Financial Accounting | SoSe 2024
Prof. Dr. Christoph Sextroh
Financial Accounting
Tutorial 5
Revenue recognition
Task 1: Multiple-element arrangement
Mocha purchases equipment, installation, and training from Lynne for a price of €1,000,000
and chooses Lynne to do the installation. Lynne charges the same price for the equipment
irrespective of whether it does the installation or not (some companies do the installation
themselves because they either prefer their own employees to do the work or because of
relationships with other customers). The price of the installation service is estimated to have a
fair value of €20,000.
§ The fair value of the training sessions is estimated at €40,000. Other companies can
also provide these training services.
§ Mocha is obligated to pay Lynne the €1,000,000 upon the delivery and installation of
the equipment.
§ Lynne delivers the equipment on May 1, 2022, and completes the installation of the
equipment on July 31, 2022. Training related to the equipment starts once the
installation is completed and lasts for 1 year. The equipment has a useful life of 8 years.
Required: How should Lynne account for the contract according to IFRS 15? Assume that
Lynne has a 30 June fiscal year ending.
Task 2: Variable consideration
A contractor enters into a contract with a customer to build an asset for €100,000, with a
performance bonus of €50,000 that will be paid based on the timing of completion. The amount
of the performance bonus decreases by 10% per week for every week beyond the agreed-
upon completion date. The contract requirements are similar to those of contracts that the
contractor has performed previously, and management believes that such experience is
predictive for this contract. The contractor concludes that the expected value method is most
predictive in this case.
The contractor estimates that there is a 60% probability that the contract will be completed by
the agreed-upon completion date, a 30% probability that it will be completed one week late,
and a 10% probability that it will be completed two weeks late.
Required: How should the contractor determine the transaction price?
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Financial Accounting | SoSe 2024
Prof. Dr. Christoph Sextroh
Task 3: Allocating variable considerations to performance obligations
Company A provides a bundled service offering to Customer B. It charges Customer B $35
000 for initial connection to its network and two ongoing services — access to the network for
1 year and ‘on-call trouble-shooting’ advice for that year.
Customer B pays the entire $35 000 upfront on 1 March 2016. Company A enables the
connection to the network on the same day. Company A determines that, if it were to charge
a separate fee for each service if sold separately, the fee would be:
• Connection fee $ 5 000
• Access fee $ 12 000
• Troubleshooting $ 23 000
The end of Company A’s reporting period is 30 June. Prepare the journal entries to record this
transaction in accordance with IFRS 15 for the year ended 30 June 2016, assuming Company
A applies the relative fair value approach. Show all workings.
Required:
a) How should the contract be recognized in the financial statements according to IFRS
15?
b) Assume that the contract includes a penalty in case of connection issues that are not
resolved within 2hrs. The entity expects to pay penalties of 1,000€ based on the
expected number of connection issues during the contract term. How does it change
your answer to (a)?
c) Assume that instead of (b) the contract include a penalty in case the troubleshooting
advice does not help to resolve connection issues within 2hrs. The entity expects to
pay penalties of 1,000€ based on the expected number of connection issues during
the contract term. How does it change your answer to (a)?
Task 4: Right of return
Industrial machinery producer Kappa prepares financial statements to 30 September each
year. On 20 September 2015, Kappa sold 100 identical items to a customer for $2,000 each.
The items cost Kappa $1,600 each to manufacture. The terms of sale are that the customer
has the right to return the goods for a full refund within three months. After the three-month
period has expired the customer can no longer return the goods and payment becomes
immediately due. Kappa has entered into transactions of this type with this customer previously
and can reliably estimate that 4% of the products are likely to be returned within the three-
month period.
Required: Explain and show how both these transactions would be reported in the financial
statements of Kappa for the year ended 30 September 2015.
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Financial Accounting | SoSe 2024
Prof. Dr. Christoph Sextroh
Task 5: Discounts
Store-It Inc. sells storage structures of various sizes to homeowners and businesses.
In June 2022, a single commercial customer orders 50 M612 storage units, priced at €10,000
each (with a cost per unit of €7,100). Store-It provides customers ordering more than 20 M612
units during a 12-month period a 4% volume discount on their entire order. On July 19, 2022,
Store-It delivered all 50 M612 units. Store-It received payments for the units on August 5, 2022.
Required: Prepare the journal entries for Store-It on July 19, 2022 and August 5, 2022.
Task 6: Significant financing components
A furniture company has recently decided to offer the customers of the very expensive luxury
furniture editions comprehensive financing methods as the low interest rate phase offers cheap
refinancing options. Especially with regard to the living room premium complete package
"THE-ART-OF-LIVING (ROOM)" three contracts were developed, which should be beneficial
for the company from an economic point of view:
1) Simple cash payment of € 300,000 when buying the furniture.
2) Payment of € 315 thousand after one year.
3) Funding over four years, in which the same payments are due at the end of each year.
Other furniture manufacturers or furniture stores use lump-sum financing rates of around 5%
for comparable transactions. As a result of the luxury versions, which appeal to wealthier
customers, the company calculates lower interest rates of 1.5% for this customer group due to
creditworthiness.
Required: How would the three contracts be accounted for according to IFRS 15?
Task 7: Principal versus agent
In addition to the exclusive direct sales of luxury furniture, the company also regularly sells
furniture to selected furniture stores. It was agreed with these stores that the goods delivered
only have to be paid for when they are resold to the end customer. In addition, the company
retains ownership of the goods for new customers, both for high-quality designer furniture and
luxury variants, until payment has been made.
Required: How are these exclusive direct sales to be considered in the IFRS financial
statements of the furniture company in accordance with IFRS 15 if no resale or payment has
been made?
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Financial Accounting | SoSe 2024
Prof. Dr. Christoph Sextroh
Task 8: Performance obligation satisfied over time vs. at a point in time
At the beginning of 20X1, a furniture company receives the order to produce highly customized
furniture for a luxury hotel in Dubai. All furniture will be shipped to the hotel in one installment
by the end of 20X3. The (fixed) purchase price is € 25 million and is paid in full in 20X3.
Should the hotel cancel the contract, the furniture company has a legally enforceable right to
be compensated for the cost incurred until the cancellation date, plus profit margin. At the
same time, the furniture company will not be able to use the produced furniture for any other
purposes. The company determines progress using an input method and expects the following
cost structure to complete the order:
All units in Mio € 20x1 20x2 20x3 Total
Expected production costs in the financial year 5.000 7.000 8.000 20.000
Required:
a) How should the furniture producer account for this contract in the financial years 20x1
to 20x3 according to IFRS 15?
b) Would your answer change if the company did not have an enforceable right to be
compensated for the production cost?