Topic: IFRS 15: Revenue from contracts with customers

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  • 7 Marks

CR – Nov 2021 – L3 – Q2b – IFRS 15: Revenue from Contracts with Customers

Determine how Barikisu Ltd should account for revenue and costs related to a construction contract with a customer under IFRS 15.

On 1 January 2020, Barikisu Ltd (Barikisu) entered into a contract with a customer to construct a specialised building for a consideration of GH¢2 million plus a bonus of GH¢0.4 million if the building is completed within 18 months. The estimated cost to construct the building is GH¢1.5 million. If the customer terminates the contract, Barikisu can demand payment for the cost incurred to date plus a mark-up of 30%. However, on 1 January 2020, due to factors outside of its control, such as the weather and regulatory approval, Barikisu is not sure whether the bonus will be achieved.

As at 31 December 2020, Barikisu has incurred a cost of GH¢1.0 million. They are still unsure as to whether the bonus target will be met. Therefore, Barikisu decided to measure progress towards completion based on the cost incurred. To date, Barikisu has received GH¢1 million from the customer.

Required:

Recommend to the directors of Barikisu how this transaction should be accounted for in the financial statements for the year ended 31 December 2020 in accordance with relevant International Financial Reporting Standards (IFRS).

Constructing the building is a single performance obligation in accordance with IFRS 15: Revenue from Contracts with Customers.

The bonus is a variable consideration. It is excluded from the transaction price because it is not highly probable that a significant reversal in the amount of cumulative revenue recognised will not occur. The construction of the building should be accounted for as an obligation settled over time. Barikisu Ltd should recognise revenue based on progress towards satisfaction of the construction of the building.

  • 5 Marks

CR – Mar 2024 – L3 – Q3b – IFRS 15: Revenue from Contracts with Customers

This question discusses the treatment of advance payments and significant financing components under IFRS 15 for Tieku Technologies.

On 1 December 2022, Pinto Ltd (Pinto), a public company, acquired 70% of the ordinary share capital of Manpam Inc (Manpam), a private company in Liberia. The functional currency of Pinto is the GH¢, and the functional currency of Manpam is the Liberian Dollar (LS). Pinto paid GH¢39.1 million for its investment in Manpam on 1 December 2022, when the net fair value of the identifiable assets acquired and liabilities assumed of Manpam were LS22,440 million.

Given that Manpam is a private company, Pinto decided to measure the non-controlling interests at acquisition at the proportionate share of the fair value of the identifiable net assets of Manpam. An impairment test conducted at the group level on the investment in Manpam at 31 December 2023 indicated an impairment loss on goodwill of LS357 million (attributable to Pinto). No impairment loss adjustments had been necessary at the previous year end.

Relevant exchange rates were:

  • 1 December 2022: GH¢1 = LS470
  • 31 December 2022: GH¢1 = LS478
  • 31 December 2023: GH¢1 = LS490

Required:
In accordance with IFRS, calculate the goodwill figure to be recognized in the consolidated statement of financial position of Pinto for the year ended 31 December 2023 (to the nearest GH¢0.1 million).

Computation of goodwill

  • 5 Marks

CR – Mar 2024 – L3 – Q2c – IFRS 15: Revenue from Contracts with Customers

This question requires determining whether Odjani Plc should recognize revenue as a principal or agent in the sale of airline tickets, based on IFRS 15.

Odjani Plc (Odjani) negotiates with major local and international airlines to purchase tickets at reduced rates compared with the price of tickets sold directly by the airlines to the public. Odjani agrees to buy a specific number of tickets and must pay for those tickets regardless of whether it is able to resell them. The reduced rate paid by Odjani for each ticket purchased is negotiated and agreed in advance. Odjani determines the prices at which the airline tickets will be sold to its customers. Odjani sells the tickets and collects the consideration from customers when the tickets are purchased. The entity also assists the customers in resolving complaints with the service provided by the airlines. However, each airline is responsible for fulfilling obligations associated with the ticket, including remedies to a customer for dissatisfaction with the service.

Required:
In line with IFRS 15: Revenue from Contracts with Customers, explain whether Odjani is a principal or agent and indicate how it would determine the amount of revenue to recognize from the ticket sales.

Under IFRS 15, the determination of whether an entity is acting as a principal or an agent is based on who controls the goods or services before they are transferred to the customer.

