Module 3

Formula & examples

1. SIGNIFICANT FINANCING COMPONENT – Journal entries
Entity A is a property developer, sold a parcel of land to a customer for $100,000. This
represents the standalone selling price of the land that would have been payable by the
customer if it was paid on the date the contract was signed.
The ownership transfers immediately to the customer once the contract is signed,
however, payment is only required at the end of two years.
The effective interest rate applicable to this contract is 10%.
In terms of IFRS 15, what are the journal entries relating to the transaction at the end of
two years?
- Significant financing component – anything more than 12 months
- Use the FV table to get the FV of $100,000 - $100,000 * 1.21= $121,000
- Journal entry:
Dr Bank. $121,000 (Total amount to be received after 2 years)
Cr. Account Receivable. $100,000
Cr. Interest Income. $21,000

2. REVENUE RECOGNITION - Standalone Price computation

BuildIt Ltd is a property developer who sold a parcel of land to a customer for $250,000.
While the ownership transfers immediately to the customer once the contract is signed,
the $250,000 payment is only required at the end of three years. The effective interest
rate applicable to this contract is 8%.
 In terms of IFRS 15, what is the standalone selling price of the land that would have
been payable by the customer if it was paid on the date the contract was signed?
Price in 3 years = $250,000
Present value = $250,000 x 0.7938 = $198,450
– Standalone price if paid at signing = $198,450

 In terms of IFRS 15, what are the journal entries relating to the transaction at the
end of three years?

Dr Bank $250,000
Cr Receivables $198,450
Cr Interest income $51,550
3. CONTRACT COST – pg 137
On 30 June 20X6, Entity V tendered for and won a contract to repair roads for the
Government. The contract is for 3 years with the option to renew for 1 year. At the
inception of the contract, Entity V anticipated that it would exercise its option to renew the
contract.
However, at the end of the third year, Entity V decided that it would not renew the
contract.

Entity V incurred the following costs to obtain the contract:

– Annual retainer fee to an external agent to assist with the completion of contracts:
$50,000
– Success bonus to a manager who worked on the tender and who will be involved
with the contract work: $30,000. This amount will be considered when setting the
profit margin of the contract.
– Sales commission to employees for successfully obtaining the contract: $80,000
– Legal fees for lodging the contract (not recoverable): $20,000

What is the amortization expense relating to the capitalized costs that would be
recognized in the statement of profit or loss for the year ended 30 June 20X9?
$80,000 + $30,000 = $110,000 -> amortised over 4 year = $27,500 per year

20X7 = $27,500
20X8 = $27,500
Balance on 20X9 = $55,000

 The incremental costs related to the contract are $110,000 ($80,000 + $30,000).
The contract is more than 12 months and these amounts are recovered during the
contract.
 The annual retainer fee is a periodic payment to the lawyer generally based on the
expected number of hours or services to be provided. It would therefore have been
incurred regardless of the contract.
 Legal fees for the lodging of the contract are not recoverable and cannot therefore
be capitalized.
 Success bonus to the manager is incremental and recoverable as it is included
when setting the profit margin.

- The incremental cost of $110,000 would be capitalized as an asset and amortized over
the life of the contract. This was initially expected to be 4 years.
- Hence, the annual amortization for year 1 (20X7) and year 2 (20X8)
= $27,500 (i.e. $110,000 / 4).
- This means that the balance of the incremental cost asset on 30 June 20X9 is $55,000.
- However, the entity indicated that it would not renew the contract so the contract life
changed from 4 years to 3 years.
 - Hence, the entire remaining balance of $55,000 would be amortized in year 3 (20X9).

4. TRANSACTION PRICE OF CONTRACT WITH NON-CASH CONSIDERATION

Mr Smith sells antiques. He enters into a contract with a customer to sell a painting. The
consideration for the painting is $800,000 in cash and also includes a luxury car with a cost
price of $100,000. The carrying amount of the car is $80,000 while the fair value of the car
is $150,000. The stand-alone selling price of the painting is $1 million.
a. What is the transaction price for this contract?

