.

Sign-up for Fibroniks SME package

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Prospective clients can sign up for Fibroniks by either visiting the OZL website www.ozl.co.zw,
walking into any of its offices, or calling its dedicated sales number. Committed sales agents
will get the clients connected. Prospective clients may choose a package that suits them and
OZL draws a contract which both the client and its representative physically sign. Each contract
is for a minimum of five years and is renewable at the end of each five years.

Business package

OZL is looking forward to start rolling out residential Fibroniks lines, however, it has a very big
SME clientele. The business client (SME) gets the following in one of its popular packages, the
“Fibroniks SME” package:

Dedicated Fibroniks fibre line ($1,000 cost of trenching and cabling to OZL); Wireless router
(access point and Wi-Fi broadcaster costing $600);

A landline (costing $20 per receiver); 100 voice call minutes per month; and A 15 gigabyte data
cap per month.

Connection

OZL lays a fibre cable network from any of its nearest fibre network lines dedicated to the
client. The dedicated Fibroniks line would normally cost OZL $1,000 (refer above) to lay to the
premises of the customer. OZL also incurs $300 of which $100 are direct costs per contract
consisting of sales commission and contract drawing costs.

Billing

OZL charges $300 per month for the Fibroniks SME package in the first 5 years which will be
reduced to $200 in the second period (5 years) if the contract is renewed. No separate charge
is made to the client for the dedicated Fibroniks line, the router, and the landline. The costs
related to these are recovered over the first 5 years of the contract.

OZL Stand-alone prices

OZL does not charge for the dedicated Fibroniks fibre line directly to the client and does not
provide these separately for strategic reasons.

The router remains the property of OZL and is not compatible with the technology used by
other internet service providers.

The landline is sold at $35 per unit to walk in clients.

Voice minutes cost an average of 7.5 cents per minute across all networks. The data bundles
are 25 cents per megabyte (1gigabyte = 1000 megabytes). Note that time value of money is
insignificant in this package.

Issue 2: Closure of Esigodini Plant

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Lux Ltd has a small plant for making soap at Esigodini in Bulawayo. This was the only asset it
held directly other than through other investment holding companies.

The plant was constructed on rented government land, and due to the shrinking activities Lux
Ltd.’s board of directors decided on 30 April 2016 to close the plant. The decision is expected
to be unanimously approved at the shareholders Annual General Meeting on 25 August 2016.
This is also the date that the shareholders will be expected to approve the annual financial
statements for issue.

The directors identified all the plant’s 60 employees to be affected by the closure. These
employees will not be given three months’ notice period but would be paid the salary for that
period instead as part of the severance package. Lux will also pay a retrenchment package
based on the Labour Amendment Act of 2015, thus 2 weeks’ salary for every year worked. The
average salary per month of the employees at the plant was $430.

Each employee received a letter of termination on 25 June 2016, however, the number of
years of service was not yet finalised. The letter only mentioned that the number of years used
would be the higher of the actual number of years in service of each employee or that of the
longest serving employee. At 30 June 2016, Human Resources department was still working
hard to determine the years of service.

On 1 August 2016 the exercise was completed, and it was determined that the average
number of years of service of the employees at the plant was twelve (12) years, however, the
longest serving employee was the plant manager who had served for 20 years.

The lease agreement on the land was a non-cancellable operating lease which was for 50 years
at $5,000 per year. The lease still had 30 years left as of 30 June 2016, the lease carries a
penalty of $30,000 if cancelled before expiry.

The plant had a $340,000 carrying amount at 30 June 2016 and Lux had found a buyer who
had committed to pay $299,000 on 31 July 2016 for all of the plant’s movable parts that could
be sold in the secondhand market as separate parts.

Lux Ltd closed the Esigodini plant on 10 July as expected. However, the financial director did
not record the result of the decision to close the plant on 30 June 2016 as he argued that there
was no specific transaction that had transpired at that date.

For this part of the question only, assume the after-tax interest rate for the period to be
8.91%.

Required Issue

1:

Advise the directors of Lux of how OZL would recognise the costs and revenue from the
Fibroniks SME package. [17 Marks]

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Issue 2: Discuss whether you agree with the financial director’s accounting treatment of the
decision to close the Esigodini plant. Your discussion should identify the specific events and
discuss the recognition and measurement of these events in both the profit and loss and the
statement financial position of Lux Ltd. [10 Marks]

Communication, layout, and presentation [2 Marks]

Question 4 Suggested Solution

Issue 1:

Advise the directors of Lux of how OZL would recognise the costs and revenue from the
Fibroniks SME package. Show any necessary calculations.

IFRS 15 Revenue from Contracts with Customers prescribes how an entity should account for
revenue from contracts with customers. OZL must therefore recognise their revenue through
a five-step model as per IFRS 15.

Identifying a Contract

IFRS 15 requires an entity to first identify a contract.