  1. Principal vs Agent Assessment:
    • Principal: An entity is a principal if it controls the goods or services before they are transferred to the customer. As a principal, Odjani would recognize revenue at the gross amount received from the customer.
    • Agent: An entity is an agent if it arranges for another party to provide the goods or services to the customer. The agent would recognize revenue as the net amount (i.e., the difference between what it receives from the customer and what it pays to the supplier).
  2. Odjani’s Role:
    • Odjani negotiates and purchases tickets in advance and assumes the risk of payment whether or not the tickets are resold. This indicates that Odjani controls the tickets before transferring them to customers.
    • Additionally, Odjani has the discretion to set the selling price for the tickets, which further suggests that Odjani is acting as the principal in the arrangement.
    • Although the airline fulfills the service obligations (i.e., providing the flight), Odjani’s control over the tickets and pricing means it is acting as a principal.
  3. Revenue Recognition:
    • Since Odjani is acting as a principal, it should recognize the gross amount received from customers as revenue.
    • The costs associated with purchasing the tickets from the airlines would be recognized as expenses, separate from the revenue recognized.
  • 4 Marks

CR – Nov 2023 – L3 – Q2c – IFRS 15: Revenue from Contracts with Customers

Revenue recognition for a data provider offering real-time and historical data access based on IFRS 15 for the year ended 31 May 2023.

Accra Investors Help (AIH), a large stock market data provider in Ghana, provides stock market data to investors across major markets in Africa.

On 1 June 2022, the data provider sold a client access to its real-time database for three (3) years at an invoiced price of GH¢3.6 million. The client has the right of access to AIH’s database any time, 24 hours each day, to obtain the real-time data about stock prices around the African markets. On the same date, AIH sold to another client for GH¢800,000 access to 30 years of historical data for the next two (2) years. The client has the right to access the data, containing historical information from 1992-2021 (24 hours each day) and is also free to download the data and retain it after the two-year access to AIH’s system has elapsed.

Required:
Advise on how much revenue AIH would recognize for the year ended 31 May 2023 on each of the two contracts. (4 marks)

The case would be dealt with in accordance with rules set out under IFRS 15: Revenue from Contracts with Customers.

IFRS 15 requires entities to apply a five-step model to recognize revenue in a manner that depicts the transfer of promised goods or services to the customer in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. More specifically, in this scenario, it is important to determine when the promised data access would transfer to the clients as this shows when a performance obligation is satisfied by transferring a promised good or service to a customer (which is when the customer obtains control of that good or service). A performance obligation may be satisfied at a point in time (typically for promises to transfer goods to a customer) or over time (typically for promises to transfer services to a customer).

In the first situation, where Accra Investors Help (AIH) sold access to a real-time database, AIH has granted the right to access its intellectual property as it exists at the time of access. Further, the content of that intellectual property is constantly updated. That allows the customer to simultaneously receive and consume benefits from AIH’s performance of the obligation.

Therefore, AIH recognizes the revenue on that contract over time; i.e. GH¢1.2 million (GH¢3.6 million divided by 3 years). The remaining GH¢2.4 million would be presented as half current liability and half non-current liability.

In the second situation, where AIH sold historical data, it provided the customer with intellectual property as of a point in time. In this case, access over time does not seem to be a key aspect of the performance obligation, and AIH’s performance obligation is satisfied at the time of sale.

Thus, AIH recognizes GH¢800,000 of revenue at the time of the sale (1 June 2022).

(Any 4 valid points for explanations for 4 marks)

  • 5 Marks

CR – Aug 2022 – L3 – Q3b – IFRS 15: Revenue from contracts with customers

This question focuses on the recognition of revenue from advance payments in line with IFRS 15 and explains the treatment for advance payment financing.

Tieku Technologies (Tieku) imports customized equipment from Europe and China for onward delivery in Ghana. It is the policy of Tieku that customers make payment for their supplies one year before delivery. Tieku does not offer discounts for advance payments. The advance payment allows Tieku to manage its import levels and to communicate delivery of supply to its customers. On 1 April 2021, Tieku received GH¢5 million from a customer to supply a customized equipment, and on 31 March 2022, Tieku delivered the equipment. Tieku’s incremental borrowing rate on 1 April 2021 was 10%.

Required:

In line with IFRS 15: Revenue from Contracts with Customers, provide an explanation (with calculations and entries, if necessary) as to how the above scenario would be treated by Tieku during the year ended 31 March 2022. (5 marks)

In accordance with IFRS 15, revenue is recognized when an entity satisfies a performance obligation by transferring control of a good or service to a customer. In cases where a customer makes an advance payment, the payment should not be recognized as revenue until the performance obligation is fulfilled (i.e., when the goods or services are delivered).

In this scenario, Tieku Technologies received an advance payment of GH¢5 million on 1 April 2021, but the equipment was not delivered until 31 March 2022. This creates a contract liability at the time the payment is received, as Tieku has an obligation to deliver the equipment in the future.

Step-by-Step Treatment:

  1. Advance Payment and Contract Liability
    On 1 April 2021, when the GH¢5 million is received from the customer, Tieku should recognize it as a contract liability:

    • Debit: Bank (GH¢5 million)
    • Credit: Contract liability (GH¢5 million)
  2. Significant Financing Component
    IFRS 15 requires entities to assess whether a contract includes a significant financing component when there is a significant period between the payment and the delivery of goods or services. The objective is to reflect the time value of money.

