04 Revenue

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04 Revenue
Financial Accounting 2A (University of Namibia)
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Solutions to GAAP: Graded Questions Revenue from contracts with customers
Solution 4.1
Part A – Definitions and overview of the process
a) Revenue is defined as:

• income
• arising in the course of
• an entity's ordinary activities. IFRS 15 App A
Revenue thus differs from income in that it is simply a type of income – one that arises
from ordinary activities. Thus, income can arise from a variety of other sources, including
an entity's activities that are not considered to be 'ordinary'. Thus, income from an entity’s
activities that are not considered to be ‘ordinary’ would not meet the definition of revenue.
b) False.
IFRS 15 does not apply to all contracts. It is only applicable if the contract:
• meets the definition of a contract and
• involves a customer/s that meet the definition of a customer; and
• is not covered by another accounting standard (IFRS) (e.g. lease contracts &
insurance contracts); and
• does not involve:
 the exchange of non-monetary items
 between entities in the same line of business
 to facilitate sales to customers or potential customers. See IFRS 15.5-6
c) Revenue recognition and measurement involves a 5-step process.
These 5 steps are as follows:

Step 1: Identify whether we have a contract with a customer.
Step 2: Identify the performance obligations contained in the contract.
Step 3: Determine the transaction price.
Step 4: Allocate the transaction price to the identified performance obligations.
Step 5: Recognise revenue when the performance obligations are satisfied.
d) Revenue is recognised when the performance obligations inherent in the contract have been
satisfied, allowing the entity to be entitled to that revenue. See IFRS15.9
e) A contract asset is 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. A receivable is the right to receive payment per IFRS 9, where
that right in the context of IFRS 15 arises out of the satisfaction of a performance obligation.
Part B continues on the next page
© Service & Kolitz, 2018 Chapter 4: Page 1

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Solution 4.1 continued…
Part B – Identifying the contract
f) A customer is defined as:

• 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. IFRS 15 App A
g) A contract is defined as:

• an agreement between two or more parties
• that creates enforceable rights and obligations. IFRS 15 App A
h) If the contract does not meet the definition of a contract as provided in IFRS 15:
• we would not be able to recognise receipts from the customer as revenue and would
thus have to recognise these as a refund liability instead; and
• we would have to continually reassess whether the criteria necessary to meet the
contract definition have subsequently been met, in which case the refund liability would
then be reversed and recognised as revenue.
i) In order to conclude that we have a contract that would fall within the scope of IFRS 15,
there are 5 criteria that must be met:
• It must be approved by all parties who are also committed to fulfilling their obligations.
• Each party’s rights to the goods and/or services must be identifiable.
• The payment terms must be identifiable.
• The contract must have commercial substance.
• It must be probable that the entity will collect the consideration to which it expects to
be entitled. See IFRS 15.9
Part C – The transaction price
j) The transaction price is defined as:

• The amount of consideration
• To which an entity expects to be entitled
• In exchange for transferring goods or services to a customer
• Excluding amounts collected on behalf of third parties. See IFRS 15 App A
k) The transaction price is C120 000, irrespective of how much is considered to be probable
of being recovered.
Collectability of the consideration is not considered when measuring the transaction price.
Collectability is only considered when determining whether a valid contract existed (see
the fifth criteria listed in the solution to part (i) above).
• If the consideration to which the entity expects to be entitled is considered to be
probable of being collected, we would have a contract, the transaction price of which
would be C120 000.
• If the consideration to which the entity expects to be entitled is not considered to be
probable of being collected, we would not have a contract and thus IFRS 15 would not
apply.

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Part C continued …
l) Constraining estimates is a process that is applied when determining the amount of variable
consideration to be included in the transaction price.
Constraining estimates simply means limiting the amount of variable consideration to be

included in the transaction price:
The amount that we include in the transaction price is limited in a way that ensures that it
is 'highly probable that a significant reversal' of revenue will not be required when the
uncertainty around this consideration is eventually resolved. See IFRS 15.56
m) The variable consideration to be included in the transaction price is calculated as follows:

Step 1: Estimate the amount of variable consideration, using either the ‘most likely
amount’ or an ‘expected value’; and then
Step 2: Limit this estimate to an amount that is ‘highly likely of not resulting in a
significant reversal of revenue in the future’.
n) A contract is said to contain an element of financing (i.e. a ‘financing component’) if the

following dates differ:
• the date of transfer of goods or services, and
• the date of settlement agreed to in the contract (explicitly or implicitly). See IFRS 15.60
This financing component could provide the benefit to either the customer or the entity.
o) The existence of a financing component in the contract may or may not affect the
calculation of the transaction price:
• If the period between these dates is equal to or less than a year, the effect of financing
may be ignored (the practical expedient).
• If the period between these dates is greater than a year, but the effect of the financing
is considered to be insignificant, then the effect of financing may be ignored.
• If the period between these dates is greater than a year but the effect of the financing
is considered to be significant, then the contract is said to contain a significant financing
component. In this case, the transaction price must be adjusted to exclude the effects
of the financing.
p) The effect of financing (if it is considered to be significant) is calculated by:

• First measuring the transaction price at the cash price:
The cash price is calculated at the present value of the expected consideration to which
the entity expects to be entitled.
• Then, calculate the effect of financing:
The effect of financing is the difference between this cash price and the expected
consideration.
The interest (expense or income) is then recognised over the period of the financing using
the effective interest method described in IFRS 9 Financial instruments.

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Part C continued …
q) When calculating the present value of consideration to which the entity expects to be
entitled, we must use an appropriate discount rate.
A discount rate is appropriate if it:

• is determined at contract inception, and
• is the rate:
- that the entity and the customer would have agreed upon had they entered into a
separate financing contract, and
- takes into account the specific circumstances at contract inception regarding:
o the credit risk of the borrower and
o any security that the borrower may have offered. See IFRS 15.64
Part D – Allocating the transaction price
r) The allocation of a transaction price means apportioning the transaction price to each of
the performance obligations contained in the contract.
s) The allocation of a transaction price to the various performance obligations is normally

done based on their relative stand-alone selling prices. If there is only one performance
obligation, the entire transaction price is allocated to that one performance obligation.
See IFRS 15.74
t) If an item is sold as part of a bundle but this item has never been sold on an individual basis
before, the transaction price allocated to this item is allocated on a ‘residual basis’. This
means that the transaction price for the entire bundle is first allocated to each of the items
in the bundle which have been sold before (and for which we can estimate a standalone
selling price). Once this has been completed, the remaining amount (i.e. the residual
amount) is allocated to the item which has not been sold on its own before.
u) For an item that has been sold on an individual basis before and is now sold as part of a
bundle, the transaction price is allocated on a ‘proportionate basis’. This means that if there
are two items in a bundle costing C120 000, and product A was previously sold for C70 000
and product B was sold for C100 000 on a standalone basis, then the C120 000 is allocated
to each product proportionately. Thus, C49 412 will be allocated to product A and C70 588
to product B.
Part E – Satisfying the performance obligations
v) A performance obligation is defined as:

• A promise contained in a contract
• To transfer to a customer either:
 A distinct good or service or bundle of goods or services; or
 A series of distinct goods or services that are:
 substantially the same; and
 have the same pattern of transfer to the customer. See IFRS 15.22 (reworded)

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Part D continued …
w) Performance obligations are classified as either:

• satisfied over time or
• satisfied at a point in time.
x) We must measure an entity’s ‘progress towards complete satisfaction of a performance

obligation’ when this performance obligation is classified as ‘satisfied over time’.
y) Progress may be measured using either:

• an input method (e.g. costs incurred to date as a percentage of total costs expected to
be incurred); or
• an output method (e.g. work certified to date as a percentage of total work to be
certified).
z) The essential difference between the input method and output method of measuring
progress towards complete satisfaction of the performance obligation is that:
• The input method is a measure of the entity’s efforts to date towards completion of the
performance obligation.
• The output method is a measure of the value that the customer has received to date.

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Solution 4.2
ADAPTATION: It may be of interest to you to extend the ‘required’ by including a

further part (part D), showing the effects of a financing component:
Part D:
An entity signs a contract with Mr Lime for an amount of C100 000 on 1 January 20X1. The terms
of the contract require that the goods be transferred to the customer immediately but that the customer
pay the entity on 31 December 20X2. The appropriate discount rate, determined at contract inception,
is 10%.
Required:
a) Calculate the transaction price assuming that the effect of the financing is considered to be
insignificant and show the journal entries for the year-ended 30 June 20X1 assuming that the
goods were transferred to the customer on 1 January 20X1.
b) Calculate the transaction price assuming that the effect of the financing is considered to be
significant and show the journal entries for the year-ended 30 June 20X1 assuming that the goods
were transferred to the customer on 1 January 20X1.
c) Briefly explain your answer to part (a) and part (b) above.
Part A Discounts
a) Transaction price = Contract price: C100 000 – Expected early settlement discount: C10 000 =
C90 000
b) The transaction price is the amount of consideration to which the entity expects to be
entitled. Thus, if the entity expects that the customer will qualify for the discount, the entity
expects to be entitled to C90 000 (C100 000 – C10 000).
Part B Rebates
a) Transaction price = Contract price: C100 000 – Expected rebate: C40 000 = C60 000
b) The transaction price is the amount of consideration to which the entity expects to be
entitled. Thus, if the entity expects that the customer will qualify for the rebate, the entity
Part C Financing (less than a year of financing – always ignored)
a) Transaction price = Contract price: C100 000
b) Transaction price = Contract price: C100 000
c) The transaction price was not adjusted for the financing component in either part (a) or
part (b),. This is because, whether or not the effects of the financing are considered to be
significant, the period between the date of transfer of the goods or services and the date of
settlement is only 6 months: the effects of financing are only accounted for if the period is
greater than a year.
Part D continues on the next page…

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Part D Financing (more than a year of financing)
a) Transaction price = Contract price: C100 000

Debit Credit
1 January 20X1
Receivable (A) 100 000
Revenue from customer contract 100 000
Revenue from customer contract satisfied at a point in time
No further journals would be required.
b) Transaction price = Present value of the contract price: C82 645

Debit Credit
1 January 20X1
Receivable (A) Cash price: PV of 82 645
Revenue from customer consideration (see calc below) 82 645
contract
30 June 20X1
Interest income (I) 82 645 x 10% x 6/12 4 132
Interest income recognised on the significant financing
component using the effective interest method
PV can be calculated using a financial calculator or using a basic calculator as follows:
C100 000 ÷ 1.1 ÷ 1.1 = 82 645
c) The transaction price is only adjusted for the financing component if the period between transfer of
the goods or services and the date of settlement is greater than a year and the effects of the financing
are considered to be significant.
- Part (a): although the period of financing was greater than a year, the effects of the financing
were considered to be insignificant and thus the transaction price was not adjusted.
- Part (b): the period of financing was greater than a year and the effects of financing were
considered to be significant, and thus the transaction price needed to be adjusted.

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Solution 4.3
a) Journals during the year ended 30 June 20X1:
Debit Credit
28 February 20X1
Receivable (A) Contract price 100 000
Receivable: settlement discount allowance (-A) Given 10 000
Revenue from customer contract Transaction price 90 000
1 April 20X1
Receivable: settlement discount allowance (-A) Given 10 000
Settlement discount forfeited by the customer is reversed and
recognised as revenue (the TP has increased since the entity now
expects to be entitled to a higher amount)
5 April 20X1
Bank (A) Contract price 100 000
Receipt from customer is recorded
Transaction price at contract inception: (Contract price: 100 000 – Expected discount: 10 000)
b) Discussion:
The transaction price is the amount of consideration to which the entity expects to be entitled. Thus,
if the entity expects that the customer will qualify for the discount, the entity expects to be entitled
to C90 000 (C100 000 – C10 000) and thus this amount is said to be its transaction price.
The contract involves a single performance obligation and thus the entire transaction price of
C90 000 (C100 000 – C10 000) is allocated to the single performance obligation.
Journal on 28 February 20X1:
Revenue is recognised as and when the performance obligations are satisfied. Since there is a single
performance obligation that is satisfied at a point in time, we recognise the full revenue when this
performance obligation is satisfied. The performance obligation is satisfied when the customer
obtains control over the goods or services. In this case, the customer obtains control over the goods
(glasses) on 28 February 20X1.
The receivable account is debited with the full price of C100 000 (this receivable asset records how
much the customer has agreed to pay) and the expected settlement discount of C10 000 is credited
to an allowance account (a measurement account that effectively reduces the carrying amount of the
receivable asset). The related revenue is thus recognised (credited) at the transaction price of
C90 000, being the amount to which the entity expects to be entitled.
Journal on 1 April 20X1 (or close of business on 31 March 20X1):
The customer had not yet paid as at 31 March 20X1 and thus the customer forfeits the settlement
discount that had been offered to him. The settlement discount allowance must thus be reversed
(thus we debit this account).
Since the discount has been forfeited, it means that the amount to which the entity expects to be
entitled is now C100 000 (i.e. the transaction price is now C100 000 – it is no longer C90 000).
Thus, the total revenue to be recognised from this performance obligation, once completed, is
C100 000 (not C90 000).
Since the performance obligation had already been satisfied by the time the discount was forfeited,
the revenue from this performance obligation had already been recognised. Thus, the adjustment to
the transaction price is recognised as an immediate adjustment to revenue (credit revenue).
Journal on 5 April 20X1:
The customer settles his account (debit the bank account) and thus the receivable account is reversed
(credit the receivable account).

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Solution 4.4
a) Definitions
A contract asset is defined as:

• 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 (e.g. the
entity’s future performance). IFRS 15 App A
A receivable is defined as:

• an entity’s right to consideration
• that is unconditional. IFRS 15.108 (extract)
A right to consideration is unconditional if:

• all we have to do is wait for time to pass
• before payment thereof falls due. See IFRS 15.108 (reworded)
A contract liability is defined as:

• an entity’s obligation to transfer goods or services to a customer
• for which:
- the entity has received consideration from the customer; or
- the amount of consideration is due. IFRS 15 App A (slightly reworded)
A comparison of the above terms:

A ‘contract asset’ and ‘receivable’ both represent the entity's rights whereas a ‘contract
liability’ represents the entity's obligation. A ‘contract asset’ is a right that is still
conditional whereas a ‘receivable’ is a right that is unconditional.
b) The 5-step process to revenue recognition
Revenue from a customer contract may only be recognised once:

Step 1: We have identified that we have a contract with a customer
Step 2: We have identified the performance obligations
Step 3: We have determined the transaction price
Step 4: We have allocated the transaction price to each performance obligation
Step 5: The performance obligations have been met (for performance obligations
satisfied at a point in time) or are being met (for performance obligations
satisfied over time).
c) Document explaining whether to recognise a contract asset or receivable
Based on the definition of a contract asset, a contract asset would be recognised only if we acquire
a right to consideration after having already transferred the goods or services to the customer but
where the right to the consideration is still conditional upon some further performance.
In this case, Destination only transferred the goods or services to the customer on
31 January 20X3 at which point it obtains a right to consideration.
• There is no further performance expected after transferring these goods or services and
thus the right to consideration is unconditional.
• Since it is an unconditional right to consideration, the right does not meet the definition
of a contract asset and thus a contract asset may not be recognised.
• An unconditional right meets the definition of a receivable and thus a receivable is
recognised instead.

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d) Document explaining the timing of the recognition of revenue:

cancellable versus non-cancellable contracts
Introduction:
The accountant processed a journal recognising revenue on 5 January 20X3 whereas the
director believes the journal recognising revenue should have been processed on
20 January 20X3. There are three dates that we need to consider:
• 5 January 20X3: the date the contract is agreed to;
• 20 January 20X3: the date the consideration becomes payable; and
• 31 January 20X3: the date the performance obligation is satisfied.
Normally revenue would be recognised when the performance obligation is satisfied.

However, in this situation, the consideration becomes payable before the performance
obligation is satisfied and thus we must consider whether the contract is:
• cancellable; or
• non-cancellable.
If the contract is cancellable
The contract is signed on 5 January 20X3 and the customer is expected to make payment
on 20 January 20X3, however, if the contract is cancellable, both these dates are ignored:
• revenue may not be recognised on either the 5 January 20X3 or 20 January 20X3 because
the entity has not yet satisfied its performance obligations – whether the contract is
cancellable or non-cancellable has no bearing on this;
• a receivable may not be recognised on either the 5 January 20X3 or 20 January 20X3
because the entity does not yet have an unconditional right to consideration: the contract
is cancellable which means that the entity must first perform its obligations before it will
be entitled to receive the consideration; and
• a contract asset may not be recognised because the entity has not yet satisfied any part
of its performance obligation.
Thus, in this example, the revenue and receivable will only be able to be recognised once
the performance obligations are satisfied.
Destination performed its obligations on 31 January 20X3, at which point the entity must
recognise the related revenue. At the same time, the entity obtains an unconditional right
to receive consideration and must thus recognise a receivable.
The following journal is thus processed:

Debit Credit
31 January 20X3
Continued on the next page

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Solution 4.4 continued ...
d) continued…
If the contract is non-cancellable
The contract is signed on 5 January 20X3, but this date is ignored because:
• the entity is unable to recognise the related revenue because it has not yet satisfied its
performance obligations; and furthermore
• the entity is unable to recognise either a contract asset or a receivable:
- a contract asset may not be recognised because the entity has not yet satisfied any
part of its performance obligation; and
- a receivable may not be recognised because the entity does not yet have an
unconditional right to consideration: although the contract is non-cancellable, the
contract states that the customer is only required to make payment on
20 January 20X3. See IFRS 15.IE199
The contract states that the customer must make payment on 20 January 20X3.
• Assuming the contract is non-cancellable, Destination will obtain an unconditional
right to receive consideration on this date – even though it has not yet have satisfied
any of its performance obligations.
Thus, on 20 January 20X3, Destination must recognise a receivable.
• However, Destination may not recognise the revenue because it has not yet satisfied
any of its performance obligations. This means that, since it must recognise a receivable
(i.e. a debit entry must be processed) but it may not recognise revenue yet, the entity
must recognise a contract liability instead (i.e. the credit entry will have to be to the
contract liability account and not the revenue account).

Debit Credit
20 January 20X3
Contract liability Transaction price 420 000
A receivable is recognised due to the payment terms of the non-
cancellable contract and a contract liability is recognised to
reflect the entity’s obligation to satisfy its performance obligations
The entity performed its obligations on 31 January 20X3, at which point the entity must
recognise the related revenue. At this point, the contract liability no longer exists because
there is no longer an obligation to transfer goods or services to the customer.
Thus, the contract liability is reversed (debit) and the revenue is recognised (credit).