OZL currently draws a contract for all the packages its offers to which both the client and its
representative physically sign. (1)

The contracts clearly outline the rights of the customer being a dedicated Fibroniks fibre line,
a wireless router, a landline, voice calls and data megabytes. (1)

The payment terms are clearly outlined being $300 per month for 5 years. (1)

The Fibroniks technology is targeted at business and residential customers with an intention
of making a profit, thus the transaction has commercial substance and probability of inflow is
high. (1)

Some customers are however likely to extend their contracts after five years. IFRS 15.8
defines a contract modification as a change in the scope or price (or both) of a contract. As
the price of the contract will be reduced to $200 per month after renewal, the renewal
qualifies as a contract modification. (1)

Identify the performance obligations

IFRS 15 par 22 defines a performance obligation as a promise in a contract to transfer to the

customer either:

a) distinct good/service;

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b) a series of distinct goods or services that are substantially the same and that have the
same pattern of transfer to the customer. (1)

A good or service that is promised to a customer is distinct if both of the following criteria are
met (par 27):

• the customer can benefit from the good or service either on its own, and
• the entity’s promise to transfer the good or service to the customer is separately
identifiable from other promises in the contract. (1)

The Fibroniks contracts have the following three distinct performance obligation:

• The Gigabyte data bundles can be enjoyed separately and is not dependent on either
the voice calls or the landline. This therefore qualifies as a distinct separate
performance obligation. (1)
• The voice calls can be enjoyed separately and are not an input to the other
performance obligations. This therefore qualifies as a distinct separate performance
obligation.(1)
• The landline can be sold separately to walk in clients. Customers are therefore capable
of enjoying the asset on its own and the OZL can enjoy revenue on landlines only
without any other goods or services. This therefore qualifies as a distinct separate
performance obligation. (1)

The dedicated fibre line is currently not being sold separately for strategic purposes. Despite
it being dedicated to the client, the Fibroniks line is not charged to the client directly and by
its nature, OZL holds the significant risks and rewards related to the asset. (2)

As there is no control transferred to the customer of the Fibroniks line, the line remains an
asset of OZL and no revenue is charged on it, thus it is not a distinct performance obligation.
(1)

Control of the internet router is not transferred to the customer as it remains the property of
OZL. The rooter is therefore not a distinct performance obligation. Rather, this also remains
an asset of OZL. (1)

Determine the transaction Price

The transaction price is the amount of consideration to which an entity expects to be entitled
in exchange for transferring promised goods or services to a customer. (1)

The transaction price of the Fibroniks package is set at $300 per month for five years which
translates to $ 18,000 (300*12*5). (1)

Allocating the Transaction Price

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The Fibroniks contract has 3 performance obligations. This means the transaction price must
be allocated to each of the performance obligations to depict the consideration expected to
be received in exchange for delivering the obligation. (1) The allocation is made based
on the stand-alone selling price of each distinct good or service. (1)

The stand alone for each performance obligation will be as follows:

• Landline: $35

• Voice minutes: an average of 7.5 cents per minute

• Data bundles: $25 cents per megabyte NB**- Measurement was not required.

Recognition of Revenue when performance obligation is satisfied.

An entity shall recognise revenue when (or as) the entity satisfies a performance obligation
by transferring a promised good or service to a customer. This may be at a point in time or
over time. (1

An asset is transferred when (or as) the customer obtains control of that asset. (1) The landline
revenue is therefore recognised upon delivery to the customer. (1) Voice minutes and data
bundles revenues are however recognised over time, thus over the five- year contract period
as the services are delivered (1)

Contract Cost

IFRS 15 defines two types of contract cost being:

1. Cost to obtain a contract (IFRS 15 par 91), and

2. Cost to fulfil a contract (IFRS 15 par 95) 3.

The incremental costs of obtaining a contract are those costs that an entity incurs to obtain
a contract with a customer that it would not have incurred if the contract had not been
obtained. (1)

For OZL to obtain the Fibroniks line contracts, they first need to connect the lay a fibre line to
the premise of the customer at a cost of $1 000. (1)

IFRS 15 par 91 allows an entity to recognise as an asset the incremental costs of obtaining a
contract with a customer if the entity expects to recover those costs. (1)

The dedicated Fibroniks line would normally cost OZL $1,000 to lay to the premises of the
customer. The cost is direct, dependent on the contract and OZL expects to recover them
indirectly through the service fees per month. The full $1 000 will; therefore, be capitalised.
(1)

OZL also incurs $300 of which $100 are direct costs per contract consisting of sales commission
and contract drawing costs. The $100 which is direct is also expected to be recovered through

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service fees, thus can be capitalised too. The $200 indirect cost will however be expensed in
full as they are not directly dependent on obtaining the contract. (2)

IFRS 15.95 allows an entity to recognise an asset (thus if not covered by another standard)
from the costs incurred to fulfil a contract only if those costs meet all the following criteria:

(a) the costs relate directly to a contract or to an anticipated contract that the entity can
specifically identify;
(b) the costs generate or enhance resources of the entity that will be used in satisfying
performance obligations in the future; and
(c) the costs are expected to be recovered. (1)

The wireless router is a cost incurred to fulfil a contract as it is the one that receives the
internet feed. The cost relate directly to each contract as a router will be dedicated to each
customer and are expected to be recovered indirectly through the service fees. (1)

The rooter seems to have a useful life exceeding 12 months thus will be scoped under IAS 16
PPE. OZL must therefore recognise the rooter as PPE and depreciate it over its useful life (1)

MAX 10

AVAILABLE 31

Issue 2:

Discuss whether you agree with the financial director’s accounting treatment of the decision
to close the Esigodini plant. Your discussion should identify the specific events and discuss the
recognition and measurement of these events in both the profit and loss and the statement
financial position of Lux Ltd.

The decision to close the Esigodini plant is an event rather than a transaction and according
to IAS1.27 An entity shall prepare its financial statements, except for cash flow information,
using the accrual basis of accounting. Under accrual basis of accounting an entity accounts for
events and transactions in the accounting period they occur rather than when cash is paid or
received. A restructuring program occurred during period ended 30 June 2016. (2)

According to IAS 37.70(b) a restructuring program includes the closure of business locations
in a country or region or the relocation of business activities from one country or region to
another; thus, the closure of a Esigodini plant in Bulawayo is a restructuring event. (1)

Lux should therefore recognise a provision for restructuring costs as required by IAS37.71 if it
meets the recognition criteria on paragraph 72, which states that:

A constructive obligation to restructure arises only when an entity:

(a) has a detailed formal plan for the restructuring identifying at least:

(i) the business or part of a business concerned;

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(ii) the principal locations affected;

(iii) the location, function, and approximate number of employees who will be
compensated for terminating their services;

(iv) the expenditures that will be undertaken; and

(v) when the plan will be implemented; and

(b) has raised a valid expectation in those affected that it will carry out the restructuring
by starting to implement that plan or announcing its main features to those affected by it.
(1)

The directors had decided to close the Esigodini plant in Bulawayo. 60 employees were
identified for termination and the respective severance payments were outlined. The plan was
expected to be implemented in the period ending 30 June 2017. (2)

The employees affected received letters of termination on 25 June 2016 that a valid
expectation was raised in those affected before 30 June 2016. (1)

Lux should therefore raise a provision for restructuring costs on 25 June 2016 as all conditions
were satisfied on that date. (1)

According to IAS37.80: A restructuring provision shall include only the direct expenditures
arising from the restructuring, which are those that are both:

(a) necessarily entailed by the restructuring; and

(b) not associated with the ongoing activities of the entity. (1)

The restructuring provision will include the following:

- severance package to the employees -

onerous lease provision (1)

severance package: the notice period salaries of the employee and the retrenchment package
as per the labour amendment act all part of the severance package. The employee is not
required to serve the notice period but will still receive their salary. Thus, the salaries for the
notice period are not for future services. (1)

The exercise to determine the period was only completed post year end and thus, it is an event
after reporting date in terms IAS 10. The exercise was completed on 1 August 2016 which is
between 30 June 2016 (reporting date) and 25 August 2016 (date of authorisation of financial
statements). (2)

The event is an adjusting event as it confirms a circumstance that existed at reporting date.
The number of years of service determine at 1 August can be used to calculate the

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retrenchment package, as follows: 20 years X 60 employees X $430 X 10 working days in 2

working weeks of 22 total working days in a month which results with $234,545.45. [if 2/4 is
used award a mark) (3 max)

The three months’ notice salary per employee is $77,400 (60 employee X $430 X 3) (1)
Onerous lease provision: an onerous contract is contract where the unavoidable costs exceed
the benefits achieved under the contract. (1/2)

Lux is required to pay $5000 per year for the remaining 30 years even when the business is
low or even with no economic benefits after closure because it the lease is non-cancellable.
(1) According to IAS37.68 the onerous lease provision is measured at the lower of the present
value of the cost of fulfilling the contract or cancellation penalty. (1)

- PV of fulling the contract: n=30, i= 12% (8.91/74.25), pmt=$5,000, Fv=0, Thus

PV=$40,279.92 (2)

- Cancellation Penalty (given) is $30,000 (1)

Thus, the onerous lease provision would be $30,000 resulting with the total provision for
restructuring costs being $341,945.45 (234545.45+77,400 + 30,000) (1)

The plant located in Esigodini would have to be measured at the lower of fair value less costs
to sell and carrying amount as it forms part of a discontinued operation under IFRS 5. (1)

The fair value of the plant would be determined as being $299,000 as that is what the available
buyer is offering. (1)

Lux would have to process an IFRS 5 impairment to the tune of $41,000 (340k – 299k). (1)

Lux should impair the plant assets as a result of the decision to close the Esigodini plant as
required by IAS37.79 or IFRS5. (1)

Alternative Issue 2:

Discuss whether you agree with the financial director’s accounting treatment of the decision
to close the Esigodini plant. Your discussion should identify the specific events and discuss the
recognition and measurement of these events in both the profit and loss and the statement
financial position of Lux Ltd.