    In this case, the advance payment was made one year before delivery, and Tieku’s incremental borrowing rate on 1 April 2021 was 10%. Therefore, the transaction has a financing component.

    The financing effect should be accounted for by recognizing interest expense over the period from 1 April 2021 to 31 March 2022. The calculation of the interest can be done as follows:

    Interest on the advance payment = GH¢5,000,000 x 10% = GH¢500,000

    Tieku should recognize an interest expense and increase the contract liability by this interest amount:

    • Debit: Finance cost (GH¢500,000)
    • Credit: Contract liability (GH¢500,000)

    The total contract liability at 31 March 2022 would be GH¢5,500,000 (GH¢5 million + GH¢500,000).

  3. Recognition of Revenue
    On 31 March 2022, when Tieku delivers the customized equipment, it satisfies the performance obligation and can recognize the revenue. The total amount to be recognized as revenue is the total contract liability (GH¢5,500,000).

    The journal entry for the recognition of revenue will be:

    • Debit: Contract liability (GH¢5,500,000)
    • Credit: Revenue (GH¢5,500,000)
  • 6 Marks

CR – Nov 2019 – L3 – Q3a – IFRS 15 – Revenue from Contracts with Customers

IFRS 15 to recognize revenue for contracts with customers involving deferred payments and prepayments.

a) IFRS 15: Revenue from Contracts with Customers specifies how and when an IFRS reporter will recognise revenue as well as requiring such entities to provide users of financial statements with more informative, relevant disclosures. The standard provides a single, principles-based five-step model to be applied to all contracts with customers.

Mankranso Ltd, a hotel, had the following transactions during the year:

i) On 31 March 2019, Mankranso Ltd signed a contract to supply 50,000 units of food packs at an agreed price of GH¢10 per unit. On the same day, 30,000 units were delivered at that date, with the remainder delivered on 1 June 2019. It was agreed that the customer would have extended credit terms of 12 months from the date of delivery. Mankranso Ltd’s cost of capital is 10%.
(3 marks)

ii) During the year ended 31 March 2019, Mankranso Ltd received payment in advance for the supply of 2,000 hotel room-nights to customers at GH¢100 per room per night. Only 400 of these had been occupied by 31 March 2019. The amounts paid by the customers are non-refundable unless the company fails to provide the agreed accommodation.
(3 marks)

Required:
In each scenario above, calculate the amount of revenue to be recognised in the financial statements of Mankranso Ltd for the year ended 31 March 2019. Justify the correct accounting treatment for each transaction.

i) Revenue from the Sale of Food Packs (Deferred Payment):

  • Step 1: Identify the contract: A contract exists as Mankranso Ltd agreed to deliver 50,000 food packs at a price of GH¢10 per unit.
  • Step 2: Identify performance obligations: Delivery of 50,000 food packs, with 30,000 delivered by 31 March 2019 and the remaining 20,000 to be delivered on 1 June 2019.
  • Step 3: Determine the transaction price: The price is GH¢10 per unit.
  • Step 4: Allocate the transaction price: The 30,000 units delivered by 31 March 2019 represent a performance obligation fulfilled, and thus revenue should be recognized for those units. However, because the customer has 12 months to pay, the transaction price must reflect the time value of money.
  • Step 5: Recognize revenue: Mankranso Ltd must discount the price of 30,000 units to reflect the deferred payment. The effective revenue to be recognized for 30,000 units is:Revenue recognized=30,000×GH¢10×11.10=GH¢272,727\text{Revenue recognized} = 30,000 \times GH¢10 \times \frac{1}{1.10} = GH¢272,727

Thus, revenue of GH¢272,727 is recognized for the year ended 31 March 2019.

ii) Revenue from Advance Payment for Room-Nights:

  • Step 1: Identify the contract: A contract exists for the supply of 2,000 hotel room-nights at GH¢100 per night.
  • Step 2: Identify performance obligations: The obligation is to provide the hotel rooms. As of 31 March 2019, 400 room-nights have been provided.
  • Step 3: Determine the transaction price: GH¢100 per room-night.
  • Step 4: Allocate the transaction price: The transaction price is allocated based on room-nights provided. For the 400 room-nights provided by 31 March 2019, revenue can be recognized.
  • Step 5: Recognize revenue: Revenue is recognized for the 400 room-nights provided as follows:Revenue recognized=400×GH¢100=GH¢40,000\text{Revenue recognized} = 400 \times GH¢100 = GH¢40,000

The remaining GH¢160,000 (for the 1,600 unoccupied room-nights) is recognized as deferred revenue.

Thus, GH¢40,000 is recognized as revenue for the year ended 31 March 2019, and GH¢160,000 is deferred revenue.

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