Debit Credit
31 January 20X3
Contract liability 420 000
Revenue is recognised from the customer contract because the PO
is satisfied (satisfied at a point in time) and the contract liability is
derecognised because the entity has no further POs to satisfy

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Solution 4.5
a) The contract is cancellable
General comment relating to both (i) and (ii):

In both (i) and (ii), we must assess the transaction price (TP) at contract inception (1 July 20X7)
based on the consideration that the entity expects to be entitled to. The entity expects it will
grant the 10% discount and thus the transaction price is C180 000 (contract price: C200 000 –
C20 000 the expected discount).
A receivable reflects the entity’s unconditional right to consideration. Since this contract is
cancellable, the date on which the customer is expected to pay is ignored (however, if it was
non-cancellable, this date would have lead to an unconditional right). Thus, the unconditional
right to consideration only arises once the entity has satisfied its PO, which will also be the date
on which we recognise the related revenue. Since the entity satisfies its performance obligation
on 1 August 20X7, we must recognise the receivable and the revenue on this date.
Note 1: The receivable balance of C180 000 would be created by debiting ‘receivable’ (A) with
C200 000 and crediting ‘receivable: discount allowance’ (-A) with C20 000. This is because
the receivable account would be used to send the statement of account to the customer and
while negotiations around the discount had not yet been finalised, we would still want to reflect
that the customer owes C200 000.
i) Assuming discount granted on 1 September
1 August 20X7 Debit Credit

Receivable: discount allowance (-A) 20 000
Revenue from customer contract (I) 180 000
Recognising the receivable and the revenue on the date
that the PO is satisfied
1 September 20X7:
Discount is granted: reversing the discount allowance
account and thus reducing the receivable account
Bank (A) 180 000
Recognising the receipt and reversing the receivable
ii) Assuming discount is not granted on 1 September
1 August 20X7 Debit Credit

Recognising the receivable and revenue on the date that
the PO is satisfied
1 September 20X7:
Discount is not granted: reversing the discount allowance
account and recognising it as revenue
Bank 200 000

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b) The contract is non-cancellable
General comment relating to both (i) and (ii):
In both (i) and (ii), we must assess the transaction price (TP) at contract inception (1 July 20X7)
based on the consideration that the entity expects to be entitled to. The entity expects it will
grant the 10% discount and thus the transaction price is C180 000 (contract price: C200 000 –
C20 000 the expected discount).
A receivable reflects the entity’s unconditional right to consideration. Since this contract is
non-cancellable, the date on which the customer is expected to pay leads to an unconditional
right to receive consideration and will thus require the entity to recognise a receivable. In this
scenario, the unconditional right to consideration arises on 15 July 20X7, which is before the
entity has satisfied its performance obligation (PO), which means that revenue may not yet be
recognised. Thus, when recognising this receivable on 15 July 20X7, we must recognise a
contract liability to reflect the fact that the entity has an obligation to perform its obligations.
When the entity satisfies its performance obligation on 1 August 20X7, it must then recognise
the revenue and, at the same time, extinguish the contract liability.
Note 1: The receivable balance of C180 000 would be created by debiting ‘receivable’ (A) with
C200 000 and crediting ‘receivable: discount allowance’ (-A) with C20 000. The receivable
account would be used to send the statement of account to the customer and while negotiations
around the discount had not been finalised, we would still want to reflect that the customer owes
C200 000.
i) Assuming discount granted on 1 September
15 July 20X7 Debit Credit

Contract liability (L) 180 000
Recognising the receivable on due date for payment (contract is
non-cancellable) and recognising a contract liability because
we are not yet able to recognise the revenue
1 August 20X7

(I)
Recognising the revenue and reversing the contract liability
1 September 20X7

Discount is granted: reversing the discount allowance
account and thus reducing the receivable account
Bank 180 000


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b) continued…
ii) Assuming discount not granted on 1 September
15 July 20X1 Debit Credit

Recognising the receivable on due date for payment (contract is
non-cancellable) and recognising a contract liability because
we are not yet able to recognise the revenue
1 August 20X1

Recognising the revenue and reversing the contract liability
1 September 20X1

Discount is not granted: reversing the discount allowance
account and recognising it as revenue
Bank 200 000


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Solution 4.6
Part A:
a) Journals
Debit Credit
31 January 20X1
Receivable (A) Contract price: 100 000 x 50% - 50 000

receivable already recognised: 0
Receivable: rebate allowance (-A) Rebate: 40 000 x 50% - rebate 20 000
allowance already recognised: 0
Revenue from customer contract Transaction price: 60 000 x 50% - 30 000
revenue already recognised: 0
Revenue from customer contract satisfied over time: progress was
measured at 50% (one out of 2 months), thus 50% of the TP
recognised as a receivable, but a rebate of C20 000 must be taken
into account when measuring the revenue
5 February 20X1
Bank (A) Given 70 000

Receivable (A) Contract price: 100 000 x 50% 50 000
Refund liability (L) Balancing 20 000
Receipt from the customer reduces the receivable but the excess is an
advance payment that must be recognised as a refund liability (i.e. it
may not yet be recognised as revenue)
28 February 20X1
Receivable (A) Contract price: 100 000 x 100% - 50 000

receivable already recognised: 50 000
Receivable: rebate allowance (-A) Rebate: 40 000 x 100% - rebate 20 000
allowance already recognised: 20 000
Revenue from customer contract Transaction price: 60 000 x 100% - 30 000
revenue already recognised: 30 000
Revenue from customer contract satisfied over time
Receivable: rebate allowance (-A) 40 000

Reversing the rebate allowance since it is forfeited and recognising it as
an adjustment to revenue (since the POs had already been satisfied)
Refund liability (L) 20 000

Reversing the refund liability and recognising it as a reduction in the
receivable balance now that the related POs have been satisfied
Calculations:
(a) TP: transaction price = (contract price: 100 000 – expected rebate: 40 000)
(b) Measure of progress:
• At 31 January 20X1: 1 month completed ÷ 2 months in total = 50%
• At 28 February 20X1: 2 months completed ÷ 2 months in total = 100%
Notice:
Did you notice that the receivable balance is actually measured based on 50% of the transaction
price? For example, the net receivable balance at 31 January 20X1 is C30 000 (receivable account:
C50 000 – rebate allowance account: C20 000), which equals: Transaction price of C60 000 x
Measure of progress of 50% = C30 000.

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Part A continued …
b) Explanation
The transaction price is the amount of consideration to which the entity expects to be
entitled. Since the entity expects the customer will provide the necessary documentation
timeously and will thus qualify for the rebate, it means that, at contract inception, the entity
The contract involves a single performance obligation and thus the entire transaction price
of C60 000 (C100 000 – C40 000) is allocated to the single performance obligation.
The revenue is then recognised when this performance obligation is satisfied. Since this
performance obligation is a performance obligation satisfied over time, the related revenue
will be recognised gradually over time, based on the measure of the entity’s progress
towards complete satisfaction of the performance obligation.
The chosen measure of progress is not given, but since the performance obligations will be
satisfied evenly over a two-month period, a time-based method (an input method) would
be considered acceptable.
Journal on 31 January 20X1:
Assuming that a time-based method was used to measure progress, we would conclude that
the entity had satisfied 50% of its performance obligations at 31 January 20X1 (1 month
completed / 2 months in total) and thus 50% of the revenue must be recognised on
31 January 20X1.
The customer has paid an amount of C70 000 and thus we debit the bank. However, the
customer has only been invoiced C50 000 to date and thus this receipt exceeds the (gross)
receivable balance by C20 000. This extra C20 000 may not be recognised as revenue since
the revenue must reflect the portion of the transaction price that reflects the measure of
progress (i.e. C30 000). Thus the excess received is recognised as a refund liability
(reflecting the fact that we must either perform our obligation or refund the customer this
amount).
Two issues need to be accounted for on 28 February 20X1:

• Revenue must be recognised when the second (and final month’s) month of services
are provided.
• When the documentation fails to be presented, the rebate is forfeited and is recognised
as an adjustment to revenue.
Since the performance obligations are completely satisfied, the amount received that was
initially recognised as a refund liability, must now be recognised as a reduction in the
receivable balance instead (i.e. the refund liability is derecognised, debited, and the contra
entry being a credit to the receivable account).

lOMoARcPSD|3314559
Part B:
a) Journals:
Debit Credit
31 January 20X1
Receivable (A) Contract price: 300 000 x 33,3% – 100 000

Receivable already recognised: 0
Receivable: rebate allowance (-A) Rebate: 120 000 x 33,3% – Rebate 40 000
allowance already recognised: 0
Revenue from customer contract (I) Transaction price: 180 000 (a) x 33,3% – 60 000
Revenue already recognised: 0
Revenue from customer contract satisfied over time:
Measure of progress = 1 / 3 months = 33,3%
2 February 20X1
Receivable: rebate allowance (-A) Rebate: (120 000 – 90 000) x 33,3% 10 000
Decrease in rebate allowance account and an increase in revenue due to
change in expected variable consideration (increasing the TP)
Receivable: rebate allowance (-A) Balance was: 40 000 – Adjustment: 30 000

Receivable (A) 10 000 30 000
Rebate allowance set-off against the receivable to reflect the fact that it
has now been confirmed that the rebate will be granted.
Notice that the receivable account now reflects a balance of C70 000:
(contract price C300 000 – Confirmed rebate: C90 000) x 33,3%
28 February 20X1
Receivable (A) Transaction price: 210 000 x 66,6% – 70 000

Receivable already recognised:
(C100 000 – C30 000)
Revenue from customer contract (I) Transaction price: 210 000 (b) x 66,6% – 70 000
Revenue already recognised: (C60 000
+ C10 000)
Revenue from customer contract satisfied over time
Measure of progress = 2 / 3 months = 66,6%
Calculations:
(a) Transaction price (contract inception) = Contract price: 300 000 – Expected rebate: 120 000 = 180 000
(b) Transaction price (adjusted) = Contract price: 300 000 – Confirmed rebate: 90 000 = 210 000
Notice:
Did you notice that, at 28 February 20X1, the adjustment to the receivable account of C70 000 was
calculated based on the transaction price whereas at 31 January 20X1, the adjustment to the receivable
account of C70 000 was based on the contract price.
The use of the contract price to calculate the receivable balance at 31 January 20X1 was necessary
because, at that stage, we did not know the exact rebate that would be granted. In other words, we
measured the receivable account (from which the statement that would be mailed to the debtor) based on
the contract price and recognised a separate receivable rebate allowance account, measured based on the
expected rebate. However, the net effect of the receivable account and the receivable rebate allowance
account (commonly referred to as a negative asset, or an asset measurement account, similar in effect to
accumulated depreciation) is that the receivable balance presented in the SOFP at 31 January 20X1 would
still be measured based on the estimated transaction price.

lOMoARcPSD|3314559
Part B continued …
b) Explanation
The transaction price is the amount of consideration to which the entity expects to be entitled. Since the
entity expects the customer will be entitled to a rebate of C120 000, it means that, at contract
inception, the entity expects to be entitled to C180 000 (C300 000 – C120 000). This amount is considered
to be the transaction price. Incidentally, since we are unsure of the extent of the rebate, it means that the
transaction price involves variable consideration. If our estimate of the variable consideration changes at a
subsequent date, we must adjust our original estimate of the transaction price.
The contract involves a single performance obligation and thus the entire transaction price of
C180 000 is to be allocated to the single performance obligation.
The revenue is then recognised when this performance obligation is satisfied. Since this performance
obligation is a performance obligation satisfied over time, the related revenue will be recognised
gradually over time, based on the measure of the entity’s progress towards complete satisfaction of
the performance obligation.
The chosen measure of progress is not given, but since the performance obligations will be satisfied
evenly over a three-month period, a time-based method (an input method) would be appropriate.
Journal on 31 January 20X1:
Assuming that a time-based method (an input method) is used to measure progress, we would
conclude that the entity has satisfied 33,3% of its POs at 31 January 20X1 (1 month completed / 3
months in total) and thus 33,3% of the revenue would be recognised on 31 January 20X1.
Journals on 2 February 20X1:
The entity obtains information that clarifies that the rebate will now only be C90 000 (not C120 000).
This means that the transaction price must be adjusted (i.e. because the estimated variable
consideration has changed). The transaction price must be adjusted from C180 000 (C300 000 –
C120 000) to C210 000 (C300 000 – C90 000).
Since 33,3% of the POs have been satisfied, it means that 33,3% of the originally estimated
transaction price of C180 000 has already been recognised as revenue. Since the transaction price
is now estimated at C210 000 (not C180 000), it means that the revenue recognised to date has been
understated and that the related rebate allowance has been overstated. Thus, the adjustment to the
transaction price will result in an adjustment (i.e. an increase) to the revenue account and an
adjustment (i.e. a decrease) to the rebate allowance account.
Furthermore, since the rebate is now confirmed, the adjusted balance in the rebate allowance is now
set-off against the receivable account. After setting off the rebate allowance account against the
receivable account, the receivable account will then reflect that the customer currently owes the
entity C70 000, being one month of the three months services, based on the adjusted contract price:
[(contract price: 300 000 – confirmed rebate: 90 000) x 33,3%].
The customer completes a further month of performance obligations and thus, the measure of
progress is 66,6% (2 months completed/ 3 months in total).
Thus, revenue to the extent of 66,6% of the transaction price must be recognised to date. The
transaction price was adjusted to C210 000 (300 000 – 90 000) due to the fact that the estimated
variable consideration changed and thus the revenue to recognise in February is calculated as:
[Revenue to be recognised to date: (Adjusted TP: C210 000 x Measure of progress: 66,6%)] –
[Revenue already recognised: (60 000 + 10 000)] = Revenue still to be recognised: C70 000

lOMoARcPSD|3314559
Solution 4.7
a) No collectability problem at contract inception
We determine the transaction price (TP) at contract inception (1 February 20X3) based on the
consideration that the entity expects to be entitled to. In this scenario, there was no evidence to
suggest that the customer had liquidity problems and that the entity would receive anything other
than the contract price of C550 000 (550 000 x C1), so the TP is C550 000. Revenue is only
recognised on 28 February 20X3 when the PO is satisfied.
28 February 20X3: Debit Credit

Receivable (A) TP550 000 x 100% 550 000
Recognising revenue and a receivable when PO satisfied
15 March 20X3:
Impairment – credit losses (E) Rec'able bal: 550 000 330 000
Receivable: allowance for credit losses (-A) – 550 000 x 40% 330 000
Impairing the receivable to reflect the credit loss (problem of
collectability) on being advised thereof by the customer's lawyers
5 August 20X3:
Bank Given 165 000
Recognising the receipt from the customer
Impairment – credit losses (E) Bal was: 220 000 – 55 000
Receivable: allowance for credit losses (-A) Received: 165 000 55 000
Impairing the receivable to reflect the total credit loss (problem
of collectability) on receipt of full and final payment of an
amount that which was less than the full amount due
Receivable: allowance for credit losses (-A) 330 000 + 55 000 385 000
Receivable (A) 550 000 – 165 000 385 000
Reversing the receivable and its related allowance account
Explanation of each journal:
28 February 20X3:
• The entity satisfies its PO on 28 February 20X3, thus obtaining an unconditional right to
consideration and thus necessitating the recognition of a receivable.
• Because the PO has been satisfied, the entity must also recognise revenue.
15 March 20X3:
• The entity is apprised by the customer’s lawyers of the customer’s liquidity problems and the entity
must thus impair the receivable balance in terms of IFRS 9 Financial instruments to reflect the
concern over collectability of this balance. However, since the receivable account is used to send
statements of account to the customer, the entity would still want the statement of account to reflect
that the customer owes C550 000. Thus, the impairment loss is indirectly credited to the receivable
account by crediting an impairment loss allowance account.
5 August 20X3:
• The entity recognises the receipt from the customer.
• This receipt was less than the full amount due and, given the cash flow problems, the entity predicts
that the rest of the balance owing will never be recovered (i.e. receipt of the full amount is doubtful).
Thus, the entity recognises a further impairment loss relating to its receivable account: the previous
impaired balance was reflected at a net amount of C220 000 but only C165 00 has been received and
no further receipts are expected. Thus, the entity must process a further impairment loss of C55 000
(C220 000 – C165 000) in terms of IFRS 9 Financial instruments.
• Then, if the entity accepts that the remaining balance owed will never be received and thus does not
intend to pursue this customer for further payments, the entity reverses the customer’s receivable
account (reversing the loss allowance account against the related receivable account).

lOMoARcPSD|3314559
b) Collectability is a concern at contract inception

General comment regarding (i) and (ii):
We determine the transaction price (TP) at contract inception (1 February 20X3) based on the
consideration that the entity expects to be entitled to. In this scenario, there is evidence to
suggest that the entity will only receive C385 000 (given). How we account for this depends
on whether we consider this to be a collectability issue or an implied price concession (if we
are aware that a customer may not be able to – or will not – pay the full amount and yet we
continue with the transaction, it can be argued that we are tacitly accepting a lower price, or in
other words, planning to give the customer a price concession):
• if we consider it to be a simple collectability issue, the TP is not adjusted; but
• if we consider it to be an implied price concession, the TP is adjusted.
i) Collectability at contract inception considered to be a possible price concession
If we assume that this scenario reflects an implied price concession, then the TP is adjusted:
C550 000 – C165 000 (balancing) = C385 000.
Thus, revenue is recognised at C385 000. The revenue will be recognised on 28 February
20X3, when the PO has been satisfied.
28 February 20X3: Debit Credit
Receivable (A) Contract price 550 000

Receivable: allowance - price concession (-A) Possible concession 165 000
Revenue from customer contract (I) TP 385 000 x 100% 385 000
Recognising revenue and a receivable when PO satisfied
15 March 20X3
Impairment – credit losses (E) Net rec'able bal 165 000

Receivable: allowance for credit losses (-A) 385 000 – 550 000 x 165 000
40%
Impairing the receivable to reflect the credit loss (problem of
collectability) on being advised thereof by the customer's lawyers
5 August 20X3
Bank Given 165 000

Impairment – credit losses (E) Net rec'able balance: 55 000

Receivable: allowance for credit losses (-A) 55 000 – Expected to 55 000
be received: 0
Recognising a further impairment loss
Receivable: price concession allowance (-A) 165 000

Receivable (A) Balancing 385 000
Reversing the receivable and its two related allowance accounts
as the account has been written off as a bad debt

lOMoARcPSD|3314559
b) Continued ...
i) Continued …
Explanation of each journal (not required):
28 February 20X3:
• The revenue and related receivable are measured at C385 000 (being 100% of the TP of
C385 000, the amount having been given in part (b)). However, since the receivable account
is used to send statements of account to the customer and while lack of certainty around the
C165 000 exists (C550 000 – C385 000 = C165 000), the entity would still want the
statement of account to reflect that the customer owes C550 000. Thus, the potential price
concession is indirectly credited to the receivable account by crediting a related price
concession allowance account.
15 March 20X3:
• The entity is apprised by the customer’s lawyers of the customer’s liquidity problems and
the entity must thus impair the receivable balance in terms of IFRS 9 Financial instruments
to reflect the concern over collectability of this balance (the receivable was initially
measured at a net amount of C385 000 but the lawyers indicated that the customer would
only pay the entity C220 000, (CP: 550 000 x 40%) thus the balance must be reduced by
C165 000 – this is over and above the potential price concession of C165 000 that the entity
was initially considering accepting and thus this further reduction of C165 000 is recognised
as an impairment loss). Thus, we now have two allowance accounts – both happening to
reflect C165 000: one is a price concession allowance and the other reflects a credit loss
allowance (impairment).
5 August 20X3:
• This receipt from the customer was less than the full amount due and given the cash flow
problems, the entity predicts that the rest of the balance owing will never be recovered (i.e.
receipt of the full amount is doubtful). Thus, the entity recognises a further impairment
loss relating to its receivable balance: the receivables balance was C385 000 (C550 000 –
allowance for price concession: 165 000 – allowance for credit loss: 165 000), but the
customer only paid C165 000. The further impairment to the receivables would be the
difference: C55 000 (C385 000 – received: 165 000 – expected to be received: nil). This
impairment will be recognised in accordance with IFRS 9 Financial instruments.
• Then, if the entity accepts that the remaining balance owed will never be received and thus
does not intend to pursue this customer for further payments, the entity reverses the
customer’s receivable accounts (reversing the impairment loss allowance account against
the related receivable account).

lOMoARcPSD|3314559
b) Continued ...
ii) Collectability at contract inception considered to be a pure collectability concern

If we assume that this is considered to be a collectability issue, then the TP (i.e. revenue) is
C550 000 but we immediately recognise an impairment loss for the credit risk.
The revenue would be reflected at the full amount of C550 000 and the impairment loss
would be recognised as a separate expense of C165 000. Compare this to part (i) where we
assumed there was a potential price concession and thus recognised revenue at the net
amount of C385 000.
1 February 20X3 Debit Credit

Recognising the unconditional right to consideration and
revenue, measured based on the unadjusted transaction price
Impairment – credit loss (E) TP: 550 000 – 165 000

Receivable: allowance for credit losses (-A) Expect to recover: 165 000
385 000
Recognising the expected credit loss as an impairment
15 March 20X3
Impairment – credit loss (E) Net rec'able bal 165 000

Receivable: allowance for credit losses (-A) 385 000 – 550 000 x 165 000
40%
5 August 20X3
Bank Given 165 000

Impairment – credit loss (E) Net rec’able bal 55 000

Receivable: allowance for credit losses (-A) 220 000 – 165 000 55 000
+ 55 000
Receivable (A) 550 000 – 165 000 385 000
Reversing the receivable and its related allowance account

lOMoARcPSD|3314559
b) continued ...
ii) continued …
Explanation of each journal (not required):
28 February 20X3:
• The revenue and related receivable are initially measured at C550 000 (being 100% of the
TP of C550 000). However, since there is a collectability concern on this date, the
receivable balance must immediately be impaired to the amount we expect to recover
(C385 000). The impairment loss is recognised as an expense. However, since the
receivable account is used to send statements of account to the customer and while there is
a lack of certainty around the C165 000 (C550 000 – C385 000), the entity would still want
the statement of account to reflect that the customer owes C550 000. Thus, the impairment
loss is indirectly credited to the receivable account by crediting an impairment loss
allowance account reflecting credit losses.
15 March 20X3:
• The entity is apprised by the customer’s lawyers of the customer’s liquidity problems,
which now appear a little better than the entity had expected at 28 February 20X3, with the
result that the entity must reduce the previously recognised impairment to the receivable
balance in terms of IFRS 9 Financial instruments to reflect this fact (the receivable was
initially measured at a net amount of C385 000 but the lawyers have indicated that the
customer would probably only pay the entity C220 000 (CP 550 000 x 40%), thus the
receivable balance must be reduced by a further C165 000 impairment for the credit loss).
5 August 20X3:
• This receipt from the customer was less than the full amount due and given the cash flow
problems, the entity predicts that the rest of the balance owing will never be recovered (i.e.
receipt of the full amount is doubtful). Thus, the entity recognises a further impairment
loss relating to its receivable balance: the previous impaired balance was reflected at a net
amount of C220 000 but only C165 000 has been received and no further receipts are
expected. Thus, the entity must process a further impairment loss of C55 000
(C220 000 – C165 000) in terms of IFRS 9 Financial instruments.
• Then, if the entity accepts that the remaining balance owed will never be received and thus
does not intend to pursue this customer for further payments, the entity reverses the
customer’s receivable accounts (reversing the impairment loss allowance account against
the related receivable account).