Discontinued operation

-In accordance with IFRS 5.32(a) a discontinued operation is a component of an entity that
either has been disposed of or is classified as held for sale and is part of a single co- ordinated
plan to dispose of a geographical area of operations.

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- The Esigodini branch is a geographical area and is part of a plan of disposal as discussed
by the directors at a meeting on the 30th of April.
- Though the directors are only expecting to have the decision to discontinue approved
at the AGM, and the branch is still open on the 10th of July, the branch meets the
recognition criteria for a discontinued operation as a plan to discontinue is already in
place.
- Thus, Lux would have to disclose (IFRS 5.33):

1. a single amount in the statement of comprehensive income comprising

the total of:

(i) the post-tax profit or loss of discontinued operations and

(ii) the post-tax gain or loss recognised on the measurement to fair value less
costs to sell or on the disposal of the assets or disposal group(s) constituting
the discontinued operation.

(b) an analysis of the single amount in (a) into:

(i) the revenue, expenses and pre-tax profit or loss of discontinued operations; (ii)

the related income tax expense as required by paragraph 81(h) of IAS 12. (iii) the

gain or loss recognised on the measurement to fair value less costs to sell or on

the disposal of the assets or disposal group(s) constituting the discontinued

operation; and

(iv) the related income tax expense as required by paragraph 81(h) of IAS 12.

- The plant located in Esigodini would have to be measured at the lower of fair value
less costs to sell and carrying amount as it forms part of a discontinued operation.
- The fair value of the plant would be determined as being $299,000 as that is what the
available buyer is offering.
- Lux would have to process an IFRS 5 impairment to the tune of $41,000 (340k – 299k).

Provision and onerous contract

- A provision is a liability of uncertain timing or amount.

- A liability is a present obligation of the entity arising from past events, the settlement
of which is expected to result in an outflow from the entity of resources embodying
economic benefits.
- The retrenchment cost of the employees is a present obligation as Lux are required to
make the payment, it arises from the retrenchment announcement and the only way
to settle is through payment to the employees.

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- The amount of the obligation is uncertain as human resources are still deciding how
much to pay each employee.
- Hence the retrenchment meets the definition of a provision.
- IAS 37.14 states that a provision shall recognised when an entity has a present
obligation (legal or constructive) as a result of a past event, it is probable that an
outflow of economic benefits would be required to settle it, and a reliable estimate
can be made of the amount of the obligation.
- A legal obligation arises on the date of the notification of the employees of the
retrenchment, which is the 25th of June, thus is before year end.
- Thus, the provision for the retrenchment shall be recognised in the financial
statements on 25 June.
- The provision shall be measured using the best estimate which can be arrived at. Thus
it would be calculated as follows:

(60 employees × 20 years × $340 × 0.5) + (60 employees × $340 × 3 months)

= 204,000 + 61,200

= $265,200

- An onerous contract is a contract in which the unavoidable costs of meeting the

obligations under the contract exceed the economic benefits expected to be received
under it (IAS 37.10).

- The lease with the government over the land is non-cancellable, meaning Lux would
still have obligations to pay the rentals even though they will not be operating on the
site anymore.
- Thus the unavoidable costs of the lease exceed the benefit of being party to the lease,
meaning the lease meets the definition of an onerous contract.
- The unavoidable costs under a contract reflect the least net cost of exiting from the
contract, which is the lower of the cost of fulfilling it and any compensation or
penalties arising from failure to fulfil it. (IAS 37.68)
- In this case the penalty is $30,000 and the present value of the lease payments is
$416.67 (FV = 0; PMT = 5,000; i = 12 % [8.91/74.25%]; n = 30).
- Thus the onerous contract shall be measured at $416.67.
- IAS 37 requires that impairment on any assets dedicated to an onerous contract must
be recognised before recognising a provision for an onerous contract.
- Therefore, the director was incorrect in his stating that there was no need to disclose
the closing of the plant in Esigodini due to the fact that there was no transaction at the
reporting date. There were actually multiple events which needed to be accounted for
at that date as evidenced in the discussion above.

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9.5. Question 5 35 Marks

Awesome Audit and advisory Services

You are the technical expert in charge of IFRS 15 implementation queries at Awesome Audit
and Advisory Services. You received the following query from Solomon Dvash the financial
manager at Integrated Excavation Services (Pty) Ltd (IES) a company that manufactures earth
moving and excavation machinery. Letter from Solomon Dvash

Solomon Dvash Financial Manager

Integrated Excavation Services 011 750 1235

Solomon.dvash@ inter.com 1 June 2016

Tiffany Welles

Awesome Advisory Services Dear Tiffany

I am concerned about how IFRS 15 Revenue from Contracts with Customers will impact on
the way that we recognise and measure transactions with our customers. I have analysed our
transactions over the past year and have identified four different types of contracts that we
typically entered into during that period. Please would you advise how these should be
accounted for in terms of the new revenue standard? I have included extracts from the sales
contracts below. The market rate of interest applicable to financing granted to our customers
is currently considered to be 12% p.a.