Based on the flow chart – Step 3 (detailed)

Non-cash consideration – measure at FV of non-cash items to be received

Transaction price: $800,00 + $150,000= $950,000

5. TRANSACTION PRICE, REVENUE ALLOCATION & RECOGNITION

Matthew Took out a mobile contract. It requires him to pay $100 for 12 months. In return,
he would receive a phone upon sign-up, usually sold at $200. He also would receive
monthly talk time which sells for $85 a month.

a. The transaction price for this contract - $1,200

b. Revenue allocated to the phone & talk time
c. Revenue recognition – phone when he leaves and talk time is monthly

Performance Allocation
Selling Price % weightage
Obligation $100 x 12
200/1,220: $1,200 x 16.39%:
Phone $200
16.39% $196.68
1,020/1,220: $1,200 x 83.61%:
Talk time $85x12: $1,020
83.61% $1,003.32
Total $1,220 100% $1,200

6. CONTRACT MODIFICATION
On 1 January 20X6, Martha entered into a contract to provide flowers for Sam's flower
shop. The contract specifies that Martha must provide 1,000 roses monthly for 5 months.
The total contract price is $15,000. The stand-alone selling price for a rose is $4.50
On 1 March, Sam's wife passed away. She loved roses and so Sam ordered an additional 600
roses from Martha for the funeral. Due to the circumstances, Martha indicated that she
would provide the roses to Sam free of charge.

a. In terms of IFRS 15, what would be the revenue from sales in March 20X6?
1,000 – 5 months
5,000 roses - $15,000 -> $3 per rose

 March – 1,600 roses

  Jan & Feb -> $6,000 for 2,000 roses
 March, April & May-> Balance 3k + 600 = 3,600 roses / $9,000 -> $2.50 per
rose
 Revenue for March -> 1,600 roses x $2.50 -> $4,000
7. PERFORMANCE OBLIGATION & ALLOCATION OF TRANSACTION PRICE
Entity A entered into a contract with Office Furniture Ltd to provide a new custom-made
desk. The contract price was $1,300 and included delivery and installation. Office Furniture
Ltd is not in the business of providing installation services separately.
- The stand-alone market price for installation would be $150 and
- the standard alone delivery price would be $250.
- The stand-alone market price for a similar custom-made desk would be $1,300.

a. How many performance obligations are there in this contract in terms of IFRS 15?
– 2 performance obligations – desk & installation come together

b. What is the allocation of the transaction price to the delivery service provided
under this contract? - $191.10

Performance Allocation
Selling Price % weightage
Obligation $1,300
1,300/1,700: $1,300 x 76.5%:
Desk $1,300
76.5% $994.5
$1300 x 14.7%:
Delivery $250 250/1,700: 14.7%
$191.1
1300 x 8.8%:
Installation $150 150/1700: 8.2&
$114.4
Total $1,700 100% $1,300

8. EXPECTED VALUE METHOD

Entity X sells robotic vacuum cleaners for $500 each. The company has a policy that allows
customers to get a full refund within 20 days if they are not completely satisfied with the
product. For January, Entity X sold 200 vacuum cleaners.

Experience indicates the following:

– 30% chance that there will be no returns;
– 45% chance that there would be 50 returns;
– 15% chance that there would be 60 returns; and
– 10% chance that there would be 65 returns.

What is the revenue that should be recognized if Entity X uses the EXPECTED VALUE
METHOD allowed by IFRS 15?

Based on the following calculations:

Revenue from no returns: ((200-0) x $500) x 30% = $30,000

Revenue from 50 returns: ((200-50) x $500) x 45% = $33,750
 Revenue from 60 returns: ((200-60) x $500) x 15% = $10,500
Revenue from 65 returns: ((200-65) x $500) x 10% = $6,750

total revenue is -> $30,000 + $33,750 + $10,500 + $6,750 = $81,000.

9. MOST LIKELY AMOUNT METHOD

Entity X sells robotic vacuum cleaners for $500 each. The company has a policy that allows
customers to get a full refund within 20 days if they are not completely satisfied with the
product. For January, Entity X sold 200 vacuum cleaners.

Experience indicates the following:

– 30% chance that there will be no returns;
– 45% chance that there would be 50 returns;
– 15% chance that there would be 60 returns; and
– 10% chance that there would be 65 returns.

What is the revenue that should be recognized if Entity X uses the MOST LIKELY AMOUNT
METHOD allowed by IFRS 15?

 (200-50) x $500 = $75,000