lOMoARcPSD|3314559
Solution 4.8
a) Discussion: identification of the performance obligations
Answer: The design and manufacture of the plant comprise a single performance obligation.
Discussion:
Introduction
The contract involves the design and manufacture of a plant. Whether the design of the plant
and manufacture of the plant constitute two separate performance obligations or one single
performance obligation depends on whether the design and manufacture are considered to be
individually distinct.
When deciding whether the goods or services promised in a contract are individually distinct,
we need to consider whether each is:
• individually capable of being distinct (able to generate economic benefits for the customer);
and
• individually distinct in the context of the contract.
Application to the scenario provided
The design is probably able to generate economic benefits for the customer (through the sale or
use thereof etc): the completed design work could no doubt be sold by the customer or the
customer could give the completed design to another company to perform the manufacture of
the plant, where the final manufactured plant would then generate economic benefits for the
customer. Thus, we conclude that the design is ‘capable of being distinct’.
However, the design would not be considered to ‘be distinct in the context of the contract’.
• For a good or service to ‘be distinct in the context of the contract’ means it must be
separately identifiable from the other goods or services promised within the contract.
• Professional judgement is required in assessing all facts and circumstances in this regard.
• In this situation, the manufacturing of the plant is highly dependent on the design work. In
other words, the customer could not have purchased the manufactured plant from Lexer
without the design work having been completed first. Thus, the design and the manufacture
are considered so interdependent that they cannot be considered separately identifiable from
one another.
Conclusion
Although the design of the plant and the manufacture of the plant are each ‘capable of being
distinct’, they are not ‘distinct in the context of the contract’ and thus the design of the plant
and the manufacture of the plant are not considered to be individually distinct goods or services.
Thus, we conclude that the design and manufacture of the plant constitutes a single performance
obligation.

lOMoARcPSD|3314559
b) Discussion bill and hold sale (storage incidental)
Introduction
Before revenue may be recognised from the sale of the plant, we must first prove that control
has passed to Klim Limited.
Passing of control in a normal transaction: assessment of IFRS 15’s example indicators (IFRS 15.38)
We prove that control has passed to a customer by considering whether there are any indications
of the transfer of control, using the five example indicators provided in IFRS 15.38 (see
Gripping GAAP on page 171).
An assessment of the facts and circumstances suggests that a number of these indicators were
met by 8 January 20X1, thus suggesting that control had passed to Klim Limited:
• Klim had become obliged to pay for the plant;
• Klim had obtained legal title over the plant;
• Klim had inspected the plant and accepted that it met all required specifications.
Passing of control in a bill-and-hold sale transaction: 4 extra criteria (IFRS 15.B81)
However, the sale of the plant is a bill-and-hold sale since Lexer Limited:
• had invoiced Klim on 8 January 20X1; and yet
• had retained physical possession of the plant.
Since the sale is a bill-and-hold sale, we need to consider whether all four additional criteria
relevant to a bill-and-hold sale (provided in IFRS 15.B81) have been met:
• the reason for the bill-and-hold arrangement must be substantive (e.g. the customer must
have requested it);
• the product must be identified separately as belonging to the customer;
• the product must be ready for physical transfer to the customer; and
• the entity must not have the ability to use the product or to direct it to another customer.
In this regard, we conclude that all these criteria have also been met:
• the bill-and-hold arrangement is substantive because Klim Limited requested that Lexer
Limited retain possession;
• the plant is separately identified as having been sold to Klim (the sale agreement has been
signed thus providing legal proof that this particular plant has been sold to Klim and
furthermore, the plant is stored in the separate storage area for items sold but not yet
collected);
• the plant was ready for delivery on 8 January 20X1;
• the plant is specialised and thus it is practically not possible for it to be redirected to another
customer and unlikely to be able to be used by Lexer Limited.
Continued on the next page…

lOMoARcPSD|3314559
b) Continued ...
Conclusion:
We conclude that control passed to Klim Limited on 8 January because there are a number of
indications that control had passed on this date (per the example indicators listed in IFRS 15.38)
and because all further criteria were met relevant to a bill-and-hold arrangement (listed in
IFRS 15.B81). Thus, Lexer Limited must recognise the revenue from the sale of the plant on
8 January 20X1 (i.e. it does not wait until the customer obtains physical possession of the plant).
Since the storage is for a minimal period of time, the agreement to store the plant for a few days
is considered incidental to the design and manufacture of the plant and thus is not considered
to be a separate performance obligation.
Since the transfer of the plant is a performance obligation that is satisfied at a point in time, the
revenue from this PO is recognised on 8 January 20X1. Since the consideration was paid by the
customer on this same day, no receivable was recognised.
Thus, the journal for the year ended 28 February 20X1 is as follows:
8 January 20X1 Debit Credit

Revenue from customer contract (I) Working above 770 000
Recording the receipt from the customer and the related revenue from
the bill-and-hold sale of plant – the only PO identified

lOMoARcPSD|3314559
c) Discussion bill and hold sale (storage significant)
Klim Limited’s subsequent request for storage constitutes a distinct service but since the storage
has been requested over a 6-month period, which the wording of the question suggests is a fairly
significant period of time, we would have to conclude that we now have two performance
obligations:
• the transfer of a plant; and
• the provision of storage over 6-months.
This is effectively a contract modification. Modifications to contracts that have been approved
by all parties are accounted for in one of the following ways:
• option 1: as an additional separate contract;
• option 2: as a termination of the old contract plus the creation of a new contract; or
• option 3: as part of the existing contract.
Option 1 and 2 apply in the event that the modification involves a distinct good or service
whereas option 3 applies in the event that it involves a good or service that is not distinct. Since
the storage is clearly distinct from the supply of a plant, option 3 will not be discussed further.
Options 1 and 2 will now be considered:
Option 1:
We would account for the modification as a separate contract if:

• the scope increases due to extra goods or services that are distinct from the original goods
or services promised; and
• the price increases by an amount that reflects the stand-alone selling prices of these extra
goods or services.
In this case, the scope has increased to the extent of the extra distinct service (storage).
However, Lexer Limited agreed to waive the costs of the extra storage. Since both the criteria
for recognition of the modification as a separate contract are not met, we do not account for the
modification as a separate contract.
Option 2:
We would account for the modification as a termination of the old contract plus a creation of
a new contract if:
• the modification does not meet the criteria to be accounted for as a separate contract; and
• the remaining goods or services still to be transferred are distinct from the goods or services
already transferred.
In this case, the modification does not meet the criteria to be accounted for as a separate contract
(see discussion above) and the remaining service to still be transferred (the storage) is clearly
distinct from the good already transferred (the plant). Thus, the modification is accounted for
as a termination of the old contract plus a creation of a new contract.
We thus reassess the contract and the recent request for storage as a single contract and conclude
the following:
• the contract price remains C770 000; and
• the contract now includes two performance obligations:
- transfer of a good: a plant (PO#1): satisfied at a point in time; and
- transfer of a service: storage (PO#2): satisfied over time.

lOMoARcPSD|3314559
c) Continued ...
Since we now have two performance obligations we will need to allocate the transaction price
to each of them.
Before assuming that the contract price is the transaction price, we must consider the effects of
the financing, since the terms of the modified contract now include a financing component.
The financing component arises since there is a difference between the date on which the
consideration is paid (8 January 20X1) and the date on which one of the performance
obligations is to be satisfied (the transfer of the storage services is to be provided over the 6-
month period ending 30 June 20X1).
However, since the period between these dates is not more than one year (the period is just under 6
months), the effects of the financing, whether or not they were considered to be significant, are not
taken into account when determining the transaction price. See comment at end of solution.
Thus, the transaction price is taken to be C770 000 (i.e. the contract price of C770 000 is not
adjusted for the financing component).
The allocation of the transaction price of C770 000 must be done based on the stand-alone
selling prices (SASPs) of each performance obligation:
• we have the stand-alone selling price of the storage (C5 000 x 6 months = C30 000) but
• there is no stand-alone selling price available for the plant (no doubt due to the fact that it is
highly specialised).
Where stand-alone selling prices are not available, they must be estimated. They may be
estimated on any basis, but IFRS 15 suggests the use of an ‘adjusted market price method’ or a
‘cost plus method’ or a ‘residual method’. Insufficient information is available to estimate the
SASP of the plant using either an ‘adjusted market price method’ or a ‘cost plus method’ and
thus we will use the ‘residual method’.
Performance Stand-alone
obligations: selling prices
1. Plant C740 000 Estimated using the residual method: Balancing: C770 000 – C30 000
2. Storage C30 000 Given: C5 000 x 6 months
C770 000
The transaction price will be recognised as revenue as and when the performance obligations
(POs) are satisfied.
• The transfer of the plant is a performance obligation (PO) that is satisfied at a point in time,
and thus the revenue from this PO (C740 000) is recognised on 8 January 20X1.
• The provision of storage is a performance obligation (PO) that is satisfied over time and thus
the transaction price allocated to this PO (C30 000) must be recognised as revenue over the
6 months that the storage is provided.
Since we receive the full transaction price of C770 000 on 8 January 20X1 but yet, on this date,
we have only satisfied one of the performance obligations (i.e. the transfer of the plant), we
may not recognise the entire receipt as revenue. In other words, the portion of the transaction
price that relates to the transfer of the plant (being the PO that has been satisfied) is recognised
as revenue but the portion that relates to the provision of future storage (C30 000) is recognised
as a contract liability, thus reflecting the entity’s obligation to either satisfy this PO or to refund
this amount.

lOMoARcPSD|3314559
c) Continued ...
Thus, the journals for the year ended 28 February 20X1 are as follows:

Contract liability (L) Working above 30 000
Recording the receipt from the customer and the related revenue from
the bill-and-hold sale of plant (PO#1) and a contract liability for the
balance
31 January 20X1
Contract liability (L) See calculation in narration 5 000
Recognising revenue from the transfer of storage services – a time-basis
(an input method) would be considered a suitable measure of progress:
progress to date = 1 month completed / 6 months in total = 16.67%.
Thus revenue recognised to date: 16.67% x C30 000 – revenue already
recognised: C0 = 5 000
28 February 20X1
Contract liability (L) See calculation in narration 5 000
Recognising revenue from the transfer of storage services – a time-basis
(an input method) would be considered a suitable measure of progress:
progress to date = 2 months completed / 6 months in total = 33,33%.
Thus, revenue recognised to date: 33,3% x C30 000 – revenue already
recognised: C5 000 = 5 000
Comment for your interest:

If Lexer had received financing from the customer for a period of more than a year and the effects
thereof were considered to be significant, the transaction price allocated to the provision of these
services will be determined at an amount net of the interest expense. For example: if the effects of the
financing were quantified to be C2 000, then the transaction price (and revenue) would be recognised
at C32 000 and an interest expense of C2 000 would be recognised over the period of the financing
using the effective interest method.

lOMoARcPSD|3314559
Solution 4.9
Part A:

Recognising the receipt from the customer and the related contract
liability for the future services
31 December 20X8
Contract liability (L) W2 10 105
Recognising the revenue from the first of the three services
31 December 20X9 (for illustrative purposes only)

Revenue from customer contracts 15 158
Recognising the revenue from the second of the three services
WORKINGS:
W1 Transaction price
= Contract price: C48 000 – Effect of significant financing component: N/A = C48 000
W2 Allocation of transaction price
The transaction price of C48 000 is allocated to the 3 annual services based on their relative standalone
selling prices, which had to first be estimated. This solution estimated the stand-alone selling prices
using the ‘expected cost-plus margin’ approach (i.e. cost plus the required margin of 20%).
Estimated Allocation of
Profit margin
Cost standalone transaction price
(20% x cost)
selling price
First service C12 000 C2 400 C14 400 14 400 / 68 400 x 48 000 C10 105
Second service C18 000 C3 600 C21 600 21 600 / 68 400 x 48 000 C15 158
Third service C27 000 C5 400 C32 400 32 400 / 68 400 x 48 000 C22 737
C68 400 C48 000 W1
Explanation:
The journals provided above were based on the conclusion that the three annual services are
three separate performance obligations. This conclusion would have been drawn after
analysing the facts and concluding that:
• the services are capable of being distinct; and
• the services are distinct in the context of the contract.
The transaction price is the amount to which the entity expects to be entitled in exchange for
transferring the goods or services. The transaction price would need to exclude the effects of
any significant financing component. In this solution, the effects of financing were considered
to be insignificant and thus the transaction price was not adjusted. In other words, the contract
price of C48 000 was accepted as being the transaction price.

lOMoARcPSD|3314559
The contract price is C48 000, which, when compared to the sum of the individual stand-alone
selling prices of the services over the three-year period of C68 400, effectively provides the
customer with an overall net discount of C20 400 (C68 400 – C48 000).
Since there is no evidence to suggest that the discount applies to one specific performance
obligation (e.g. to the first service), the discount inherent in the contract price of C20 400 is
allocated proportionately to each of the individual services. This is automatically achieved
when we allocate the transaction price to the performance obligations based on their individual
stand-alone selling prices as shown in the journals above.

lOMoARcPSD|3314559
Part B:

liability for the future services
31 December 20X8
Recognising the revenue from the first of the three services
31 December 20X9 (for illustrative purposes only)

Recognising the revenue from the second of the three services
WORKINGS:
W1 Transaction price
= Contract price: C48 000 – Effect of significant financing component: N/A = C48 000
W2 Allocation of transaction price
The transaction price of C48 000 is allocated to the 3 services based on the expected cost of each.
Costs Workings Revenue allocation
Year 1 C12 000 (C12 000/57 000 x C48 000) C10 105
Year 2 C18 000 (C18 000/57 000 x C48 000) C15 158
Year 3 C27 000 (C27 000/57 000 x C48 000) C22 737
C57 000 C48 000 (W1)
Explanation:
The journals provided above are effectively based on the conclusion that the 3 annual services
comprise one single performance obligation (the services are designed to address different
aspects of the engine as it ages and we are thus told that each service is dependent on the
previous service/s having been performed timeously and in the correct sequence). This
conclusion would have been drawn after analysing the facts and concluding that either:
• the services were not considered to capable of being distinct; and / or
• the services were not distinct in the context of the contract.
The transaction price is the amount to which the entity expects to be entitled in exchange for
transferring the goods or services. The transaction price would need to exclude the effects of
any significant financing component. In this solution, the effects of financing were considered
to be insignificant and thus the transaction price was not adjusted. In other words, the contract
price of C48 000 was accepted as being the transaction price.
Since there is only one performance obligation, the entire transaction price is simply allocated
to this performance obligation. Since the performance obligation is satisfied over time, the
transaction price is recognised as revenue using a suitable measure of progress. It is suggested
that a suitable measure of progress would be costs incurred to date as a percentage of total
expected costs.

lOMoARcPSD|3314559
Solution 4.10
Part A: Journals involving a warranty (assurance-type)

Bank (A) 75 000
Recognising the receipt from the customer as revenue
Cost of sales (E) Given 21 750
Inventory (A) 21 750
Recognising the cost of the goods sold
31 December 20X1 (cumulative
journal)
Bank (A) 75 000 x 3,5% x 12/12 2 625
Interest income (A) 2 625
Recognising interest as income (not revenue in terms of IFRS 15!)
Explanation (for your interest only):

A warranty is generally understood to be ‘an undertaking as to the quality of a thing sold etc,
often accepting responsibility for defects or repairs over a specified period’. (Oxford
Dictionary, 1996)
However, IFRS 15 clarifies that the nature of warranties can vary widely across the world.
IFRS 15 separates warranties into two types:
• assurance-type warranties (assurance that the product complies with agreed-upon
specifications); and
• service-type warranties (where the customer is provided with a service in addition to the
assurance that the product complies with agreed-upon specifications).
Assurance-type warranties are not accounted for in terms of IFRS 15 but instead are accounted
for as liabilities (provisions) in terms of IAS 37 Provisions, Contingent Liabilities and
Contingent Assets.
Service-type warranties, on the other hand, are accounted for in terms of IFRS 15 as a separate
performance obligation and thus a portion of the transaction price would be allocated to this
warranty obligation.
If a warranty contained in a contract could have been purchased separately by a customer, then
that warranty is automatically accounted for as a service-type warranty.
In the scenario provided, the warranty appears to be a simple assurance-type warranty:
• If the goods are found to be defective within 9-months of purchase, they may be returned
for a refund (together with a nominal amount of interest), suggesting it is an assurance-type
warranty; and
• There is no evidence to suggest that this warranty is sold separately and thus it is not
automatically accounted for as a service-type warranty.
Thus, in this case, the sale must be recognised as revenue in terms of IFRS 15 and the warranty,
being an assurance-type warranty, must be accounted for in terms of IAS 37.
In terms of IAS 37, a warranty provision (a liability) would be recognised if the warranty met
the definition of a liability (present obligation as a result of a past event that is expected to result
in an outflow of future economic benefits) and if a reliable estimate thereof was possible. In
this case, the entity has no past experience on which to assess the probability of return and thus
the definition of a liability is not met and a reliable estimate of the possible outflow resulting
from the warranty policy is not possible. In such cases, a contingent liability is disclosed in the
notes instead.

lOMoARcPSD|3314559
Solution 4.10 continued...
Part B: Journals involving a right of return

Refund liability (I) 75 000
Recognising the receipt from the customer as a refund liability due to
the right of return
Right of return asset (A) Given 21 750

Recognising the cost of the inventory sold as a right of return asset
1 October 20X1

Cost of sales (E) 21 750
Right of return asset (A) 21 750
Recognising the revenue from the customer contract and the cost of sale
expense on the date that the right of return expired without the customer
having returned any of the goods
31 December 20X1 (cumulative journal)
Bank (A) 75 000 x 3,5% x 12/12 2 625


lOMoARcPSD|3314559
Part B (right of return) continued ...
Explanation (for your interest only)
When dealing with a right of return, one is dealing with variable consideration. This is because
one is unsure of how much will be returned and thus how much of the transaction price we will
be able to keep.
Variable consideration is included in the transaction price only to the extent that it is highly
probable that there will be no need for a significant reversal of revenue in the future. This is
referred to as constraining the estimated variable consideration.
In assessing whether there would be a high probability of a significant reversal of cumulative

revenue in the future, IFRS 15 requires us to consider the likelihood and the magnitude of the
reversal. In this regard, it provides, by way of example, a number of factors that may suggest
a high likelihood of a significant reversal (see IFRS 15.57 for the full list).
In this case, Boutique has no past experience on which to predict the possibility of the goods
being returned. Consequently, assuming that the sale amount of C75 000 is considered to be
material, the inability to predict means that Boutique cannot conclude that there is a high
probability that a significant reversal of cumulative revenue will not occur in the future.
Thus Boutique must initially recognise the entire receipt as a refund liability and only recognise
the receipt as revenue when the right of return period expires without the goods having been
returned.
In addition to the recognition of the entire receipt as a refund liability, we will need to recognise
the entire cost of the goods sold as a refund asset, reflecting the right to recover the asset (i.e.
right of return asset).
This refund asset should be measured at the cost of the item sold and adjusted for any costs
expected to be incurred in recovering these goods. No evidence was given of extra costs of
recovery, so we assume these to be nil.

lOMoARcPSD|3314559
Part C: Journals involving a warranty (service-type warranty)

Revenue from customer contract (I) Revenue from sale of product: 64 286
75 000/ (product 75 000 + warranty
12 500) x 75 000
Warranty provision (L) Revenue from sale of warranty: 10 714
12 500/ (product 75 000 + warranty
12 500) x 75 000
Recognising the receipt from the customer: only the portion of the total
transaction price that relates to the sale of the item is recognised as
revenue. The portion that relates to the warranty becomes a
performance obligation forming part of the bundle and must initially be
recognised as a liability
Cost of sales (E) Given 21 750

Recognising the cost of the inventory sold as an expense.
31 December 20X1
Warranty provision (L) 10 714

Recognising the revenue from the sale of the warranty provision when
the warranty expired without the need to replace the item
31 December 20X1 (cumulative journal)
Bank (A) 75 000 x 3,5% x 12/12 2 625


lOMoARcPSD|3314559
Solution 4.11
Journals
Mykonos
30 June 20X4 Debit Credit

Accounts receivable (A) 92 000 x C3.00 276 000
Refund liability (L) 92 000 x (C3.00 – C2.70) 27 600
Revenue from customer contract (I) 92 000 x C2.70 248 400
Transaction with Mykonos:
Recognising the receivable and the related revenue and refund liability,
subject to a potential volume rebate
Trekker’s Grill

Transaction with Trekker’s Grill:
Recognising the receivable and the related revenue and refund liability,
subject to a potential volume rebate
Breezy Teahouse