TABLE 1: CONTRACT ANALYSIS

TYPE 1

Contract with Arora Mines to supply them with five drilling machines for $600 000 each. The
contract contains a clause in which Arora Mines has the right but not the obligation to sell the
drilling machines back to IES for $480 000 within a year of delivery date. The repurchase price
is about 10% above the expected market value of the machines at repurchase date. The
machines typically cost $200 000 each to manufacture.

TYPE 2

Many of our excavating machines are manufactured by us and then sold on extended terms.
The following is typical of this type of transaction. An order for an excavating machine was
received from Marange Diamond Mines. On receipt of the order a deposit of $1.5 million was
received and it took approximately a year to manufacture the machine. The outstanding

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payments for the machine are payable over 60 months; the monthly lease payment is $180
871, paid in arrears. The interest rate quoted in the contact is 5% p.a. The cost to manufacture
the machine is $7 500 000.

TABLE 1: CONTRACT ANALYSIS

TYPE 3

Contract to sell a laser drilling machine to Dilbert Excavation Enterprises for $3 000 000. The
contract contains a clause in which IES commits to repurchase the machine for $3 763 200 in
2 years after the sale date. The cost to manufacture the laser drill is $2 000 000.

TYPE 4

Starting in January 2016 IES began selling generators to various customers with a stated policy
that any of the generators could be returned within 30 days of delivery subject to a cap of
20%. That is a customer may only return a maximum of 20% of goods purchased within the
30-day period. Only generators that are in perfect condition are accepted for return; there is
a high demand for generators and it is therefore expected that all generators on hand can be
sold. The generators cost $2 000 each and are sold for $4 500 each. During April 2016 150
generators were sold and as in previous months the total sales price was recognised in
revenue. The following pattern of generator returns was established from credit notes issued
for generators: January 1%, February 19% and March 5% of generators sold. These returns
were debited to revenue when the credit notes were issued. By 31 May 2016 15% of the
generators had been returned.

You are required to:

A. Explain, with reasons, how the TYPE 1 and TYPE 3 transactions should be classified,
recognised and measured in the financial records of IES. Calculations are required
where necessary.
Up to 1 mark is available for presentation. (14)
B. Prepare all of the journal entries required initially to recognise the sale of the machine
to Northern Cape Diamond Mines.
Current and deferred tax consequences may be ignored. Narrations are not required.
(8)
C. Prepare all of the journal entries required to recognise the initial sale and subsequent
returns within the 30-day period of generators sold during April 2016.
Current and deferred tax consequences may be ignored. Narrations are not required.
(13)

TOTAL 35

Question 5 Suggested Solution

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Part A

TYPE 1
Contract with Arora Mines to supply them with five drilling machines for $ 600
000 each.
The contract contains a clause in which Arora Mines has the right but not the
obligation to sell the drilling machines to Integrated ES for $480 000 each
within a year of delivery date. The repurchase price is about
10% above the expected market value of the machines at
repurchase date. The machines typically cost $ 200 000 to manufacture TYPE
3
Contract with Dilbert Excavation Enterprises to sell a laser drilling machine for $
3 000 000. The contract contains a clause in which Integrated ES commits to
repurchase the machine for $3 597 075 2 years after the sale date, at which
time the market related value is expected to be $ 3 800 000. The cost to
manufacture the laser drill is $2 000 000.
TYPE 1
The right to return the machines to IES is a put option, giving Arora the right but
not the obligation to return the asset or to stand ready to return the asset. 1
Therefore, it appears that Arora has the ability to direct the use of the asset and
to obtain all the benefits from the remaining life of the asset. 1
However, Arora has a significant economic incentive to exercise the put option
because the repurchase price is higher than the market value of the asset (IFRS
15 par B71). 2
Revenue cannot be recognised on the contract with Arora because control of
the machines does not pass to Arora on the sale of the machines. 1
Arora is effectively paying IER for the right to use the machines and the contract
must be treated as lease in accordance with IAS 17 IFRS 15 par B 70. 2
IER's obligation to repurchase the machine must be recognised at the present
value of 480 000* 5* 1n*12% =$ 2 142 857 and the balance between this and
the transaction 2
price, $3 000 000 must be treated as an operating lease to be recognised over a
year. 1
Available 10
Maximum 9