Bank (A) C800 000 800 000
Refund liability (L) C800 000 – C51 750 748 250
Transaction with Breezy Teahouse:
Recording the receipt from the customer and the related revenue and
refund liability (the difference is recognised as a refund liability because
the customer has currently overpaid – there is no potential rebate
currently expected)

lOMoARcPSD|3314559

Discussion and explanation – for your interest only
General comment:
Revenue recognised is measured based on the transaction price, which in a nutshell, is the
amount to which the entity expects to be entitled in exchange for the goods or services. The
transaction price is thus not always equal to the contract price / invoice price.
There are various factors that we need to consider when determining the transaction price, for
example:
• we would exclude any significant financing components (financing is an issue that requires
discussion in the case of Breezy Teahouse); and
• we would need to carefully measure any consideration that is considered to be variable
(Sunflower Company’s pricing structure explicitly states how the prices would vary
depending on annual volumes purchased, and thus, since the Sunflower Company is unable
to be certain of the annual volume that each of its customers will purchase, the invoiced
price to all three customers will not necessarily equal the transaction price, since each
transaction is affected by what is referred to as variable consideration).
Variable consideration must be included in the transaction price at the estimated amount to
which the entity expects to be entitled, where this estimate must be constrained to an amount
that has a high probability of not causing a significant reversal of revenue in the future.
Mykonos
Mykonos purchased 92 000 units from the Sunflower Company in June 20X4 and is thus, based
on the pricing model, charged C3,00 per unit.
However, Mykonos is expected to purchase 1 112 500 units during the calendar year and thus,
according to the pricing model, which is based on cumulative purchases over the year, the price that
the Sunflower Company expects to charge Mykonos per unit is only C2,70 (in other words, the
Sunflower Company expects to have to provide Mykonos with a rebate some time before year end).
This means that if we recognised revenue based on C3,00 per unit, there would be a high
probability of a significant reversal of revenue by year-end. Thus, although we invoice the
customer at C3,00, we must constrain the invoice price of C3,00 to C2,70 when measuring the
revenue to be recognised from this sale, being the estimated consideration that we expect to be
entitled to and which is not expected to result in a highly probable significant reversal of
revenue in the future.
Thus, the revenue recognised from the sale of the first 92 000 units will be based on a
transaction price of C2,70 per unit even though the actual price charged on the invoice is C3,00
per unit. This C3,00 per unit is used to recognise the receivable. The difference of C0.30 per
unit (C3,00 – C2,70) between the invoice price (i.e. the contract price) and the transaction price
is recognised as a refund liability, representing the expected rebate.
Thus, the journals are as follows:

Recognising the Mykonos receivable and the related revenue and
refund liability, subject to a potential volume rebate

lOMoARcPSD|3314559

Trekker’s Grill
Trekker’s Grill purchased 49 500 units from the Sunflower Company in June 20X4 and is thus,
based on the pricing model, charged C3,00 per unit.
However, Trekker’s Grill is expected to purchase 490 000 units during the calendar year and
thus, according to the pricing model, which is based on cumulative purchases over the year, the
price that the Sunflower Company expects to charge Trekker’s Grill per unit is only C2,88 (in
other words, the Sunflower Company expects to have to provide Trekker’s Grill with a rebate
of C0,12 per unit some time before year end).
This means that if we recognised revenue based on C3,00 per unit, there would be a high
probability of a significant reversal of revenue by year-end. Thus, although we invoice the
customer at C3,00, we must constrain the invoice price of C3,00 to C2,88 when measuring the
revenue to be recognised from this sale, being the estimated consideration that we expect to be
entitled to and which is not expected to result in a highly probable significant reversal of
revenue in the future.
Thus, the revenue recognised from the sale of the first 49 500 units will be based on a
transaction price of C2,88 per unit even though the actual price charged on the invoice is C3,00
per unit. This C3,00 per unit is used to recognise the receivable. The difference of C0,12 per
unit (C3,00 – C2,88) between the invoice price (i.e. the contract price) and the transaction price
is recognised as a refund liability, representing the expected rebate.

Contract liability (L) 49 500 x (C3.00 – C2.88) 5 940
Recognising the Trekker’s Grill receivable and the related revenue
and refund liability, subject to a potential volume rebate
Breezy Teahouse
Breezy Teahouse purchased 17 250 units from the Sunflower Company in June 20X4 and is
thus, based on the pricing model, charged C3,00 per unit.
Breezy Teahouse is expected to purchase 237 900 units during the calendar year. Consequently,
the price expected to be charged to Breezy Teahouse is C3,00 per unit. The transaction price to
be allocated to the sale therefore matches the invoice price (i.e. the contract price). There is thus
no rebate expected and the entire invoiced price may be recognised as revenue.
However, Breezy Teahouse has paid for further units in advance. The amount paid in advance
is allocated to a refund liability account because the Sunflower Company is not yet
unconditionally entitled to the amount.
If the timing of the receipt of consideration differs from the timing of the exchange of goods or
services, either the entity or its customer is said to receive a financing benefit. Where this
occurs, the contract is said to include a financing component. However, we only adjust the
transaction price if the financing component is considered to be a significant financing
component and if the period between the date of the receipt of consideration and the date of
exchange of the goods or services is more than one year.

lOMoARcPSD|3314559

In the case of Breezy Teahouse, however, the financing benefit enjoyed by the Sunflower
Company is ignored when determining the transaction price because the period between the
date of receipt of the consideration and the date of transfer of control over the bouquets is not
more than one year. the receipt of the C800 000 relates to both:
• the sale of Bouquets in June (i.e. the period between the date of receipt of consideration
and the date of delivery of the bouquets is less than a month); and
• future expected sale of bouquets during the remainder of the same year (i.e. the period
between the date of receipt of consideration, being June 20X4, and the date of expected
delivery of the bouquets is less than a year).

Bank (A) C800 000 800 000
Refund liability (L) C800 000 – C51 750 748 250
Recognising the receipt from Breezy Teahouse and the related revenue
and refund liability (no potential volume rebate expected)

lOMoARcPSD|3314559
Solution 4.12
Part A
a) Allocation of transaction price to items within a bundle (calculations)
Allocation of transaction prices of each bundle
Braai bundle Standalone selling price Allocation of TP

Sports Books C50 (50/86 x C78) C45,35
Entertainment books C36 (36/86 x C78) C32,65
C86 C78,00
Winter bundle Standalone selling price Allocation of TP

Cooking book C24 (24/52 x C42) C19,38
History book C28 (28/52 x C42) C22,62
C52 C42,00
NY res bundle Standalone selling price Allocation of TP

Sports book C50,00 (50/144.96 x C126) C43,46
Entertainment book C36,00 (36/144.96 x C126) C31,29
Cooking book C24,00 (24/144.96 x C126) C20,86
History book C28,00 (28/144.96 x C126) C24,34
E-books C 6,96 (6.96/144.96 x C126) C 6,05
C144,96 C126,00
The stand-alone selling price for the E-books was estimated using the entity’s cost plus its
required 16% profit mark-up: Cost: C6 + Profit: (C6 x 16%) = C6.96
b) Allocation of transaction price to items within a bundle (brief explanation)
The allocation of the transaction price within each bundle is performed based on the observable
stand-alone selling prices for each item within the bundle.
However, an observable stand-alone selling price for the E-books was not available (since it is
not sold separately) and thus had to be estimated before we could allocate the transaction price
of the NY resolutions bundle. The stand-alone selling price for the E-books could be estimated
in any number of ways, but IFRS 15 suggests the use of the ‘adjusted market assessment
approach’, the ‘expected cost plus margin approach’ and the ‘residual approach’. In this
situation, we were given the cost and the required mark-up and thus we are able to use the
‘expected cost plus margin approach’.
The fact that the sum of the stand-alone selling prices of the items within each bundle exceeded
the contract price per bundle, meant that the contract price was discounted in each of the three
bundles. Since we are not told that the discount applies to any specific item/s in these bundles,
these discounts were automatically allocated to each item in the bundle when allocating the
transaction price per bundle to each item in the bundle.

lOMoARcPSD|3314559
Solution 4.12 continued …
b) Continued…a more detailed discussion (not required, included for interest only)
Note from the author: The question asked you to ‘briefly explain how each of the three
bundle prices are allocated’ and thus the above explanation should suffice. However, the
extent of your answer in a test situation should always be dictated by the mark allocation. A
slightly more detailed explanation is thus provided for your interest:
IFRS 15 Revenue from Contracts with Customers prescribes how an entity should account for
revenue from contracts with customers. The core principle of IFRS 15 is that an entity should
recognise revenue to depict the transfer of goods/services to customers at an amount that reflects
the consideration to which the entity expects to be entitled in exchange for those goods and
services. In other words, we are talking about how much of the transaction price should be
allocated to each of the goods or services (which would be recognised as revenue when the
relevant performance obligation is satisfied), because the transaction price is defined as the
consideration to which the entity expects to be entitled in exchange for transferring goods and
services to a customer, excluding amounts collected on behalf of third parties.
Marleybone normally sells two types of bundled products (the Braai bundle and the Winter
bundle), but at New Year season, it sells a third type of bundle (the New Year’s resolution
bundle). The Braai bundle has a retail price of C78, the Winter bundle has a retail price of C42
and the New Year’s resolution bundle has a retail price of C126. The retail price of each bundle
is referred to as each bundle’s contract price.
When determining how much of the contract price represents the transaction price, we must
exclude amounts collected on behalf of third parties but must also consider:
• Variable consideration
• Significant financing components
• Non-cash consideration
• Consideration paid to the customer.
In this case, there is no talk of amounts collected on behalf of third parties. Similarly, there is no
significant financing component, non-cash consideration or consideration paid to the customer.
Variable consideration includes items such as possible discounts, which may need to be estimated
and then constrained. In this case, there are discounts involved but these are not variable. Thus,
in this case, each bundle’s contract price also represents its transaction price.
A discount is offered on the sale of each of the three bundles. This is evident since the sum of the
relevant standalone selling prices was lower than the retail price of the bundle.
This discount does not relate to any specific item in the bundle and must thus be allocated to each
of the items within the bundle based on each item’s relative stand-alone selling price. The
allocation of this discount is not done as a separate calculation since it is automatically allocated
to each of the items in the bundle when allocating the transaction price (which is already net of
the discount) of that bundle based on the relative standalone selling prices of the individual items
that make up that bundle.
Since there is no observable stand-alone selling price for the E-books (i.e. it had not previously
been sold separately), this stand-alone selling price must be estimated. The stand-alone selling
price for the E-books could be estimated in any number of ways, but IFRS 15 suggests the use of
the ‘adjusted market assessment approach’, the ‘expected cost plus margin approach’ and the
‘residual approach’. In this situation, we were given the cost and the required mark-up on cost
and thus we are able to use the ‘expected cost plus margin approach’ (Cost: C6 + Profit: (C6 x
16%) = C6.96).

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Part B
Journals in 20X9
Debit Credit
31 January 20X9
Bank (A) 200 x C126 25 200

Revenue – Entertainment book sales 200 x C31,29 (see Part A) 6 258
Revenue – Cooking book sales 200 x C20,86 (see Part A) 4 172
Revenue – History book sales 200 x C24,34 (see Part A) 4 868
Revenue – E-books sales 200 x C6,05 (see Part A) x 60% 726
Contract liability – E-books 200 x C6,05 (see Part A) x 40% 484
Contract liability – Sports books 200 x C43,46 (see Part A) 8 692
Recognising the receipt from customers for 200 New Year’s resolution
bundles, recognising part as revenue and part as a contract liability
depending on the extent to which the performance obligation had been
satisfied

lOMoARcPSD|3314559
Solution 4.13
a) Recognition of the receipt of joining fees and membership fees:
Joining fees
The joining fees charged to members (i.e. customers) are, in effect, related to the administrative
costs of setting up the members on the gym’s systems. The process of setting up the member
on the gym’s system, whilst necessary for the entity to do, does not ‘transfer a good or service
to the customer’. Thus, the joining fee is accounted for as an advance part payment in exchange
for access to the gym facilities. In other words, it means that the joining fee should be
recognised as and when this performance obligation (i.e. access to gym facilities) is satisfied.
See IFRS 15.B49
Since the contract involves providing a member with access to the gym facilities for a 12-month
period (i.e. not just a day-access), this performance obligation will be satisfied over time and
thus any related revenue would be recognised over this same time-period.
It was therefore incorrect to recognise the C30 000 received in joining fees as revenue upon
date of receipt (i.e. it should be recognised over 12 months).
Membership fees
The annual membership fees charged to members (i.e. customers) entitle the members to access
the Fitness gym facilities for a 12-month period. Thus Fitness has a performance obligation that
will be satisfied over time.
Since the performance obligation is satisfied over time, the revenue relating to this performance
obligation must also be recognised over this same time-period.
It was therefore incorrect to recognise the C450 000 received in membership fees as revenue
upon date of receipt (i.e. it should be recognised over 12 months).
Conclusion:
Until the performance obligation was satisfied, the receipt should be recognised as a contract
liability, thus reflecting the entity's obligation to provide services to the customers. This contract
liability should then have been gradually reversed and recognised as revenue as the related
performance obligations were satisfied.

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b) Determining the transaction price
Introduction
First, we determine the contract price and then ascertain whether this needs to be adjusted for
issues such as significant financing components, non-cash consideration, consideration payable
to the customer and variable consideration. In this case, there is no non-cash consideration, no
consideration payable to the customer and no variable consideration. However, we need to
consider whether the financing benefit is a significant financing component.
The contract price
As referred to above, membership of the gym effectively involves two fees:

• a joining fee of C100 (as explained above, this does not provide the customer with a
separate transfer of goods or services in addition to the service of access to the gym facilities
and thus the joining fee is added to the membership fee when determining the transaction
price relating to the contract providing access to the gym facilities); and
• a membership fee of C1 500 (providing access to the gym facilities for 12-months).
The total contract price to secure gym membership is therefore C1 600 (C100 + C1 500).
The existence of a financing benefit
The fact that the fees (i.e. the joining fees and membership fees) are paid by the customer in
advance means that the entity obtains a financing benefit. The effects of financing are taken
into account when determining the transaction price if they are considered to represent a
significant financing component.
However, due to the practical expedient given in IFRS 15, we do not account for the effects of
this financing benefit, whether significant or not, because the period between the date of receipt
and the timing of the transfer of services is not greater than one year. See IFRS 15.63
Furthermore, if the primary purpose of the advance payment was not to obtain financing from
the customer, (e.g. if the advance payment was to simplify the otherwise burdensome
administration of receiving monthly payments and the difference between the promised
consideration and the total cash price if paid on a monthly basis ‘is proportional to the reason
for the difference’), then any benefit received from the financing would not be considered to be
a significant financing component and thus the transaction price would not require adjustment.
See IFRS 15.62
We thus conclude that the transaction price is simply the unadjusted contract price of C1 600.

lOMoARcPSD|3314559
c) Identifying the performance obligations
The contract provides the customer with access to the gym for a period of time. This is clearly
a performance obligation (which will be satisfied over time). However, the existence of a
renewal option must also be considered when identifying the performance obligations and also
when allocating the transaction price.
The membership contract (for which the total contract price is effectively C1 600) enables the
customer to renew his/her contract and is thus said to include an ‘option of renewal’.
Since the optional renewal is offered at a 20% discount off the normal stand-alone selling price,
and assuming this discount is significant, this option is considered to be a material right granted
to the customer.
On the assumption that this right would be considered to be material, and since this material
right is only available to customers that had entered into the original membership contract, this
material right must be accounted for as a separate performance obligation within the original
membership contract. See IFRS 15.B40
This means that the contract effectively contains two performance obligations:
• PO#1: Access: to provide access to the gym facilities for 12-months
• PO#2: Option: to provide discount of 20% if the contract is renewed.
Note:
The revenue from the second performance obligation would be recognised when the services
are transferred or when the option expires. See IFRS 15.B40

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d) Allocation of the transaction price
Introduction
Having two performance obligations within the contract (providing gym access and the option
of renewal) means that the transaction price will need to be allocated between these two
performance obligations. This is normally done based on their relative stand-alone selling
prices. See IFRS 15.B42
However, since the renewal entitles a customer to services that are similar to the services offered
in the original contract and on the same terms as the original contract, IFRS 15 provides an
alternative method of accounting for the transaction price (i.e. instead of the normal method of
allocating the transaction price to the performance obligations based on their relative stand-
alone selling prices). See IFRS 15.B43
Each of these two methods is explained below.
Normal method (IFRS 15.B42)
Each of the two stand-alone selling prices (SASP) would need to be determined:
• The SASP for PO # 1 (access for 12 months) is C1 600; but
• The SASP for PO #2 (the option to renew) would need to be estimated.
This estimate would reflect the discount that the customer would enjoy if he/she exercised
the option, adjusted for the likelihood that it would be exercised: C1 500 x 20% x 55% =
C165. See IFRS 15.B42
We would then need to allocate the transaction price of C1 600 to each of these performance
obligations based on these stand-alone selling prices.
The allocation would be as follows:
Stand-alone Transaction price Allocation of TP based on SASP:

selling prices (300 members)
PO#1 C1 600 Calculation (a) C435 127 C480 000 x (1 600 ÷ 1 765)
PO#2 165 Calculation (b) 44 873 C480 000 x (165 ÷ 1 765)
C1 765 C480 000 C1 600 x 300 members
a) Joining fee: C100 + Membership fee: C1 500 = C1 600

b) Discount on renewal of membership: C1 500 x 20% discount x 55% likelihood = C165
Alternative method (IFRS 15.B43)
Since the renewal entitles a customer to services that are similar to the services offered in the
original contract and on the same terms as the original contract, we may, as a matter of practical
expediency, not bother determining the two stand-alone selling prices (i.e. the SASP for the
provision of access to gym facilities for 12 months and the SASP for the option to renew) and
then allocating the transaction price to each.
Instead, we are allowed to simply calculate the total expected consideration and the total
expected services to be provided and then allocate this total expected consideration to these
total expected services in a way that reflects the progress towards complete satisfaction of the
total expected services.

lOMoARcPSD|3314559
d) continued …
In this case, we would estimate the total expected transaction price by adding to the initial
C480 000 received (i.e. joining fees: C30 000 + membership fees: C450 000), the expected
extra consideration from the anticipated renewals of C198 000 (membership fees: C450 000 x
55% x 80% - or see alternative calculations below).
Total expected
consideration
Year 1 C480 000 Calculation (a)
Year 2 C198 000 Calculation (b)
C678 000
a) Consideration from the original contract:
(300 members x Joining fee: C100) + (300 members x Membership fee: C1 500) = C480 000
b) Consideration from the expected renewals:
(300 members x 55% x Membership fee: C1 500 x 80%) = C198 000
We would then recognise this total expected consideration as revenue over the two years using an
appropriate measure of progress. In this case there is no evidence to suggest that the cost of
providing access to the gym facilities in the second year would differ from the first year and thus a
simple time-based measure of progress is considered acceptable (i.e. straight-lining over 2 years).
Allocation of Allocation based on measure of progress:

total expected Total revenue x measure of progress to date – revenue recognised previously
consideration
Year 1 C339 000 C678 000 x 12/24 months – Recognised in a prior year: C0
Year 2 C339 000 C678 000 x 24/24 months – Recognised in a prior year: C339 000
C678 000

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e) Journals
Overview
Since the renewal option provided the customer with goods / services similar to the goods/
services in the original contract and on the same terms as the terms in the original contract,
IFRS 15 allows for two different methods of allocation of the transaction price: the normal
method and the alternative method. The journals that are processed will be affected by which
method was chosen. Thus, the journals for each of these two methods are presented separately
below.
The journals based on the normal method of allocation (see part d)
The accountant was incorrect to recognise the total receipts of C480 000 as revenue on date of
receipt. Instead, these receipts should have initially been recognised as a contract liability, thus
reflecting Fitness’s obligation to either satisfy the performance obligations or to refund the
money. Then, assuming that we used the normal method of allocating the transaction price,
revenue of C435 127 should have been recognised during the course of 20X8, leaving a balance
of C44 873 (C480 000 – C435 127) in the contract liability account (see part (d) for workings).
This balance of C44 873 reflected the obligation to provide a discount on any renewals.
This remaining contract liability would then be recognised as revenue as the options were
exercised or expired (i.e. on 31 January 20X9).
The journals should thus have been as follows (for practical reasons, these journals are
presented as cumulative journals for the year):
Debit Credit
On receipt during 20X8
Bank (A) 30 000 + 450 000 480 000
Receipt from customers: membership fees of C450 000 plus joining
fees of C30 000
By the end of 20X8

Contract liability (L) Working in part (d) 435 127
Revenue from customer contracts (I) 435 127
Recognition of revenue: allocating TP to POs using SASPs
By the end of 20X9 (assuming renewals were as expected)

Bank 300 x 55% x C1 500 x 80% 198 000
Contract liability (L) CL bal: 480 000 – 435 127 44 873
Revenue from customer contracts (I) 198 000 + 44 873 242 873
Recognition of revenue: allocating TP to POs using SASPs
Note: The cumulative revenue recognised is C678 000
The journals based on the alternative method of allocation (see part d), are presented on the
next page….

lOMoARcPSD|3314559
e) Journals continued …
The journals based on the alternative method of allocation (see part d)
The accountant was incorrect in recognising the total receipts of C480 000 as revenue on date
of receipt. Instead, these receipts should have initially been recognised as a contract liability,
thus reflecting Fitness’s obligation to either satisfy the performance obligations or refund the
money. Then, assuming that we used the alternative method of recognising the transaction
price as revenue based on a measure of progress, revenue of C339 000 should have been
recognised during the course of 20X8, leaving a balance of C141 000 in the contract liability
(C480 000 – C339 000) (see part (d) for workings).
This contract liability would then be recognised as revenue over the remaining year (20X9) as
the second year of gym access was provided to those original members who decided to renew
their contracts.
The journals should thus have been as follows (for practical reasons, these journals are
presented as cumulative journals for the year):
Debit Credit
On receipt during 20X8
Bank (A) 30 000 + 450 000 480 000
Receipt from customers: membership fees of C450 000 plus joining
fees of C30 000
By the end of 20X8

Contract liability (L) Working in part (d) 339 000
Revenue from customer contracts (I) 339 000
Recognition of revenue: allocating the total expected consideration
to the total expected services to be provided, recognising the
revenue using a time-based measure of progress
By the end of 20X9 (assuming renewals were as expected)

Bank C1 500 x 80% x 300 x 55% 198 000
Contract liability (L) CL bal: 480 000 – 339 000 141 000
Revenue from customer contracts (I) 198 000 + 141 000 339 000
Recognition of revenue: allocating the total expected consideration
to the total expected services to be provided, recognising the
revenue using a time-based measure of progress
Income from non-members (for your interest only as the question only asked about the joining
fees and membership fees)
The income from the non-members represents consideration that would have been received in
exchange for immediate access to the gym. As such, the performance obligations related to the
non-members would be classified as ‘satisfied at a point in time’ and thus revenue from these
performance obligations (being the service of providing access to the facilities) would be
recognised at the same time that the access was provided.
Since the access would have been provided at the same time as the consideration would have
been received, the immediate recognition of the receipt as revenue is acceptable.

lOMoARcPSD|3314559
Solution 4.14
Adaptation:
Please adjust the required as follows:
a) Discuss whether a ‘contract with a customer’, as defined, exists in Contract A and B.
IFRS 15 Revenue from Contracts with Customers prescribes how an entity should account for
revenue from contracts with customers.
The core principle of IFRS 15 is that an entity should recognise revenue in a way that:
• ‘depicts the transfer of promised goods or services to customers
• in an amount that reflects the consideration to which the entity expects to be entitled
• in exchange for those goods and services’. IFRS 15.2
In order to fulfil this principle, an entity is required to apply the following 5 steps to each
contract with a customer:
Step 1 – identify a contract(s) with a customer
Step 2 – identify the performance obligations inherent in the contract
Step 3 – determine the transaction price
Step 4 – allocate the transaction price to the performance obligations in the contract
Step 5 – recognise revenue when the entity satisfies a performance obligation
We will first discuss how to account for revenue from Contract A and then how to account for
revenue from Contract B.

lOMoARcPSD|3314559
a) Discuss whether Contract A represents a ‘contract with a customer’
Before revenue may be accounted for in terms of IFRS 15, we must first establish if there is a
contract with a customer.
With this in mind, we ask ourselves:

• Is there a customer?
A customer is defined as:
 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. IFRS 15 Appendix A
• Is there a contract?
A contract is defined as:
 an agreement between two or more parties
 that creates enforceable rights and obligations. IFRS 15 Appendix A
Furthermore, a contract, as defined, is said to exist only if it meets all of the following five
criteria:
a) If it is approved by all parties who are also committed to fulfilling their obligations;
b) If each party’s rights to the goods and/or services are identifiable;
c) If the payment terms are identifiable;
d) If the contract has commercial substance; and
e) It is probable that the entity will collect the consideration to which it expects to be
entitled. See IFRS 15.9
Application of the above theory to Hansa Shipping (HS)
Hansa Shipping (HS) meets the definition of a customer since:

• Hansa Shipping (the party) signed a contract with Mocca Installation (the entity)
• whereby Mocca Installation would construct a factory floor (goods and services)
• which is something that Mocca Installation provides as part of its ordinary activities (it
specialises in industrial installation projects)
• in exchange for consideration of C22 400 000 (the contract price) plus a potential bonus of
C2 240 000.
The Hansa agreement meets the definition of a contract:

• There is an agreement between two or more parties: Mocca Installation and Hansa Shipping
have signed a contract; and
• The contract creates rights and obligations, which are enforceable:
- Mocca Installation promised to install a factory floor (i.e. this is Mocca Installation’s
obligation and Hansa Shipping’s right); and that
- Hansa Shipping promised to deliver consideration of C22 400 000 (and possibly a
bonus of C2 240 000) in return (i.e. this is Hansa Shipping’s obligation and Mocca
Installation’s right)
- The agreement was documented in a contract (i.e. suggesting enforceability).

lOMoARcPSD|3314559
a) continued…
The 5 criteria proving that the contract exists are also all met:
• Both parties have approved the contract since they have both signed the contract.
Furthermore, it is assumed that there is full commitment to fulfilling their respective
obligations since Mocca Installation is in the business of providing industrial installations
and thus it would be unlikely that they would not be committed to completing the contract
and there is no evidence to suggest that Hansa Shipping would not be committed to paying
the required consideration.
• Hansa Shipping’s right to a completed factory floor is stipulated in the contract and thus its
rights are said to be identifiable.
• The contract stipulates payment terms because it states that Hansa Shipping must pay
C22 400 000 (fixed consideration) for the completed factory floor, plus a further
C2 240 000 (variable consideration) if the factory floor is completed within 2 years. The
contract also stipulates that Hansa Shipping is required to pay this consideration by way of
monthly progress payments, with the final bonus of C2 240 000 being due and payable on
completion of the factory floor, assuming it was completed within the stipulated 2-year
period.
• One concludes that a contract has commercial substance if the risk, timing or amount of the
entity’s future cash flows is expected to change as a result. We therefore conclude that the
contract has commercial substance because Mocca Installation expects to receive cash in
the amount of C22 400 000 (and possibly an additional C2 240 000), evidence that it
expects its future cash flows to change (i.e. the contract has commercial substance).
• When assessing whether the consideration to which Mocca Installation expects to be

entitled is probable of being collected, we must only consider the customer’s ability and
intention to pay that amount when it is due.
There is no evidence suggesting that Hansa Shipping will either be unable to pay or have
no intention of paying as and when the progress payments fall due. Thus, we conclude that
the consideration to which Mocca Installation expects to be entitled is probable of being
collected.
For your interest:

If you had been asked to discuss whether contract B involved a ‘contract with a customer’, the
answer would have been largely the same. However, the wording of the question also allowed
us to assume that the cash selling price of C2 100 000 is simply the cash selling price of similar
equipment sold by other entities (i.e. other than Mocca), rather than the price at which Mocca
sells such equipment. In this case, one might have concluded that, since Mocca specialises in
industrial installation projects, the sale of idle equipment was incidental to its ordinary
activities. If one follows this train of thought, (i.e. that the sale was not part of Mocca’s ordinary
activities), we would have concluded that the definition of a customer is not met and thus that
the sale should not be accounted for in terms of IFRS 15. In this case, it would be accounted
for as a ‘profit or loss on sale of an item of property, plant and equipment’ and presented as
income rather than as ‘revenue from contracts with customers’.

lOMoARcPSD|3314559
b) The performance obligations in Contract A
Identifying the performance obligations
A performance obligation is a promise to transfer:

• a distinct good/service (or bundle thereof); or
• a series of distinct goods or services that are substantially the same and that have the same
pattern of transfer to the customer.
The process of completing the installation of the factory floor involves the transfer of a vast
array of goods and services:
• various goods (e.g. bricks, mortar, metal work etc); and
• various services (e.g. services of builders, tilers etc).
The question is thus whether these various goods and services are distinct supplies that should
thus be accounted for as separate performance obligations or whether the completed factory
floor is a single performance obligation.
Goods/services are considered to be distinct if they meet both the following criteria –
• The good or service is capable of being distinct; and
• The good or service is distinct is the context of the contract.
A good or service is considered to be capable of being distinct if it is able to generate economic

benefits for the customer, either on its own or in combination with readily available resources.
• These resources do not need to be currently owned by the customer but must simply be
resources that the customer could obtain if desired (resources are considered to be readily
available if they are sold separately by the entity or any other entity).
• Goods or services are considered capable of generating economic benefits for the customer
if the customer is able to use or consume them or is able to sell them for a price greater than
scrap value.
In this case, it appears possible to argue that each of the supplies is able to generate
economic benefits for the customer because the customer could no doubt either sell the
goods or services for a price greater than scrap (e.g. assuming that, for example, only the
raw materials are transferred, these could probably be sold by the customer at an amount
greater than scrap).
Alternatively, the customer could no doubt use them (e.g. the raw materials could be used
by the entity to complete the factory floor using another installation company or could even
be used in another building).
P.S. One can also deem goods or services to be able to generate economic benefits for the
customer if the entity (Mocca Installation) regularly sells such goods or services separately
(however, this does not appear to be the case in this instance).
A good or service is distinct in the context of the contract if the promise to transfer it is
separately identifiable in the contract. There are no sub-criteria to be met in order to prove this
criterion but IFRS 15 gives examples of when a good or service would not be considered distinct
in context of the contract. These examples include when the good or service:
• is used as an input to create an output promised in the same contract; or
• is used as an input to modify an output promised in the same contract; or
• is highly dependent on another good or service promised in the same contract (e.g. if it is
not possible to buy the one without the other).

lOMoARcPSD|3314559
b) continued…
In this case, it is argued that the various goods (e.g. raw materials of bricks and flooring supplies
etc) and the services (e.g. the labour provided by builders etc) are not distinct in the context of
the contract because the most significant and core promise in the contract is to install a factory
floor, rather than to promise to supply individual raw materials and services. In other words,
the raw materials and services that will be transferred will simply be used as an input to create
the promised output (the factory floor).
Thus, the various goods (raw materials) and services (labour) necessary to install the factory
floor are not individually distinct because, although they may be argued to be capable of being
distinct, they are not distinct in the context of the contract. Thus, these goods and services are
bundled together into a single performance obligation. In other words, the contract contains one
performance obligation: the installation of the factory floor.
Are the POs satisfied at a point in time or over time
Revenue from a contract with a customer is recognised when the entity satisfies its performance
obligations by transferring the promised goods or services to a customer.
Goods or services are deemed to have been transferred once a customer has obtained control of
those goods or services.
Control over the goods or services (please note that goods and services are both considered to
be assets, ‘even if only momentarily, when they are received and used’ – see IFRS 15.33) is
evidenced by the ability to do the following (or the ability to prevent others from doing so):
• direct how the asset will be used; and
• obtain substantially all of the remaining benefits from that asset. IFRS 15.33 reworded
Control can be transferred at a point in time or over time and thus each performance obligation
is classified at contract inception as either:
• a performance obligation satisfied over time; or
• a performance obligation satisfied at a point in time.
We first assess whether the PO is satisfied over time – if it is found to not be a ‘PO satisfied
over time’, then we conclude that it is a ‘PO satisfied at a point in time’.
A performance obligation is considered to be a satisfied over time if the answer to any one of
the following three criteria is yes:
• Criterion one – IFRS 15.35(a):
Does the customer receive the asset and consume its benefits at the same time that the entity
performs its obligations?
• Criterion two – IFRS 15.35(b):
If the entity is creating or enhancing an asset:
- does the customer get control of the asset as it is being created or enhanced?
• Criterion three – IFRS 15.35(c):
If the entity is creating or enhancing an asset:
- does the asset have no alternative use for the entity; and
- does the entity have an enforceable right to payment for performance completed to
date?

lOMoARcPSD|3314559
b) continued…
The answer to criterion three (IFRS 15.35(c)) is yes because:

• Mocca has no alternative use for the property.
In assessing this criterion, we should consider whether there are any contractual restrictions
or practical limitations that would prevent Mocca’s ability to readily redirect the asset to
another customer, but we should not consider whether Mocca could legally direct the asset
to another customer in the event that Hansa Shipping terminated the contract.
Due to practical reasons, it is not able to direct (e.g. sell) the asset (i.e. the factory floor) to
another customer because it appears that it is being constructed in Hansa Shipping’s
privately-owned building. Thus, Mocca has no alternative use for the asset.
• Mocca has an enforceable right to payment for performance completed to date.
The terms of the agreement stipulate that Mocca is entitled to progress payments calculated
based on the percentage of work completed to date multiplied by the contract price of
C22 400 000. Furthermore, if the customer fails to make these payments on due date,
Mocca will be entitled to 100% of the contract price if it completes the contract.
Since these payments are calculated based on the contract price (i.e. including profit), we
conclude that Mocca has an enforceable right to payment for performance completed to
date (please note: if these payments had been calculated in a manner that would simply
reimburse Mocca for its costs incurred to date, then this criterion would not have been met).
Since both sub-criteria in criterion 3 (IFRS 15.35 (c)) are met, we conclude that the installation
of the factory floor is a performance obligation that is satisfied over time.
Measurement of progress towards complete satisfaction (not required):
Since it is considered to be a performance obligation that is satisfied over time, Mocca will need
to measure its progress towards complete satisfaction of the said performance obligation.
Progress may be measured using either an:
• input method; or
• output method.
The input method measures progress based on the entity’s efforts to date (e.g. costs incurred as
a percentage of the total costs expected to be incurred) whereas the output method measures
progress based on the value that the customer has obtained to date (e.g. work certified as a
percentage of the total work to be certified). The output method is considered to be superior to
the input method, but Mocca is free to choose any method.

lOMoARcPSD|3314559
c) The performance obligations in Contract B

The transfer of the equipment is a transfer of a distinct good and thus the contract involves only
one single performance obligation: the transfer of the equipment.
Are the POs satisfied at a point in time or over time
Revenue from a contract with a customer is recognised when the entity satisfies its performance
obligations by transferring the promised goods or services to a customer.
Goods or services are deemed to have been transferred once a customer has obtained control of
those goods or services.
Control over the goods or services is evidenced by the ability to do the following (or prevent
others from doing so):
• direct how the asset* will be used; and
• obtain substantially all of the remaining benefits from that asset*. IFRS 15.33 reworded
*: please note that goods and services are both considered to be assets, ‘even if only
momentarily, when they are received and used’ – see IFRS 15.33.
In this situation, it is clear that the transfer of the equipment is a performance obligation satisfied
at a point in time and thus the revenue from the customer contract of C2 100 000 must be
recognised in January 20X5 when the equipment is transferred to the customer.

lOMoARcPSD|3314559

d) Transaction price
Answer
The transaction price for:

• the Hansa contract is R24 640 000.
• the Molucca contract would either be C2 688 000, if the financing effects were considered
insignificant, or C2 100 000, if the financing effects were considered significant.
Determining the transaction price
The transaction price in a contract with a customer is the consideration that the entity expects
to be entitled to in exchange for the transfer of the promised goods and services.
The determination of the transaction price involves assessing whether the contract price includes:
• fixed consideration and/ or variable consideration;
• a significant financing component;
• non-cash consideration; and /or
• consideration payable to the customer.
Contract A: Hansa Shipping
In the case of Hansa Shipping, the contract price does not involve a financing component, non-
cash consideration or consideration payable to the customer but it does involve a mixture of
fixed and variable consideration. This is explained below.
The contract price has been determined at C22 400 000 together with a performance bonus of
C2 240 000 if the construction is completed within a 24-month period. The possibility of a bonus
means that the contract includes not only fixed consideration but also variable consideration. Variable
consideration should be included in the determination of the transaction price at the:
• estimated amount that the entity expects to be entitled to, which has been
• suitably constrained to an amount that has a high probability of not causing a significant
reversal in the future.
When estimating the amount to which the entity expects to be entitled, we may use:
• the ‘expected value’ method; or
• the ‘most likely amount’ method. See IFRS 15.53
The expected value method is most suitable for situations where there are many possible
outcomes whereas the ‘most likely amount’ method is generally most suitable for situations
where there are only a few possible outcomes (and ideal for situations where there are only two
possible outcomes). See IFRS 15.53
There are only two possible outcomes in this situation:

• Mocca Installation completes it within 24 months, in which case it will earn the bonus
(bonus of C2 240 000); or
• Mocca Installation does not complete it within 24 months, in which case it will not earn the
bonus (bonus would be nil).
Since there are only two possible outcomes, we use the ‘most likely amount’ method. Since
Mocca Installation has estimated that there is a 95% chance that the bonus criteria will be met
and thus a 5% chance that the bonus criteria will not be met, we estimate the variable
consideration to be C2 240 000 (on the basis that it has the higher likelihood of occurring).

lOMoARcPSD|3314559
d) continued…
This estimate must then be constrained to an amount that has a high probability of not causing
a significant reversal in the future. Since this is a simple situation involving only 2 possible
outcomes, we conclude that, based on the high probability (95%) of this outcome occurring,
there is a high probability of there being no significant revenue reversal in future.
For your interest: Allocating Hansa’s transaction price (not required)
Since there is only one performance obligation (the floor installation), the entire transaction
price is allocated to this single performance obligation.
Conclusion
The contract price is C22 400 000 but the transaction price is C24 640 000 (i.e. including the
variable consideration of C2 240 000).
For your information (not required)

The construction contract with Hansa meets the definition of a contract and Hansa meets the
definition of customer (part a). Thus, the transaction falls within the ambit of IFRS 15. The
contract includes one performance obligation (part b): to install a factory floor. The entire
transaction price is thus allocated to this one performance obligation. This performance
obligation is classified as satisfied over time. Mocca should thus recognise the transaction price
of C24 640 000 as revenue using an appropriate measure of progress. An appropriate measure
of progress could be either an input or output method. It is suggested that a suitable method to
measure progress may be costs incurred to date as a percentage of total expected costs.
Contract B: Molucca Coffee Merchants
The contract price has been determined at C2 688 000, being fixed consideration – it does not
involve variable consideration. It also does not include non-cash consideration or consideration
payable to the customer. However, it does involving financing since the timing of the transfer
of the goods to the customer (the equipment) is not the same as the timing of the receipt of the
consideration from the customer.
In this case, the goods are transferred to the customer before the customer makes the necessary
payments. This means that the Mocca is providing finance to the customer, Molucca (i.e. it is
the customer that is receiving the financing benefit).
The effect of providing the customer with a financing benefit should be separated from the
transaction price and recognised as revenue from interest (i.e. instead of as revenue from the
customer contract) if the effect thereof is significant.
As a practical expedient, IFRS 15 allows Mocca to ignore the effects of financing if the period
between the date on which the goods are transferred and the date on which the consideration is
payable is a year or less.
Since the period between the transfer of the equipment and the final payment is more than a
year (in this case, the period is three years), this practical expedient is not available to Mocca.
Thus Mocca must decide if the effect of the financing is considered to be significant.
If Mocca concludes that the effect of the financing is considered to be insignificant, then the
transaction price would be determined to be C2 688 000.

lOMoARcPSD|3314559
d) continued…
However, if Mocca concludes that the effect of the financing is considered to be significant,
then the transaction price would be determined by excluding the financing component. This
means that the transaction price would thus be measured at the cash selling price of C2 100 000.
The difference between the contract price of C2 688 000 and the transaction price of C2 100 000
will be recognised as interest income using the effective interest rate (IFRS 9).
For your interest: Measurement of interest income (not required)
In order to recognise the difference as interest, the implicit interest rate needs to be calculated
for the transaction. The implicit interest rate is calculated as follows –
N=3
PV = C2 100 000
PMT = C896 000
FV = C0
Comp I = 13.4368%
The effective interest rate table would be as follows:
Year Opening balance Interest at 13,4368% Instalment Closing balance

20X5 2 100 000 (1) 282 173 (2) (896 000) (3) 1 486 173
(2)
20X6 1 486 173 199 694 (896 000) 789 867
(2)
20X7 789 867 106 133 (896 000) 0
(2 688 000)
(1) The C2 100 000 is recognised as revenue from the customer contract in January 20X5 (IFRS 15).
(2) The interest of C282 173, C199 694 and C106 133 is recognised as revenue from interest in each
of the three years, using the above effective interest rate method (IFRS 9).
(3) The annual instalment = C2 688 000 / 3 instalments = C896 000.
For your interest: Allocation of Molucca’s transaction price & journals (not required)
Since there is only one performance obligation (the transfer of the equipment), the entire
transaction price is allocated to this single performance obligation.