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TYPE 3
Dilbert does not control the benefits from the remaining life of the drilling
machine because they have an obligation to return the drill to IEB. Therefore the
transaction 2
cannot be treated as a sale.
Because the repurchase price is higher than the original transaction price this is
a financing transaction. 1
A financial liability is recognised for $3 000 000 and the difference between this
and the repurchase price, $763 200 is recognised as interest expense over 2
years. 2

Available 5
Maximum 4
Presentation 1
Total 14

Part B
Alternative solution - using
HP 10bII+
1,680,00 1,680,00
FV deposit 0 FV of deposit 0 2
1,500,00 1,500,00
PV 0 PV 0
n 1 n 1
i 12 i 12%

PV of lease 9,575,18 9,584,48

payments 1 PV of MLP 2 2
Pmt 180,871 PMT 180,871
n 60 n 60
i 5 i 0.42%

11,255,1
81 11,264,4
Total Total 82

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Journal entries

Net investment in 11,255,1 Net investment 11,264,4

lease 81 in lease (SFP) 82 1
11,255,1 11,264,4
Revenue 81 Revenue (P/L) 82 1

Cost of goods 7,500,00 7,500,00

sold 0 COGS (P/L) 0
Inventory 7,500,00 7,500,00
0 Inventory (SFP) 0 1
1

Part C

30-Apr Bank 675,000 1

Refund liability 135,000 2
Revenue 540,000 1

Asset -right of
recovery 60,000 1
Cost of sales 240,000 1
Inventory 300,000 1

May Refund liability 135,000 1

Bank 101,250 1
revenue 33,750 1

Inventory 45,000 1
Cost of sales 15,000 1
Asset -right of return 60,000 1

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13

9.6. Question 6 16 Marks

Excel Ltd

Excel Leisure Ltd (“Excel‟) operates four golf driving ranges, two in Harare and one each in
Bulawayo and Gweru. The business strategy has been to acquire land in suitable locations and
to develop it into golf driving ranges. Excel also opened family-orientated restaurants on the
driving range sites in order to diversify income streams. Excel has traded well over the past
couple of years and intends to list on the ZSE Limited within the next 18 months. The sole
shareholder and chief executive officer of Excel, Mr Vengera, is keen to list his business which
will enable him to enlarge the company’s capital and to facilitate a share incentive scheme for
company employees. The company’s financial year end is 31 December.

Golf driving range division

Driving ranges require significant space and the average size of the properties owned is 75
hectares (or 750 000 square metres). Excel owns all properties from which it operates, and
generally targets sites in outlying urban areas. It is anticipated that the properties owned will
increase in value in due time since residential development occurs in the surrounding areas

In the past revenue has been generated from two sources at the driving ranges. Firstly, from
the public who pays for using golf balls (charged per bucket of 50 golf balls). Secondly, from
beverages and snacks sold at the restaurant.

Excel introduced golf driving range memberships with effect from the 2010 financial year. The
key benefits of becoming a member are the unlimited usage of the golf driving range (as
opposed to paying for a bucket of golf balls) and a 10% discount on all food and beverage
purchases from the restaurant situated on the site. New members are charged a once-off
entrance fee of $75. Entrance fees are not refundable in the event of individuals ceasing to be
members through voluntary resignation or failure to pay membership fees when due.

The membership period is from 1 January to 31 December each year. Annual membership fees
in 2010 were $120 per member (regardless whether members joined in January or later in the
year). New members have to pay their membership fees upfront. Members who are renewing
their memberships are required to pay fees on or before 31 January every year. The
introduction of membership proved popular with the public and 5 000 memberships in total
were sold at the four driving ranges during 2010.

Restaurant division

The restaurants situated at the golf driving ranges cater for golfers and non-golfers. The décor
and facilities are family orientated, and the restaurants serve a wide variety of meals.

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Restaurants are open seven days a week for breakfast, lunch and dinner.

Excel introduced a customer loyalty programme for non-members of the golf driving ranges in
January 2010. Customers electing to join the loyalty programme are issued with loyalty cards
(cards with magnetic strips containing individuals‟ details). Customers are encouraged to
present loyalty cards to waitrons when paying for their purchases at the restaurants and these
cards are then swiped at the point-of-sale devices which records the amount spent and
updates the loyalty points balance. The loyalty reward is one point for each $1 spent at the
restaurants which can be redeemed for food and beverages at the restaurants (in full or partial
payment of bills). Loyalty points can also be redeemed for buckets of golf balls at the driving
ranges. The estimated selling price of one customer loyalty point is $0.90.

REQUIRED

Marks 14

(a) Discuss, with reasons, the appropriate, recognition and measurement of the entrance
fees and membership fees of Excel Leisure Ltd. Your discussion does not need to include any
calculations.

Communication skills: Logical flow and conclusion 1

(b) Discuss, with reasons, the appropriate, recognition and measurement of the customer
loyalty programme of Excel Leisure Ltd. Your discussion does not need to include any
calculations. 9

Communication skills: Logical flow and conclusion 1

Please note: Your answers must comply with International Financial Reporting Standards

(IFRS).