Accounts receivable (A) 2 100 000
Revenue from customer contract (I) 2 100 000
Recording the sale of the equipment on deferred payment terms
31 December 20X5
Accounts receivable (A) C2 100 000 x 13.4368% 282 173
Revenue from interest (I) 282 173
Recording interest income using the effective interest rate
Bank (A) 896 000

Accounts receivable (A) 896 000
First instalment paid by customer – C2 688 000/3

lOMoARcPSD|3314559
Solution 4.15
a) Journals – sale of goods with a right of return
01 March 20X9 Debit Credit
Accounts receivable (A) Full invoice amount 307 800

Current tax payable: VAT VAT: 307 800 / 1.14 x 0.14 37 800
Accounts receivable: unearned interest (-A) TP excl VAT – PV of TP excl VAT 38 519
Revenue from customer contract (I) PV of TP excl VAT x 95% 219 907
Refund liability (L) PV of TP excl VAT x 5% 11 574
Recognising the sale of the goods on deferred payment terms and with
a right of return
Cost of sales (E) Balancing: 135 000 – 6 345 128 655

Right of return asset (A) 135 000 x 5% x 94% 6 345
Inventory Given 135 000
De-recognition of inventory and recognition of right of return asset and
cost of sales
Explanation of journals
1. Accounts receivable: C307 800
The receivable account is debited with the full amount payable.
2. VAT: C37 800
The invoice price of C307 800 includes VAT at 14%, which is an amount collected on behalf
of third parties. The transaction price is defined as excluding amounts collected on behalf of
third parties and thus the VAT is excluded when determining the transaction price. This VAT
is thus not recognised as revenue but instead, is recognised as a current liability, payable to the
third party (tax authorities).
The VAT portion is calculated as: C307 800 / 1.14 x 0.14 = C37 800
3. Financing component: C38 519
Then we need to consider the contract duration of 24 months (measured from delivery date to
payment date). The practical expedient of ignoring the financing component is only available
if the financing period is 12 months or less. Since the financing period is 24 months in this
example, the practical expedient relating to the financing component is not available and hence
the cash flows need to be discounted at an appropriate discount rate (given as 8% pa).
The transaction price (excl VAT) of C270 000 (C307 800 x 100% / 114%) is thus reduced to
the present value of C231 481 discounted at 8% for 2 years.
N = 2; FV = C270 000; I = 8%; Comp PV = C231 481
Of this present value of C231 481, 95% will be immediately recognised as ‘revenue from
customer contracts’ and 5% will be recognised as a ‘refund liability’ – see below. The 5%
refund liability will subsequently be recognised as ‘revenue from customer contracts’ if the
goods are not returned after 3 months. The difference between the transaction price of C270 000
and the PV of C231 481 will be recognised as ‘revenue from interest’ using the effective interest
rate method.

lOMoARcPSD|3314559
a) continued …
4. Right of return – effect on revenue and refund liability

The goods sold can be returned for a full refund. This means that the transaction price
effectively includes variable consideration. The 5% expected return reduces the transaction
price at which revenue is initially recognised and will be accounted for as a refund liability
(IFRS 15.55 & IFRS 15.B21-23). In other words, the 5% expected return is excluded from the
transaction price and is recognised as a refund liability instead of as revenue. Thus the effect of
the right of return means that we recognise:
• Revenue: PV of ex VAT TP: 231 481 x Not expected to be returned: 95% = 219 907
• Refund liability: PV of ex VAT TP: 231 481 x Portion expected to be returned: 5% = 11 574
5. Right of return – effect on cost of sales and right of return asset
In addition to recognising the refund liability, we need to recognise a refund asset to reflect the
inventory that we expect to receive back into stock. This is explained as follows:
We expect that 5% of the inventory could be returned and thus the possible return of inventory
is initially recognised as a ‘right of recovery asset’ (also called a ‘right of return asset’) instead
of as a ‘cost of sales expense’.
The cost of the inventory expected to be returned is: 5% x cost of inventory: C135 000 = C6 750
However, we are told that the returned goods will have suffered a 6% loss of value as a
consequence of the returns, (e.g. possibly due to the need to re-package/clean-up/re-paint the
inventory etc).
The expected loss of value is calculated as: 6% x C6 750 = C405
The net value of the inventory expected to be returned is thus calculated as: C6 750 – C405 = C6 345
The net value of the asset is the amount at which the right of recovery asset (or right of return
asset) must be measured (C6 345) and the residual cost of inventory is then expensed to cost of
sales (total cost of inventory: 135 000 – right of return asset: 6 345 = C128 655)
Another way of calculating the cost of sales of C128 655, is that it is the sum of:
• Cost of inventory sold and not expected to be returned: 95% x C135 000 = C128 250; plus
• Cost of fixing the returned inventory: C405.

lOMoARcPSD|3314559
b) Journals relating to the return of goods
i) No goods are returned within the 90-day period
31 May 20X9 Debit Credit

Derecognising the entire refund liability and recognising it as revenue
on expiry of the right to return when goods had still not been returned

Derecognising the entire right of return asset and recognising it as cost
of sales on expiry of the right to return when goods had still not been
returned
ii) 5% of the goods are returned within the 90-day period

Derecognising the entire refund liability and recognising it as a
reduction in the receivable when goods are returned
Inventory (A) 6 345

Derecognising the right of return asset and recapitalising as inventory
when goods are returned
iii) 3% of the goods are returned within the 90-day period

Revenue from sale of goods 11 574 / 0.05 x 0.02; or 4 630
Balancing: 11 574 – 6 944
Accounts receivable (A) 11 574 / 0.05 x 0.03; or 6 944
PV 231 481 x 3%
Derecognising a portion of the refund liability (6 944) and reducing the
receivable by this amount when goods are returned and derecognising
the remaining refund liability (4 630) and recognising this as revenue
when right to return period expires without the return of goods
Cost of sales (A) 6 345 / 0.05 x 0.02 2 538

Inventory (A) 6 345 / 0.05 x 0.03 3 807
Derecognising the right of return asset (6 345) and recognising part of
this as cost of sales (2 538) to the extent that goods were not returned
and part as a recapitalisation as inventory (3 807) to the extent that
goods were returned

lOMoARcPSD|3314559
b) Continued …
iv) 7% of the goods are returned within the 90-day period

Revenue from sale of goods PV 231 481 x (7% - 5%) 4 630
De-recognition of the refund liability when goods are returned and
reducing the receivable (in respect of the 5% expected return) and
reducing the previously recognised revenue and reducing the receivable
(in respect of the unexpected further return of 2%)
Inventory (A) 135 000 x 5% x 94% 6 345

Right of return asset (A) 6 345
Inventory (A) 135 000 x 7% x 94% - 6 345 2 538
Cost of sales 2 538
De-recognition of right of return asset and recapitalisation as inventory
(in respect of the 5% expected return) and reducing the previously
recognised cost of sales and recapitalisation as inventory (in respect of
the extra unexpected 2% returns)

lOMoARcPSD|3314559
Solution 4.16
a) Definitions
Definition: Performance obligation:
IFRS 15 defines a performance obligation as:

‘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
pattern of transfer to the customer.’ IFRS 15 Appendix A
Definition: Distinct
Goods/services are considered distinct if they meet both the following criteria:
• The good or service must be capable of being distinct:
‘the customer can benefit from the good or service on its own or together with other
resources that are readily available to the customer’ IFRS 15.27(a)
A good or service is considered to be capable of being distinct if it is able to generate

economic benefits for the customer by the customer using it, consuming it or selling it at a
price greater than scrap. See IFRS 15.28
• The good or service must be distinct is the context of the contract:

The entity’s promise to transfer the good/service must be ‘separately identifiable from other
promises within the contract’. IFRS 15.27(b)
As a guideline, IFRS 15 mentions certain factors to be considered, in deciding whether or

not a specific promise to transfer goods or services is separately identifiable from other
promises in the context of the contract.
The following are the examples given of goods or services promised in terms of a contract
which would not be considered separately identifiable and would thus not be distinct in the
context of a contract. Goods or services that are:
- used as an input to create an output within the same contract: if the entity is using the
goods or services as an input to create some other promised item for the customer
within the same contract, then that good or service being used is considered to be part
of this other promised item (i.e. it is merely an input to create an output);
- used as an input to modify an output within the same contract: if the entity is using the
goods or services to significantly customise another good or service promised within
the same contract, then that good or service is considered to be part of the customised
good or service (i.e. it is merely an input to modify an output);
- highly dependent on another good or service promised within the same contract: for
example, if it is not possible for the customer to buy the one without the other, then
these goods or services are so interdependent that they cannot be considered separately
identifiable from one another. See IFRS 15.29
Comment:
The extent of your answer in a test situation always depends on the mark allocation. Depending
on the marks awarded to the answer to this question.

lOMoARcPSD|3314559
b) Steps 2 – 4 of the revenue recognition process
Step 2: Identifying the performance obligations
The contract between TerraDrive and SolidState offers three performance obligations:
• The supply of hard drives,
• The installation of hard drives; and
• The system maintenance.
Explanation:
The above three goods and services are considered to be separate performance obligations since
each is capable of being distinct and each is distinct in the context of the contract:
• The hard drives, installation and maintenance are each capable of being distinct for the
following reasons:
 SolidState could use the hard drives or, since there is a market for hard drives, it could
no doubt sell it for an amount greater than scrap;
 The installation of the hard drives will enable SolidState to use the hard drives thus
improving business processes; and
 The maintenance of the hard drives will enable the hard drives to continue to be used
over the period of the maintenance (lack of maintenance may reduce its ability to be
used).
 Furthermore, according to IFRS 15, the mere fact that TerraDrive sells each of these
three goods or services separately (there are separate stand-alone prices for each),
allows us to assume that each of these is capable of generating economic benefits for
the customer.
• The hard drives, installation of the hard drives and maintenance are each distinct in the
context of the contract for the following reasons:
 The fact that one can purchase the hard drives from TerraDrive without being forced to
also have it installed by TerraDrive means that that the hard drives and the installation
of the hard drives are not that interdependent that we cannot identify them separately.
 Similarly, the maintenance of the hard drives is merely ‘popular’ with TerraDrive’s
customers and is thus not a requirement. Thus, the maintenance is not considered to be
highly dependent on either the installation of the hard drives or the supply of the hard
drives.
 None of these 3 goods or services was used as an input to create or modify a single
output promised in the same contract.

lOMoARcPSD|3314559
b) continued …
Step 3: Determining the transaction price
The transaction price is C2 000 000.
Explanation:
TerraDrive has specified a contract price of C2 000 000. However, the transaction price does
not always equal the contract price.
The transaction price in a contract with a customer is defined as:

• ‘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. Appendix A
The determination of the transaction price involves, not only excluding amounts collected on
behalf of third parties, but also the assessment of whether the contract price includes:
• fixed consideration and/ or variable consideration
• a significant financing component
• non-cash consideration; and/ or
The contract price is given as C2 000 000 and there is no reference to amounts collected on
behalf of third parties (e.g. VAT collected on behalf of the tax authorities).
This contract price of C2 000 000 is fixed and contains no variable consideration (which would
have involved including in the transaction price a ‘constrained estimate of variable
consideration’).
An element of financing does exist since the date of the receipt of the consideration is not the
same as the dates on which the goods or services are transferred. However, we would only
adjust the transaction price if the effect of this financing is considered to constitute a significant
financing component. In this regard, we are told that the effects of the financing do not
constitute a significant financing component.
The contract refers only to C2 000 000 and does not refer to the existence of non-cash
consideration.
Similarly, there is no evidence to suggest that TerraDrive is required to transfer consideration

to SolidState, its customer.
Thus, the transaction price is equal to the contract price of C2 000 000.

lOMoARcPSD|3314559
b) continued …
Step 4: Allocating the transaction price to the performance obligations
The contract has 3 separate performance obligations. This means that the transaction price will
need to be allocated to each of these performance obligations. This allocation is done based on
the relative stand-alone selling prices of each performance obligation.
The sum of the relative stand-alone prices for the 3 performance obligations is C2 480 000
(C320 000 + C840 000 + C1 320 000), whereas the transaction price is only C2 000 000. This
indicates that the customer has been given a discount of C480 000 (C2 480 000 – C2 000 000)
for purchasing a bundle of goods and services (See IFRS 15.81).
There is no evidence to suggest that the discount relates to any specific good or service within
the bundle and thus the discount is allocated proportionately to all the goods or services in the
contract (i.e. to all three performance obligations) (See IFRS 15.81).
Stand-alone Allocation of
selling price TP
Hard-drive C320 000 C320 000/C2 480 000 x C2 000 000 C258 065
Installation C840 000 C840 000/C2 480 000 x C2 000 000 C677 419
Maintenance C1 320 000 C1 320 000/C2 480 000 x C2 000 000 C1 064 516
C2 480 000 C2 000 000
Notice that, by allocating the discounted transaction price, the discount of C480 000 is allocated
automatically to each of the three performance obligations in the same ratio as their relative
stand-alone selling prices.

lOMoARcPSD|3314559
c) Journals
Journals in 20X7
Debit Credit
28 December 20X7

000
Contract liability (L) 1 000 000
Recognising the receipt of 50% from the customer together with the
contract liability representing the 3 performance obligations

Revenue from customer contracts (I) See working in part (b) 258 065
Recognising the revenue from the transfer of the hard drives (one of the
three POs)
Comment (for your informative purposes only):

• A contract liability is defined as:
• an entity’s obligation to transfer goods or services to a customer
• for which:
- the entity has received consideration from the customer; or
- the amount of consideration is due.
• Thus, the contract liability of C741 935 (1 000 000 – 258 065) reflects TerraDrive’s two remaining
performance obligations for which consideration has already been received.
Journals in 20X8
Debit Credit
9 January 20X8

Revenue from customer contracts (I) See working in part (b) 677 419
Recognising the revenue from the completion of the installation (one of
the three POs), reversing part of the contract liability account (P.S. the
CL now has a balance of C64 516 (1 000 000 – 258 065 – 677 419)
31 December 20X8
Contract liability (L) Balance in this account: 64 516

1 000 000 – 258 065 – 677 419
Receivable (A) Balancing: 354 838 – 64 516 290 322
Revenue from customer contracts (I) 1 064 516 (See working in part 354 838
(a)) / 3 years x 1 year
Recognising revenue from the completion of the first yr of the 3-year
maintenance service: revenue recognised was measured based on the
measure of progress, which was based on time – first reversing the
remaining balance in the contract liability account and then recognising
a receivable for the remaining revenue
Bank (A) (Contract price: 2 000 000 – 500 000

Deposit: 1 000 000) x 50%
Receivable (A) Balance in this account 290 322
Contract liability (L) Balancing: 500 000 – 290 322 209 678
Recognising the receipt of the first of the two instalments (the balance
owed by SolidState, calculated after deducting the 50% deposit of
C1 000 000 that was received in advance, was receivable in 2 further
equal instalments)
The excess over the receivable is recognised as a contract liability

lOMoARcPSD|3314559
Solution 4.17
a) Identifying performance obligations

The process of creating the customised call-centre software involves the transfer of six different
modules (services).
The question is thus whether these various modules are distinct services that should thus be
accounted for as separate performance obligations or whether the completed software package
is a single performance obligation.
Goods/services are considered to be distinct if they meet both the following criteria –
• The good or service is capable of being distinct; and
• The good or service is distinct is the context of the contract.
Criterion #1: are the 6 modules capable of being distinct?
A good or service is considered capable of being distinct if it is able to generate economic

benefits for the customer, either on its own or in combination with readily available resources.
• These resources do not need to be currently owned by the customer but must simply be
resources that the customer could obtain if desired (resources are considered to be readily
available if they are sold separately by the entity or any other entity).
• Goods or services are considered capable of generating economic benefits for the customer
if the customer is able to use or consume them or is able to sell them for a price greater than
scrap value.
In this case, we are told that Mango, the customer, is unable to make use of the software until
the sixth and final module is complete and thus the various modules are only able to generate
economic benefits for Mango when they are used as part of the completed call centre software
package. It is unlikely that the individual modules could be sold as they have been customised
specifically for Mango (logos, user interface etc).
Thus, we conclude that the modules are not individually capable of being distinct.
Criterion #2: are the 6 modules distinct in the context of the contract?
A good or service is distinct in the context of the contract if the promise to transfer it is
separately identifiable in the contract. There are no sub-criteria to be met in order to prove this
criterion but IFRS 15 gives examples of when a good or service would or would not be
considered distinct in context of the contract. Based on these examples, goods or services are
not distinct in the context of the contract if the good or service:
• is used as an input to create an output promised in the same contract; or
• is used as an input to modify an output promised in the same contract; or
• is highly dependent on another good or service promised in the same contract (e.g. if it is
not possible to buy the one without the other).
In this case, the services (the six modules to be delivered) are not distinct in the context of the
contract because the most significant and core promise in the contract is to create a complete
software package, rather than to promise to supply individual modules.

lOMoARcPSD|3314559
a) continued …
In other words, all six modules are used as an input to create the output (the software package)
that was promised in the same contract.
Thus, we conclude that the six modules are not distinct in the context of the contract.
Conclusion:
Thus, since the six modules are neither capable of being distinct nor are they distinct in the
context of the contract, they are bundled together into a single performance obligation, being
the creation of the complete call centre software package. In other words, there is one
performance obligation: the supply of customised call-centre software.

lOMoARcPSD|3314559
b) Determining the transaction price
The contract price is given as C1 800 000. However, the transaction price does not always equal
the contract price.
The transaction price in a contract with a customer is defined as:

The contract price quoted by TP does not involve any amounts collected on behalf of third
parties, non-cash consideration nor does it include consideration payable to the customer but it
does involve a mixture of fixed and variable consideration and a financing component. This is
explained below.
Variable consideration
The contract price is C1 800 000 but we are told that there is a possible discount of C120 000.
The possibility of a discount means that the contract involves variable consideration. Variable
consideration should be included in the determination of the transaction price at the:
• estimated amount that the entity expects to be entitled to, which has been
• suitably constrained to an amount that has a high probability of not causing a significant
reversal in the future. See IFRS 15.56
When estimating the amount to which the entity expects to be entitled, we may use:
• the ‘expected value’ method; or
• the ‘most likely amount’ method. See IFRS 15.53
The expected value method is most suitable for situations where there are many possible
outcomes whereas the ‘most likely amount’ method is generally most suitable for situations
where there are only a few possible outcomes (and ideal for situations where there are only two
possible outcomes). See IFRS 15.53
There are only two possible outcomes in this situation:

• TP will grant the discount of C120 000 and thus will expect consideration of C1 680 000
(Contract price: C1 800 000 – expected discount: C120 000); or
• TP will not grant the discount of C120 000 and thus will expect consideration of
C1 800 000 (Contract price: C1 800 000 – expected discount: C0).

lOMoARcPSD|3314559
b) continued …
Since there are only two possible outcomes, we use the ‘most likely amount’ method. Since
TP has indicated that it expects to grant the discount of C120 000, we estimate the transaction
price at the most likely amount of C1 680 000. This estimate has a high likelihood of not
resulting in a significant reversal of cumulative revenue in future (in fact, if the discount is not
granted, the revenue will be increased rather than reversed). Thus the transaction price is
C1 680 000, representing the amount that TP expects to be entitled to.
Financing component
The terms of the contract require Mango to pay a deposit of 35% at the inception of the contract.
This advance payment indicates that the customer has provided a financing benefit to TP. TP
will need to account for the interest expense if:
• the main purpose of requiring an advance payment from the customer was to obtain
financing; and
• if this financing benefit is regarded as significant; and
• if the period between the timing of the payments and the transfer of the services is more
than a year. See IFRS 15.61 and IFRS 15.63
Since the transfer of the services is expected to be complete within 560 hours of signing the
contract, the period between the advance receipt of 35% of the contract price and the transfer
of the services is well under one year. Thus, irrespective of both the primary purpose of the
advance payment and whether the financing benefit was considered to be significant or not, the
financing benefit received by TP is ignored in determining the transaction price.
Conclusion:
The transaction price is C1 680 000, (being the contract price of C1 800 000 less the expected
discount of C120 000).

lOMoARcPSD|3314559
c) Journals
1 September 20X6 Debit Credit

Bank (A) C1 800 000 x 35% 630 000
Recognising the receipt of the deposit of 35% of the contract price as a
contract liability
31 March 20X7 (a cumulative journal)

Contract liability (L) Per journal above 630 000
Receivable (A) Revenue 1 176 000 – CL 630 000 546 000
Revenue from customer contracts (I) Calculation (a) 1 176 000
Recognising the revenue based on measure of progress
Calculations:
Calculation (a): Transaction price allocated to POs satisfied by year-end =

Transaction price: C1 680 000 ÷ 560 hours x [3 modules x 84 hrs each Calc (c) + module 4:
140 hrs Calc (b)] = C1 176 000.
Calculation (b): # hours that Module 4 is expected to take = 140 hours
Calculation (c): # hours that each module other than module 4 are expected to take = 84 hours each
Comments:
• TP recognises the revenue on the assumption that the PO (creating the software) is a PO
that is satisfied over time. This is based on criterion 3 (see IFRS 15.35 (c)):
 There is no alternative use for the asset (it is software that is customised specifically
for the customer, Mango); and
 TP has an enforceable right to receive payment for performance completed to date (we
are told that the contract provides that TP be paid costs plus a 20% profit if the contract
is cancelled at any stage and that TP believes that a 20% profit is reasonable).
• The measure of progress has been based on the number of hours per module since no
evidence has been given to suggest that the cost per hour is significantly different depending
upon the module being worked on – thus it is assumed that the cost per hour is relatively
stable around the C1 800 per hour average given in the question.
• The deposit of C630 000 (35% x contract price: C1 800 000) would initially have been
recognised as a contract liability to reflect TP’s obligation to perform or refund the money.
• As the modules were completed and accepted by Mango, the related revenue would have
been recognised. This gradual recognition of revenue to the year ended 31 March 20X7
(of C1 176 000) will have caused the contract liability of C630 000 to be gradually reversed
and a receivable of C546 000 (Revenue: C1 176 000 – contract liability: C630 000) to be
gradually recognised.

lOMoARcPSD|3314559
Solution 4.18
When a contract with a customer to provide goods or services also provides the customer with
an option to acquire additional goods or services, this must be accounted for as a separate
performance obligation if this option amounts to a ‘material right that it would not receive
without entering into that contract’. See IFRS 15.B40
In this case, the contract provides the customer with points, based on existing purchases, that
equate to a discount of C1 per point on future purchases of a specific product (if, for example,
the customer purchased further goods of the same amount, it would effectively work out to a
10% discount off the selling price of these purchase). The points thus amount to a material right
that the customer would not have received had that customer not entered into the first contract.
Thus the offer of points must be accounted for as a separate performance obligation.
This means that the transaction price (C150 000) must be allocated between two performance
obligations: the sale of goods and the sale of points.
The allocation of the transaction price must be done based on the relative stand-alone selling
prices. Where a stand-alone selling price is not available, it must be estimated.
In this case, we are told that the stand-alone selling price of the goods sold is C150 000 and the
points sold is C1 per point. When allocating the transaction price, however, we must also build
into the estimate of the stand-alone price ‘the likelihood that the option will be exercised’. In
this regard, the entity estimates that 14 250 points of the 15 000 points will be redeemed, thus
the stand-alone selling price of the points is estimated at C14 250 (14 250 x C1).
The transaction price of C150 000 is thus allocated as follows:
selling price TP
Goods sold C150 000 C150 000/164 250 x C150 000 C136 986
Points sold C14 250 C14 250/C164 250 x C150 000 C13 014
C164 250 C150 000
The sale of goods is recognised as revenue at the point of sale (because the sale of goods is a
PO satisfied at a point in time). The sale of points is recognised as a contract liability until either
the points are redeemed or expire, whichever occurs first.
On date of sale of goods Debit Credit

Bank/ Receivable (A) Given 150 000
Contract liability (L) Working above 13 014
Recognising the receipt from the customer (or receivable), partly
recognised as revenue from the sale of goods and partly recognised as a
contract liability for the sale of customer loyalty points
On date of redemption of points
Contract liability (L) Given xxx
Revenue from customer contract (I) Working above xxx
Recognising the revenue when the customer loyalty points are redeemed

lOMoARcPSD|3314559
Solution 4.19
31 December 20X8 Debit Credit
Bank (A) Given 1 300 000

Revenue from customer contract (I) W1 1 203 704
liability for the customer loyalty points and the balance recognised as
revenue from the sale of the sweets and popcorn
Contract liability (L) 52 000/104 000 points x C96 296 48 148

Redemption of 52 000 points recognised as revenue
Contract liability (L) C96 296 x (93 000 / 117 000) – Revenue 28 395
Revenue from customer contracts recognised in prior years: C48 148 28 395
Recognition of revenue from the redemption of a further 41 000 points
during 20X9. The revenue recognised is measured based on:
• The original portion of the TP allocated to the points: C96 296
• The cumulative points redeemed to date: 93 000 (up from 52 000)
• The revised estimate of the number of points that will be redeemed:
117 000 (was 104 000).
WORKINGS:
W1: Allocation of transaction price
Stand-alone Allocation of TP
selling price
Popcorn and sweets C1 300 000 C1 300 000/1 404 000 x C1 300 000 C1 203 704
Loyalty points C104 000 C104 000/C1 404 000 x C1 300 000 C96 296
C1 404 000 C1 300 000

lOMoARcPSD|3314559
Explanation of journals at 31 December 20X8 (for your interest only)
During the year ended 31 December 20X8, Nu Kinekor sold goods worth C1 300 000, each
C10 of which resulted in one loyalty point. This means that 130 000 loyalty points were given
to customers (C1 300 000 / C10 x 1 point). At 31 December 20X8, management’s estimate
was that only 80% of the points would be redeemed. This means that an estimated 104 000
points were expected to be redeemed in future (130 000 points x 80%). Since each point is
valued at C1, the value of these loyalty points is C104 000 (104 000 points x C1). The allocation
of the transaction price to the two performance obligations is thus as follows:
Stand-alone Allocation of TP
selling price
Popcorn and sweets C1 300 000 C1 300 000/1 404 000 x C1 300 000 C1 203 704
Loyalty points C104 000 C104 000/C1 404 000 x C1 300 000 C96 296
C1 404 000 C1 300 000
The recognition of revenue is dependent on whether the performance obligation is satisfied over
time (SOT) or at a point in time (PIT). For performance obligations that are satisfied over time,
the entity recognises revenue in a manner that reflects the progress towards complete
satisfaction of the performance obligation. For performance obligations satisfied at a point in
time, the entity recognises revenue at that point in time which generally coincides with the
transfer of control of an asset to the customer.
Popcorn and sweets
For the sale of the popcorn and sweets, the performance obligation is satisfied at a point in time
which occurs when the entity transfers control of the goods to the customer at the point of sale.
The revenue will therefore be recognised on the date of sale.
Loyalty points
The performance obligation relevant to the loyalty points is only satisfied when the points are
redeemed for goods. Thus the transaction price that was allocated to the loyalty points is
initially recognised as a contract liability. As the loyalty points are redeemed, a relevant portion
of this contract liability will be derecognised and recognised as revenue.
When calculating what percentage of the transaction price allocated to the loyalty points arising
in 20X8 (C96 296) should be recognised as revenue in 20X8, we use the number of points
redeemed as a percentage of the total number of points that we expect to be redeemed (52 000
/ 104 000).
Explanation of journals at 31 December 20X9:

• the cumulative number of points redeemed to date is 93 000: a further 41 000 of the points
that were awarded in 20X8 were redeemed in 20X9, which means that the cumulative
number of points redeemed to date = 52 000 + 41 000 = 93 000.
• the revised estimate of the total number of points expected to be redeemed is now 117 000
points: since it is now estimated that 90% of the 20X8 points will be redeemed (not 80%),
the total estimated points that will be redeemed is 117 000 points (130 000 points x 90%)
– not 104 000 points.

lOMoARcPSD|3314559
Solution 4.20
a) Discussion
Determining the transaction price

The sale of the 80 air-conditioning units for C15 000 per unit, suggests that the contract price
is C1 200 000 (C15 000 x 80 units).
The contract price is not always equal to the transaction price. This is because the transaction
price in a contract with a customer is defined as:
There is no evidence that the contracted price of C15 000 per unit contains an amount collected
on behalf of a third party, nor is there evidence of variable consideration, non-cash
consideration or consideration payable to the customer. However, the payment terms have been
deferred and consequently the contract involves a financing arrangement.
If financing is included in the contract, then depending on whether the entity or the customer
obtains the financing benefit, interest expense or interest income must be accounted for.
However, the effect of the financing is only accounted for in the event that it is considered to
be a significant financing component. Furthermore, as a practical expedient, we need only
account for the financing component if the time delay between satisfying the PO and the receipt
of payment is more than a year.
In this case, although the period of financing of the sale of the unit is less than a year (from
30 December 20X4 to 30 June 20X5), the financing of the 2-year maintenance exceeds one
year (from 30 June 20X5 to the final date of maintenance, 31 December 20X6). This means
that the practical expedient is not available to us and we would have to account for the effects
of the financing component. However, we are told that the financing component is insignificant
and thus the effect of the financing component is ignored.
The transaction price is thus C1 200 000 (i.e. the transaction price equalled the contract price).
Before we can allocate the transaction price, we must identify the performance obligations
(POs). The contract with the government has 3 distinct performance obligations:
• Sale of the air-conditioning unit
• Installation/ fitment of the unit
• Maintenance services over a period of 2 years

lOMoARcPSD|3314559
a) Discussion continued …
Allocating the transaction price
As the contract contains multiple performance obligations, the transaction price needs to be
allocated to each performance obligation. The allocation of the transaction price is based on the
relative stand-alone selling prices of each PO that existed at contract inception.
The stand-alone selling prices are ideally based on directly observable market prices. However,
they may be estimated based, for example, on the cost plus an appropriate margin, an adjusted
market assessment approach or using the residual approach. See IFRS 15.78-79
We are given the costs for each of the services (the fitment and the maintenance) and we are
given the cost of each of the air-conditioning units. We are also given the normal market-related
mark-up on the cost of each of these services as being 18%. However, we are not told what the
normal mark-up on cost would be for the supply of the air-conditioning units and nor are we
given the normal market price of the unit. However, since we have been given sufficient
information to estimate the stand-alone selling prices for 2 of the 3 POs (based on the cost plus
an appropriate mark-up), we can use the residual approach to then estimate the stand-alone
selling price for the third PO (i.e. the supply of the unit).
selling price TP
(per unit) (x 80 units)
Fitment C1 062 C900 x 1.18 C84 960
2-year maintenance C7 195 C2 916 x 1,03 x 1.18 + C2 916 x 1.03 x 1.03 x 1.18 C575 600
Air-conditioning units C6 743 C15 000 – 1 062 –7 195 C539 440
C15 000 C1 200 000
Comment on the allocation of the TP to the 2-year maintenance:

The information provided states that the maintenance costs are ‘currently C2 916 pa’ and that
they increase by 3% at the end of the year. We know that this cost of C2 916 relates to
maintenance performed in 20X4 (we know this due to the use of the future tense in the
information provided to us: the government will place an order on 1 October 20X4 and
BlackRock will deliver the units on 30 December 20X4). However, the contract under
discussion involves the provision of maintenance services in 20X5 and 20X6. This means that
an increase of 3% will be applied on 31 December 20X4 which would be effective in 20X5 –
and a further increase of 3% would then be applied on 31 December 20X5, which would be
effective in 20X6. Thus, the costs and related stand-alone selling price for maintenance services
(using an 18% mark-up on costs) in the 20X5 and 20X6 is calculated as follows:
Maintenance Calc of costs pa Costs Calc of selling price Stand-alone

selling price
(per unit)
20X5 2 916 x 1.03 C3 003 3 003 x 1.18 C3 544
20X6 2 916 x 1.03 x 1.03 C3 094 3 094 x 1.18 C3 651
C7 195
Comment on the timing of the recognition of the related revenue (for informative purposes)
• The revenue from the sale of the air-conditioning unit will be recognized at a point in time
(when control passes to the customer, which normally coincides with delivery)
• The revenue from the fitment will be recognized at a point in time (fitment date)
• The revenue from the maintenance will be recognized over time (2 years)

lOMoARcPSD|3314559
a) Discussion continued …
Comment:
The extent of your answer in a test situation always depends on the mark allocation. This
question specifically required a discussion regarding how to determine the TP and how to
allocate the TP. It did not specifically require a full discussion on how to identify the POs.
However, depending on the marks awarded to the answer to this question, a discussion thereof
could have been implicitly required. In that case, the following additional discussion regarding
how we go about identifying the POs could also have been provided:
POs are the distinct promises in the contract. Promises in the contract are considered to be
distinct if they meet both the following criteria:
• The good or service must be capable of being distinct:
• The good or service must be distinct is the context of the contract. See IFRS 15.27
A good or service is considered to be capable of being distinct if ‘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’. IFRS 15 goes on to explain that this situation arises if the good or service is
able to generate economic benefits for the customer by the customer using it, consuming it or
selling it at a price greater than scrap. However, IFRS 15 states that ‘various factors may provide
evidence that the customer can benefit from a good or service either on its own or in conjunction
with other readily available resources’ and gives, as an example: ‘the fact that the entity
regularly sells a good or service separately’. See IFRS 15.27 (a) and IFRS 15.28
The question clarifies that ‘the accepted industry practice to apply an 18% profit margin on
similar services’ suggests that ‘the initial fitment…and the maintenance services’ are services
that are regularly sold separately. Thus, we conclude that the supply of the air-conditioning unit,
the installation thereof and the ensuing maintenance are all capable of being distinct.
A good or service is considered to be distinct is the context of the contract if the entity’s promise
to transfer the good/service is ‘separately identifiable from other promises within the contract’.
There are no sub-criteria to prove whether a good or service is distinct in the context of the
contract, but IFRS 15 provides examples to assist with this criterion. In this regard, a good or
service is not distinct in the context of the contract if it is:
• used as an input to create an output that is promised in the same contract (i.e. ‘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 ….’)
• used as an input to modify an output that is promised in the same contract
• highly dependent on another good/ service promised in the same contract. See IFRS 15.27 & 29
Black Rock does not promise a significant service of integrating the air-conditioning unit with
the installation and the maintenance. Nor is there evidence to suggest that the installation and/
or the maintenance involves modifying the unit in any way. Similarly, there is nothing to suggest
that any of the inputs are ‘highly dependent’ on other inputs in the same contract. For example,
Black Rock could have installed a unit that the government had purchased from another entity
and similarly, Black Rock could have supplied the government with a unit that was then
installed by another entity. In other words, there is not a high degree of inter-dependence
between the inputs to create a single output. Thus, we conclude that supply of the unit, the
installation and maintenance are all distinct in the context of the contract.
Thus, the supply of the unit, the installation and maintenance are three distinct POs (they are
capable of being distinct and are distinct in the context of the contract).

lOMoARcPSD|3314559
b) Journals
Receivable (A) Alloc of TP – see part (a) – supply of 539 440

Revenue from customer contract (I) air-conditioning units 539 440
Recognising the receivable and revenue from the supply of the air-
conditioning units in terms of the contract with the government
Cost of sales (E) C6 600 (given) x 80 units 528 000

Recognising the cost of the sales
Receivable (A) Alloc of TP – see part (a) – fitment of 84 960

Revenue from customer contract (I) air-conditioning units 84 960
Recognising the receivable and revenue from the fitment of the air-
Cost of service - fitment (E) C900 (given) x 80 units 72 000

Recognising the cost of the fitment
30 June 20X5

Receivable (A) 539 440 + 84 960 624 400
Contract liability (L) Balancing: 1 200 000 – 624 400 575 600
Recognising the receivable and revenue from the supply of the air-
31 December 20X5
Contract liability (L) Alloc of TP: part (a): maintenance of 287 800
Revenue from customer contract (I) air-conditioning units: 287 800
C575 600 / 24 months x 12 months
Recognising the receivable and revenue from the first year’s
maintenance of the air-conditioning units in terms of the contract
Cost of service - maintenance (E) C2 916 x 1.03 p.a. (given) x 80 units 240 278
Recognising the cost of the first year’s maintenance

lOMoARcPSD|3314559
Solution 4.21
Adaptation
The first sentence refers to a selling price of C1 392 000. Please change this to C1 400 000.
Financial year-end: 31 December 20X2 Debit Credit

28 February 20X2
Accounts receivable (A) C1 400 000 x 10 14 000 000
Revenue from customer contract 14 000 000
Cost of sales C1 638 000 / 1,3 x 10 12 600 000
Inventory 12 600 000
Recognising the revenue from the sale of ten armoured vehicles and the
related cost of sales
1 March 20X2
Accounts receivable 2 800 000
Recognising the first payment received
31 December 20X2
Accounts receivable (A) 1 680 000 (W1) x 10/12 1 400 000
Interest income (I) 1 400 000
Recognising the interest earned for the year (10 months to date)
Financial year-end: 31 December 20X3

28 February 20X3
Accounts receivable (A) 1 680 000 (W1) x 2/12 280 000
Interest income (I) 280 000
Recognising interest earned for the year until receipt of the second
instalment (2 months)
28 February 20X3
Accounts receivable (A) 5 600 000
Recognising the receipt of the 2nd instalment
31 December 20X3
Accounts receivable (A) 1 092 000 (W1) x 10/12 910 000
Interest income (I) 910 000
Recognising of the interest earned for the year (10 months between last
instalment and financial year-end)
W1: Effective interest rate table relating to the interest on the sale of the armoured vehicles
Opening Interest at Closing

Year balance 15 % Instalment balance
1 March 20X2 14 000 000 (2 800 000) 11 200 000
To 28 February 20X3 11 200 000 1 680 000 (5 600 000) 7 280 000
To 28 February 20X4 7 280 000 1 092 000 (8 372 00) 0
Comment:
The contract involved the supply of armoured vehicles upfront followed by payment in instalments
over a period of 2 years. The delay between the supply and the payment in full is more than one year
and thus the practical expedient offered by IFRS 15 to ignore the effect of financing is not available.
Since no evidence was given to the contrary, we assumed further that:
• the effect of the financing was considered to be a significant financing component; and
• the 15% p.a. was an appropriate interest rate.
The transaction price is thus the present value of the payments expected to be received, discounted at
this effective interest rate of 15% (you can use a calculator or divide each instalment by the present
value factor:
C2 800 000/ 1 + C5 600 000 / PVF: 1.15 + C8 372 000/ PVF: (1.15/1.15) = C14 000 000.

lOMoARcPSD|3314559
Solution 4.22
a) Calculations and explanation
Answer:
The transaction price is C9 504

The allocation of the transaction price is as follows:
Stand-alone Allocation
selling price of TP
C C
Satellite dish Note 1 1 899 (C1 899 – Discount Note 3: 1 800 x 1 899 / 11 400) x 94% 1 503
Decoder Note 1 765 C765 – Discount Note 3: 1 800 x 765 / 11 400 644
Network access Note 1 8 160 C8 160 – Discount Note 3: 1 800 x 8 160 / 11 400 6 872
Magazines, delivered Note 2 576 C576 – Discount Note 3: 1 800 x 576 / 11 400 485
11 400 9 504
Notes:
1. Given (1 899; 765 and 8 160)
2. (C30 + C10) x 12 months x 1.2 mark-up = C576
3. Discount = SASP: 11 400 – Contract price: 9 600 = C1 800
4. Transaction price = Contract price (C800 x 12) – Consideration to which NTC does not expect to be
entitled: 6% x (C1 899 – Discount: 1 800 x 1 899 / 11 400) = C9 504
Explanation:
The contract price is C9 600 (C800 x 12), but the transaction price is the consideration to which
NTC expects to be entitled in exchange for the transfer of promised goods and services to the
customer (performance obligations), excluding amounts collected on behalf of third parties.
Determining the consideration to which NTC expects to be entitled involves assessing whether
the consideration includes:
• variable consideration;
• any consideration payable to the customer.
In this case, there is no amount collected on behalf of a third party, no non-cash consideration
and no consideration payable to a customer. However, we need to consider the financing
component and variable consideration:
• Since the consideration is receivable in instalments, there is a financing component.
However, because the financing does not exceed one year, IFRS 15 allows, as a practical
expedient, for the financing to be ignored.
• Since satellite dishes are sold with a right to return for a full refund in the event that they
are returned within 60 days means that we are dealing with a ‘right of return’ (it does not
meet the narrow definition of a warranty – see ‘discussion’ starting two pages overleaf).
A right of return is accounted for as variable consideration in determining the transaction
price. Thus, since management estimates that 6% of all dishes sold end up being returned,
effectively representing consideration to which the entity does not expect to be entitled, we
must reduce the transaction price by this 6%. However, it is only the dish that may be
returned and thus we only reduce the amount of the transaction price that would otherwise
have been allocated to the dish.

lOMoARcPSD|3314559
a) Continued …
However, before we calculate the effect on the transaction price of the 6% possible return of
dishes, it is important to note that the contract price of C9 600 is a discounted price. The fact
that it has been discounted is evident in that the sum of the stand-alone selling prices is C11 400
(C1 899 + C765 + C680 x 12 months + (30 + 10) x 12 months x 1.2) whereas the contract price
is C9 600. This represents a discount of C1 800 (C11 400 – C9 600).
Since there is no evidence to suggest that the discount applies to a specific PO / POs, we must
allocate this discount across all POs, including the supply of the satellite dish, based on each of
the PO’s relative stand-alone selling prices (SASPs). Thus, the portion of the discount that is
allocated to the dish is C300 (Discount: C1 800 x C1 899/ C11 400).
Thus, since discount of C300 is allocated to the sale of a dish, the price that relates to the dish
and that would be refunded in the event that a dish was returned is C1 599 (C1 899 – Discount:
C300).
However, we do not include C1 599 in the transaction price. This is because the estimated
amount of variable consideration to be included in the transaction price must be limited such
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’ (see IFRS 15.IN7(c)).
Thus, assuming that the expectation that 6% of all sales of dishes will be returned is a reliable
estimate (e.g. based on past experience), we would calculate the expected value from the sale
of dishes at 94% (100% - 6% returns) of the relevant portion of the transaction price. Thus, the
portion of the TP relating to the satellite dish is reduced by 6% to C1 503 (C1 599 x 94%).
Or, in other words, if the entity expects 6% of all dishes sold to be returned, the amount of
consideration to which the entity does not expect to be entitled (variable consideration) is C96
(C1 599 x 6%) and thus, the portion of the TP relating to the satellite dish is reduced by the
consideration of C96 to which the entity does not expect to be entitled, to C1 503 (C1 599 –
C96).
Thus, the transaction price (in total), being the amount to which the entity does expect to be
entitled, is C9 504 (Consideration: C9 600 – Variable consideration to which the entity does
not expect to be entitled: C96).
This transaction price of C9 504 is then allocated to each of the 4 POs, correctly identified by
the accountant, based on their relative stand-alone selling prices.