(UNISA Adapted)

Question 6 Suggested Solution

Part (a) – Accounting treatment of entrance and membership fees Recognition

The entrance fees and membership fees provide access to the following at Excel Leisure Ltd:
(½)

• Access to the driving range; and

• Discount of purchases at the restaurant.

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It has to be determined if the above are distinct services and goods and are therefore separate
performance obligations in the membership contract (IFRS 15.22). (½)

The access to the driving range and the discount on restaurant purchases are both distinct and
therefore qualify as separate performance obligations because:

• Members can benefit from the good (discount) and service (access to the driving
range) on its own; and

• Excel Leisure Ltd.’s promise to transfer the good (discount) and service (access to the
driving range is separately identifiable from other promises in the contract (IFRS
15.27).

(1)

An entity recognises revenue when the entity satisfies a performance obligation by

transferring goods or services (asset) to a customer. An asset is transferred to a customer when
the customer obtains control of that asset (IFRS 15.31). (½)

The entity has to determine at contract inception if the performance obligation is satisfied
over time or at a point in time (IFRS 15.32). (½)

The discount on purchases relates to goods sold at the restaurant and is therefore a
performance obligation that Excel Leisure will satisfy when the customer purchases goods at
the restaurant. Consequently, the performance obligation in this regard is satisfied at a point
in time. (½)

Conclusion

• Revenue related to the discount purchases are recognised when the sales at the
restaurant are made.
• Upon receipt of the membership fees a contract liability equal to the transaction price
allocated to discount purchases is recognised.
• When members utilise their discount when purchasing goods at the restaurant the
contract liability is decreased with the amount of revenue recognised from the
discount.

The access to the driving range is provided on a time basis since the members have access to
the driving range over the period 1 January to 31 December. (½)

Therefore, members will simultaneously receive and consume the benefits as Excel Leisure
Ltd performs over the membership period (IFRS 15.35(a)). (1)

Based on the above, Excel Leisure Ltd satisfies its performance obligation to provide access to
the driving range over time. (½)

Conclusion

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• Revenue from membership fees that relate to the driving range access is recognised
from the date on which the member joins in 2010 up until December 2010. (1/2)
• Upon receipt of the membership fees a contract liability equal to the transaction price
allocated to driving range access is recognised. As time lapses the contract liability is
decreased with the amount of revenue recognised for the driving ranges access.
• Revenue from entrance fees are however recognised upon receipt since these fees are
non- refundable.

Measurement

Revenue is recognised at the amount of the transaction price allocated to that performance
obligation (IFRS 15.46). The transaction price is the amount of consideration to which an entity
expects to be entitled to in exchange for transferring promised goods or services to a
customer, excluding amounts collected on behalf of third parties (IFRS 15.47). (½)

The once-off entrance fee is recognised at $75 per member once the member pays the fee.
(½) The transaction price of the membership fee of $120 should be allocated to each
performance obligation in the membership contract i.e. the access to the driving range and
the discount purchases. (1)

To achieve the above, Excel Leisure Ltd should determine the relative stand-alone selling price
of each performance obligation (IFRS 15.73). (1)

In light of this, Excel Leisure should estimate the stand-alone selling price of access to the
driving range by either evaluating the price of memberships at other driving ranges or by
estimating the expected costs of proving access to the driving range and adding an appropriate
profit margin to this (IFRS 15.79(a)-(b)). (1)

The stand-alone selling price of the discount purchases is equal to the balance of the
membership fees after deducting the stand-alone selling price of the driving access (IFRS
15.79(c)). This residual approach is allowed if the criteria in terms of IFRS 15.79(c) are met:(1)

The entity sells the same good and service to different customers for a broad range of amounts
(i.e. the selling price is highly variable because representative stand-alone selling prices are
not available from past transactions or observable data). (½)

This is the case with the discount purchases since this amount is highly variable as it is
dependent on future sale purchases by members. Some members may make use of this
discount more often than other making it difficult to estimate the selling price. Past
transaction data in this regard is also not available since this is the first year of implementing
this membership contract(1)

Part (b) – Accounting treatment of entrance and membership fees

Recognition

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The customer loyalty programme is a contract with a customer since the customer loyalty
programme provides customers with a material right to points that will grant them a discount
in the future when purchasing goods at the restaurant or buckets of golf balls (IFRS 15.10).(1)

Excel Leisure Ltd.’s promise to provide points to customers is a performance obligation for the
following reason:(1)

The points promised to customers are distinct (IFRS 15.27) since it is:

Separately identifiable from other goods offered in terms of the sales contract; and (1)
Customer can benefit from the points on its own (i.e. the customer can redeem the points for
a discount on future purchases). (1)

Excel Leisure Ltd may only recognise revenue from the customer loyalty programme once it
has satisfied its performance obligation in terms of the contract (IFRS 15.31). Excel Leisure Ltd
therefore recognises revenue from the customer loyalty programme once the customers
redeem their points that they have earned. (1)