lOMoARcPSD|3314559
a) Continued …
Discussion (i.e. a discussion is more comprehensive than an explanation – a discussion was

not required but has been included for your interest):
Determining the transaction price:
When determining how much of the contract price represents the transaction price, we first
exclude any amounts collected on behalf of third parties and then assess whether the contract
price includes:
The comprehensive package is a 12-month package charged out at C800 per month, and thus
the total contract price (total consideration) is C9 600 (C800 x 12).
However, the transaction price is the amount of consideration to which NTC expects to be
entitled in exchange for the transfer of promised goods and services to the customer
(performance obligations), excluding amounts collected on behalf of third parties.
When determining how much of the contract price represents the transaction price, we first
exclude any amounts collected on behalf of third parties and then assess whether the contract
price includes:
In this scenario, there is no evidence of:

• amounts collected on behalf of third parties (e.g. VAT);
• non-cash consideration; or
However, a possibility of a financing component exists (because goods are transferred at the
beginning of the contract and the consideration is received in monthly instalments) and the
possibility that variable consideration exists must be considered (because of the possible return
of goods).
• The entire contract is only 12 months, during which time the entire contract price is
expected to be received and the performance obligations are expected to be satisfied and
thus the delay between receiving consideration for the goods and services and the supply
thereof will not be longer than a year. Thus, even if a significant financing component was
found to exist, the practical expedient in IFRS 15 means that we would not need to account
for the financing component separately from the transaction price.
• Customers are able to return satellite dishes for a refund. The issue is whether this is
considered to be a right of return (dealt with in IFRS 15.B20-26) or whether this right
should be considered to be a warranty (dealt with in IFRS 15.B27-33).

lOMoARcPSD|3314559
a) Continued …
The difference between how to account for a right of return and how to account for a
warranty is explained below:
• a right of return is accounted for as variable consideration, which means it would affect the
determination of the transaction price (i.e. it is not a separate performance obligation);
• a warranty could be accounted for in two different ways depending on whether it is a
service-type warranty or an assurance-type warranty.
 a service-type warranty is accounted for as a separate performance obligation (i.e. it
does not affect the determination of the transaction price); whereas
 an assurance type warranty is accounted for in terms of IAS 37 Provisions, contingent
liabilities and contingent assets.
IFRS 15 describes a warranty and a right of return as follows:

• warranty (an assurance-type or service-type warranty) as being when ‘a customer may
return a defective product in exchange for a functioning product’. See IFRS 15.B27
• right of return as being the customer’s ‘right to return the product for various reasons (such
as dissatisfaction with the product) and receive any combination of the following: (a) a full
or partial refund of any consideration paid; (b) a credit that can be applied against amounts
owed, or that will be owed, to the entity; and (c) another product in exchange. See IFRS 15.2B20
In this case, the right to return the dishes does not meet the narrow definition of a warranty since:
• goods can be returned for a variety of reasons not just if they are ‘defective’; and
• goods are returned for a full refund rather than ‘in exchange for a functioning product’.
Instead, the right to return the dishes meets the wider definition of a right of return, the
description of which includes the return for ‘various reasons’ and in exchange for ‘a full refund’.
Thus, as explained above, the right to return the dishes is accounted for as a right of return,
which is variable consideration, and where variable consideration is taken into account when
determining the transaction price.
Management expects that 6% of satellite dishes are returned and thus the transaction price
allocated to the satellite dishes must be reduced by 6% and this 6% reduction in the transaction
price must be accounted for as a refund liability. If the dishes are not returned within the 60-
day period, this refund liability would be reversed and recognised as revenue.
The information given does not specify the amount of the refund and thus we need to calculate
it. The stand-alone selling price of the dish is given as C1 899 but a customer that buys the
package, will have obtained a discount. This discount is calculated as follows:
Stand-alone selling prices: C

 Satellite dish 1 899 Given
 Decoder 765 Given
 Network access 8 160 C680 x 12
 Magazines (delivered) 576 (C30 + C10) x 12m x 1,2
11 400
Discount (1 800) Balancing: 11 400 – 9 600
Contract price 9 600

lOMoARcPSD|3314559
a) Continued …
There is no evidence to suggest that the discount of C1 800 applies to any specific PO and thus
we allocate the discount to all four POs based on their relative stand-alone selling prices.
• This means that the discount that would be allocated to the dish is C300 (Discount: 1 800
x Dish SASP 1 899 / Total SASP: 11 400 = C300).
• Thus, the discounted selling price of the dish, which would eventually be recognised as
revenue assuming the dish was not returned, would be C1 599 (SASP: C1 899 – Allocated
discount: 300 = C1 599)
On the assumption that the refund would be based on this discounted stand-alone selling price,
we then estimate that, on average, the portion of the consideration to which the entity does not
expect to be entitled is C96 (C1 599 x 6% = C96), being the portion that would initially be
recognised as a refund liability, and excluded from the transaction price.
The estimated amount of variable consideration to be included in the transaction price must be
limited such 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’ (see IFRS 15.IN7(c)). If we assume that the expectation that 6% of all
sales of dishes will be returned is a reliable estimate (e.g. based on past experience):
• we include in the TP the expected value from the sale of dishes at 94% (100% - 6% returns)
of the portion of the transaction price that would otherwise have been allocated to the dishes:
C1 599 x 94% = C1 503; or, in other words…
• the portion of the TP relating to the dish must be reduced by the consideration of C96 to which
the entity does not expect to be entitled: C1 599 – C96 = C1 503
Thus the transaction price is C9 600 – C96 = C9 504
Identifying performance obligations
In order to allocate the transaction price, we must identify the performance obligations (POs)
in the contract. We are told that the accountant has correctly identified the following 4 POs:
• Satellite dish;
• TV decoder;
• Network access; and
• Delivered magazine.
Allocating the transaction price:
As the contract contains multiple performance obligations, the transaction price needs to be
allocated to each performance obligation relative to its stand-alone selling price.
The allocation of this initial estimate of the transaction price would thus be as follows:
Stand-alone Allocation
selling price of TP
C C
Satellite dish 1 899 (C1 899 – Discount: 1 800 x 1 899 / 11 400) x 94% 1 503
Decoder 765 C765 – Discount: 1 800 x 765 / 11 400 644
Network access 8 160 C8 160 – Discount: 1 800 x 8 160 / 11 400 6 872
Magazines (delivered) 576 C576 – Discount: 1 800 x 576 / 11 400 485
11 400 9 504

lOMoARcPSD|3314559
b) Journals
Bank (A) 800 x 2 months 1 600

Accounts receivable (A) Balancing: 1 600 – 1 503 – 644 – 1 145 – 81 - 1 869
96
Revenue – satellite dish See part (a): allocation of TP: (1 899 – 300) x 1 503
94%
Revenue – decoder See part (a): allocation of TP 644
Revenue – network access See part (a): allocation of TP C6 872 x 2/12 1 145
Revenue – delivered magazine See part (a): allocation of T: C485 x 2/12 81
Refund liability – satellite dish Discounted SASP of dish: (1 899 – 300) x 6% 96
Recording the sale of the goods and services for 2 months

Inventory C880 + C412 + (C30 + C10) x 2 months 1 372
De-recognition of inventory – satellite, decoder and 2 magazines

lOMoARcPSD|3314559
Solution 4.23
a) Enforceable right to payment
Introduction
Grincor has entered into a contract with Epsom Properties as the customer. The terms of the
contract require Grincor to satisfy only one performance obligation, the construction of high
class apartments, in exchange for a consideration of C21 000 000. When to recognise this as
revenue will depend on whether the construction of the apartments is a performance obligation
‘satisfied over time’ or at a ‘point in time’.
In this regard, IFRS 15 provides three separate criteria, stating that if any one of these three
criteria is met, then the performance obligation is ‘satisfied over time’. see IFRS 15.35
One of these criteria is that:

• ‘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’. See IFRS 15.35 (c)
We have been asked to simply assess the second half of this abovementioned criterion: whether
the entity has an enforceable right to payment for performance completed to date.
Discussion
IFRS 15 states that an entity has an enforceable right to payment for performance completed to
date if:
• the entity has an entitlement to payment, in the event of a contract termination for reasons
other than a breach by the entity, that is enforceable by either contractual terms and/or any
laws that apply;
• this entitlement exists at all times throughout the contract; and
• this payment would be sufficient to compensate for performance completed to date.
We shall first consider whether there is a right to payment in the event of a termination, for
reasons other than the breach by the entity, that is enforceable. Then we shall consider whether
this right exists at all times throughout the contract and then consider whether the right to
payment would be considered sufficient to compensate Grincor for performance completed to
date.
Is the right enforceable?
In assessing whether there is an enforceable right to payment, we look to any contractual terms
and/ or applicable legislation that may give Grincor an entitlement to receive payment from the
customer in the event that the contract is terminated through no fault of the entity.
No information is available regarding the legislation applicable to Grincor and Epsom and the
jurisdiction in which they operate but we are given information regarding the contractual terms.
These contractual terms provide that if Epsom (the customer) terminates the contract, for
reasons other than Grincor having failed to perform as promised, Grincor (the entity) will be
entitled to retain all progress payments received to date (although Grincor would not have any
further rights to compensation from Epsom).

lOMoARcPSD|3314559
a) continued …
In the event that this contractual clause does not operate outside of the law and is thus binding
(i.e. the legislation of a country or jurisdiction often maintains that clauses of a contract that are
‘outside of the law’ are rendered ultra vires and thus meaningless), we have evidence that
Grincor has an enforceable right to payment.
Does the right exist at all times?
We now consider whether this enforceable right to demand or retain payment exists at all times
throughout the contract. IFRS 15 explains that the right need not be a present unconditional
right to payment. This is because most contracts give the entity a right to payment only on
specific milestones, such as completion of certain aspects of the project. Instead, the right must
simply be a ‘right to demand or retain payment for performance completed to date’ in the event
that the contract was terminated for reasons other than the entity breaching the contract (e.g.
we ask ourselves whether the entity has a right to demand payment if, for example, the customer
breached the contract). See IFRS 15.B10
Thus, whether or not Grincor has an enforceable right to payment on 30 June 20X5 and 20X6
(which are specific points in time) is actually irrelevant. What is important is that the right to
payment exists at all times throughout the contract.
In this case, we are told that the contract includes a payment schedule requiring the customer
to make progress payments to Grincor during the course of construction: 20% on contract
inception, 60% at regular intervals during the construction phase and 20% at the completion of
the construction. We are not given further information as to what is meant by ‘regular payments’
and would thus have to first establish that these payments are sufficiently regular (e.g. weekly)
to be able to conclude that there is effectively a right to payment at all times throughout the
contract.
However, assuming we are able to conclude that the progress payments are suitably regular,
before we simply conclude that the right to payment effectively exists at all times throughout
the contract, we must remember that although a payment schedule that is included in the
contract is useful in proving whether or not a right to payment exists throughout the contract,
the payment schedule has to be seen in context of the entire contract. For example, if the
contract includes a payment schedule but then stipulates that payments would have to be
refunded to the customer in the event of a termination, these scheduled payments would
obviously be ignored. In this case, however, we are told that the payments received by Grincor
would be non-refundable (unless Grincor breaches the contract). See IFRS 15.B10-13
Is the right to payment sufficient?
Assuming we are able to conclude that Grincor has an enforceable right to payment at all times,
we then assess whether these payments would be sufficient. A payment schedule exists
stipulating that Grincor is scheduled to receive 20% deposit upfront, 60% by way of regular
progress payments and the remaining 20% only upon completion. This means that the contract
only allows for a maximum of 80% of the contract price to be paid in the event of a premature
termination.
Thus, we would need to establish, despite the fact that the receipt of a maximum of 80% of the
contract price is possible in the event of an early termination, that the total payments received
to date of a possible early termination would nevertheless be sufficient to compensate Grincor
for its costs and a reasonable profit.

lOMoARcPSD|3314559
a) continued …
When considering whether payments to date would be considered ‘sufficient compensation’,

we must bear in mind that IFRS 15 explains that sufficient compensation refers to compensation
large enough to recompense Grincor for its costs incurred to date and include a reasonable
profit. We are told that the progress payments are based on work certified to date, which is a
measure based on the contract price, where a contract price would constitute the contract costs
plus the contract profit. Thus the progress payments are designed to cover Grincor’s costs plus
a proportion of the contract profit (albeit up to a maximum of 80% of the contract price in the
event of a premature termination). However, we must establish that the portion of the contract
profit that is recoverable is considered to be a reasonable profit.
The fact that Grincor would only receive a maximum of 80% of the contract price does not
automatically mean that recovery of a reasonable profit would not be possible. IFRS 15 explains
that a reasonable profit would be one that either reflects a portion of the total contract profit based
upon the portion of the work performed to date or, if this contract-specific profit is unusually high,
then the profit that the entity normally achieves on similar contracts. See IFRS 15.B9
This interpretation of what constitutes a ‘reasonable profit’ means that, for example, if the
contract were terminated after Grincor had completed 80% of the work and Grincor was thus
entitled to only 80% of the contract price, Grincor could actually end up recovering a larger
than normal profit in the event that significant costs were to have been incurred during the
remaining 20% of the project and were thus avoided. Alternatively, if the contract price had
included a larger than normal contract profit, then 80% of the inflated contract price may yet
secure for Grincor a reasonable profit.
Looking closer at the payment schedule, we note that the contract stipulates that Grincor would
be entitled to retain payments received to date of a premature termination but would not be
entitled to demand any further payments in the event of such termination.
This means that we would also need to establish that, after receiving the 20% upfront deposit,
that the ensuing 60% progress payments are made with sufficient regularity such that, at all
times, despite being exposed to the possibility of an early termination between progress
payments, Grincor’s costs incurred to date and reasonable profit would be recoverable. For
example, if the progress payments during the period of construction were made every 3 months
rather than, say, every week or every 2 weeks, then it is possible that these progress payments
may not be sufficiently regular to be able to conclude that Grincor was effectively entitled to
sufficient compensation at all times during the contract. This is illustrated as follows: if the last
progress payment was made on 31 March and the contract was terminated on 31 May, the next
progress payment would only have been due on 30 June and thus any work done during April
and May, however significant or costly, would not have been compensated for and thus the
terms of the contract would fail to meet this aspect of the criterion.
Conclusion:
Since the contract provides for Grincor to retain progress payments in the event that the
customer terminates the contract for reasons other than Grincor’s failure to perform, we have
evidence of enforceability of payments in the event that the contract is terminated for reasons
other than for breach by the entity. However, in order to prove that Grincor would be entitled
at all times to sufficient compensation for work performed to date, we would have to establish
that the progress payments are sufficiently regular to cover costs and a profit at any one point
in time in the contract and that this profit is a reasonable profit.

lOMoARcPSD|3314559
a) continued …
Establishing that the profit that is recoverable would be a reasonable profit requires a more
thorough assessment of when the contract costs are expected to be incurred and also whether
the contract profit is sufficiently high such that 80% of the contract price would result in a profit
that resembles the usual profit achieved on similar contracts.
Thus we conclude that insufficient information is available to conclude without doubt that there
is an enforceable right to payment at all times throughout the contract that would compensate
Grincor for costs incurred plus a reasonable profit.
Further comment:
Assuming that, after a thorough investigation of the contract, we are able to conclude that
Grincor has an enforceable right to payment that compensates Grincor for costs incurred plus a
reasonable profit, then, if we can also prove that Grincor has no alternative use for the asset, we
will have proved that the PO is satisfied over time. If we cannot prove this, we would have to
consider the other two criteria given in IFRS 15.35 before being able to conclude that the PO
is satisfied over time. If none of the 3 criteria in IFRS 15.35 are met, we would conclude that
the PO is satisfied at a point in time. [See Gripping GAAP, section 9.4.2].

lOMoARcPSD|3314559
b) Journals
1 March 20X5 Debit Credit

Bank (A) 21 000 000 x 20% 4 200 000
Contract liability (L) 4 200 000
Recording the upfront deposit from Epsom
30 June 20X5
Contract liability (L) 21 000 000 x 20% (above) 4 200 000
Receivable (A) Balancing: 6 300 000 – 4 200 000 2 100 000
Revenue from customer contract (I) 21 000 000 x 30% 6 300 000
Recording the revenue from the 30% work completed to date
Bank (A) Not given xxx
Receivable (A) xxx
Recording the progress payments received
30 June 20X6
Receivable (A) 11 550 000
Revenue from customer contract (I) 21 000 000 x 85% - 21 000 000 x 30% 11 550 000
Recording the revenue from work completed to date
Receivable (A) xxx
Recording the progress payments received
Although not required, the final journals may be of interest:

Receivable (A) 3 150 000
Revenue from customer contract (I) 21 000 000 x 100% - 21 000 000 3 150 000
x 85%
Recording the revenue from work completed to date
Receivable (A) xxx
Recording the progress payments received that were constituted by cash
consideration – at this point the cash received from the customer should
have reached C16 800 000 (C21 000 000 x 80%) with only the final 20%
consideration being due – see next journal. Thus, the remaining balance
on the accounts receivable, assuming the customer had paid 80% to date
as scheduled, should reflect C4 200 000 (C21 000 000 x 20%)
Investment in shares (A) Given 4 375 000
Receivable (A) Balance in this a/c: 21 000 000 x 20% 4 200 000
Revenue from customer contract (I) Balancing: 4 375 000 – 4 200 000 175 000
Recording the final 20% progress payment, being non-cash
consideration for which a FV is able to be estimated; thus measured at
its FV of C4 375 000. The accounts receivable balance would have been
C4 200 000 (C21 000 000 x 20%) and since the consideration was non-
cash consideration measured at its fair value of C4 375 000, the excess
of C175 000 is recognised as revenue (the TP is effectively adjusted from
C21 000 000 to C21 175 000)

lOMoARcPSD|3314559
b) continued …
Explanation of transaction price (for your interest)
The contract price is C21 000 000.
This contract includes non-cash consideration, being a certain number of the customer’s own
equity shares, to be paid in lieu of the final 20% of the contract price.
• Non-cash consideration should be valued based upon the fair value of the non-cash
consideration unless the form of the non-cash consideration is such that its fair value is
unable to be reliably estimated, in which case the non-cash consideration must simply be
valued indirectly by reference to the stand-alone selling prices of the goods or services
offered to the customer (e.g. C21 000 000 x 20% = C4 200 000).
• However, since the non-cash consideration involves shares in Epsom Properties, the fair
value of which was ascertainable at C4 375 000, we measure the shares and the revenue at
their fair value of C4 375 000.
• Thus, the transaction price, which was originally estimated to be C21 000 000, has now
increased to C21 175 000 (i.e. it is adjusted).
This contract also includes a financing component since it involves payments in advance and
in arrears.
• The contract was signed on 1 February 20X5.
• It is expected the contract will take 2 years to complete.
• Since there is an upfront payment of 20%, the customer has provided Grincor with
financing (and thus Grincor would recognise interest expense) for the period until 20% of
the work is complete.
• The next 60% is paid regularly, as and when the work is completed, and thus the 60%
payments do not include an element of financing.
• The final 20% payment is delayed until completion, so depending on the time lag between
the completion of 80% and the completion of 100%, it is possible that Grincor has provided
financing to the customer (in which case Grincor would recognise interest revenue).
• However, we are told that the effects of the financing are insignificant.
• Only the effects of significant financing components are accounted for.

04 Revenue

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04 Revenue

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Financial Accounting 2A (University of Namibia)

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Solutions to GAAP: Graded Questions Revenue from contracts with customers

Part A – Definitions and overview of the process

a) Revenue is defined as:

c) Revenue recognition and measurement involves a 5-step process.

These 5 steps are as follows:

Part B continues on the next page

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Solutions to GAAP: Graded Questions Revenue from contracts with customers

Solution 4.1 continued…

Part B – Identifying the contract

f) A customer is defined as:

g) A contract is defined as:

Part C – The transaction price

j) The transaction price is defined as:

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Solutions to GAAP: Graded Questions Revenue from contracts with customers

Solution 4.1 continued…

Constraining estimates simply means limiting the amount of variable consideration to be

m) The variable consideration to be included in the transaction price is calculated as follows:

n) A contract is said to contain an element of financing (i.e. a ‘financing component’) if the

p) The effect of financing (if it is considered to be significant) is calculated by:

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Solutions to GAAP: Graded Questions Revenue from contracts with customers

Solution 4.1 continued…

A discount rate is appropriate if it:

Part D – Allocating the transaction price

s) The allocation of a transaction price to the various performance obligations is normally

Part E – Satisfying the performance obligations

v) A performance obligation is defined as:

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Solutions to GAAP: Graded Questions Revenue from contracts with customers

Solution 4.1 continued…

w) Performance obligations are classified as either:

x) We must measure an entity’s ‘progress towards complete satisfaction of a performance

y) Progress may be measured using either:

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Solutions to GAAP: Graded Questions Revenue from contracts with customers

ADAPTATION: It may be of interest to you to extend the ‘required’ by including a

Part C Financing (less than a year of financing – always ignored)

a) Transaction price = Contract price: C100 000

b) Transaction price = Contract price: C100 000

Part D continues on the next page…

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Solutions to GAAP: Graded Questions Revenue from contracts with customers

Solution 4.2 continued…

Part D Financing (more than a year of financing)

a) Transaction price = Contract price: C100 000

b) Transaction price = Present value of the contract price: C82 645

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Solutions to GAAP: Graded Questions Revenue from contracts with customers

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Solutions to GAAP: Graded Questions Revenue from contracts with customers