Revenue is not recognised for unredeemed points since the performance obligation has not
been satisfied. A contract liability is recognised for the unredeemed points at the end of the
financial year.(1)

Measurement

Revenue from the customer loyalty programme is measured based on the transaction price
allocated to that performance obligation (IFRS 15.46). (1) Since the sales contract comprises
more than one performance obligation, the entity has to allocate the transaction price to the
goods sold to customers and the points awarded to customers based on the relative stand-
alone selling price basis (IFRS 15.76). (1)

Consequently, Excel Leisure Ltd should allocate the amount received from the sales in the
restaurant to revenue (a profit or loss item) and a contract liability (a statement of financial
position item) for the customer loyalty points awarded from the sales. (1)

The contract liability for unredeemed points is reduced when revenue is recognised from the
redemption of the customer loyalty points. (1)

Total (12)

Maximum (9)

Communication skills: Logical flow and conclusion (1)

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9.7. Question 7 14 Marks

Coolworth

Coolworth Ltd (Coolworth) is a respected retail chain company that supplies clothing, food
and homeware. Coolworth launched a new customer loyalty programme on 1 January 20.13
that rewards a customer with one customer loyalty point for every $15 of purchases. Each
point is redeemable for a $0.20 discount on future purchases of Coolworth products. The
estimated stand- alone selling price of one point is $0.09.

Sales to Coolworth customers amounted to $270 000 (the stand-alone selling prices of the
products) during the financial year ended 31 December 20.13. Coolworth expects that 12 000
points will be redeemed during the financial year ended 31 December 20.13. At the end of
the 20.13 financial year 10 000 points have been redeemed by customers. At 31 December
20.14 11 800 points have been redeemed cumulatively in respect of the 20.13 sales.
Coolworth continues to expect that 12 000 points will be redeemed in respect of the 20.13
sales.

Sales to Coolworth customers amounted to $330 000 (the stand-alone selling prices of the
products) during the financial year ended 31 December 20.14. At the end of the 20.14 financial
year 12 500 points on the 20.14 sales have been redeemed by customers and Coolworth
expects that 15 000 points will be redeemed in total in respect of the 20.14 sales.

All sales made in 20.13 and 20.14 were cash sales.

REQUIRED

Provide the journal entries to account for the customer loyalty program in the financial
statements of Coolworth Ltd for the year ended 31 December 20.13 and 31 December
20.14.

N.B.Journal narrations are not required. Tax and VAT effects may be ignored.

Round all amounts of to the nearest USD.

Your answer must comply with International Financial Reporting Standards (IFRS).

(UNISA Adapted)

Note: In this case the contract with a customer includes two performance obligations i.e. the
promise to provide goods and the promise to provide loyalty points to the customer. Since
these two performance obligations are distinct in terms of IFRS 15.27, the entity has to
allocate the transaction price to these two performance obligations.

Question 7 Suggested solution

Suggested solution
Dr Cr Marks

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31-Dec-13
J1 Bank (SFP) 270,000 (0.5)
Revenue: products (P/L) (C2) 268,390 (2.5) Revenue: Loyalty points (P/L) 1,342
(1.5) Deferred revenue (SFP) (C3) 268 (1.5)

Recognition of revenue from products and loyalty points

J2 31-Dec-14
Deferred revenue (SFP) 242 (0.5) Revenue: Loyalty points
(P/L) 242 (1.5)
Recognition of revenue from 2013 loyalty points redeemed in 2014
J3 Bank (SFP) 330,000 (0.5)
Revenue: products (P/L) (C5) 328,031 (2.5) Revenue: Loyalty points (P/L) 1,640
(1.5) Deferred revenue (SFP) (C6) 328 (1.5)
Recognition of revenue from products and loyalty points

CALCULATIONS
C1 Loyalty points earned during 2013 ($270k/$15) (1)
Stand-alone selling price of loyalty points (18k x $0.09) (0.5)

C2 Allocation of transaction price in 2013

Revenue allocated to products:
[270k x (270k/(270k + 1,620) [C1])] 268,390 (1.5)
Revenue allocated to points:
[270k x (1,620/(270k + 1,620) [C1])] 1,610 (0.5)
C3 Contract liability (deferred revenue)
1,610 x 2k unredeemed points/12k expected points 268 (1)

C4 Loyalty points earned 2014 (330k/15) (1)

Stand-alone selling price of loyalty points (0.5)

C5 Allocation of transaction price 2014

Revenue allocated to products:
[330k x (330k/330k + 1,980) [C4])] 328,032 (1.5)
Revenue allocated to points:
[330k x (1,980/(330k + 1,980) [C4])] 1,968 (0.5)

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C6 Contract liability (deferred revenue) 268 (1)

1,968 x 2.5k unredeemed points/15k expected points

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