IFRS15 Revenue from

contracts with customers

 Level1 Level 2 Optional
basice concept Y
The five-step model 1 Y Y
The five-step model 2 Y Y
Common types of transaction Y Y
Example Y
Performance obligations satisfied over time Y Y
Performance obligations satisfied over time 2 Y
IAS20 Government grant Y
Revenue recognition
 Revenue recognition
The Conceptual Framework defines income as 'increases in
economic benefits during the accounting period in the form of
inflows or enhancements of assets or decreases of liabilities that
result in increases in equity, other than those relating to
contributions from equity participants'.

Income includes both revenue and gains and is reported in two

possible places depending on its nature:
 Revenue recognition
Profit or loss:
•Revenue from - sale of goods
- rendering of services
- construction contracts

•Interest and dividend income (see Financial instruments chapter)

•Changes in the fair value of financial instruments (see Financial

instruments chapter)

Other comprehensive income:

•Gains on revaluation of property, plant and equipment

•Changes in the fair value of investments in equity instruments (if

election made).
Revenue from contracts with
customers (IFRS 15)
 Revenue from contracts with customers (IFRS 15)
Revenue is recognised when there is transfer of control to the
customer from the entity supplying the goods or services.

The core principle of IFRS 15 is that an entity recognises revenue

to depict the transfer of 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 or services.

IFRS 15 sets out a five step model for the recognition of revenue
Revenue from contracts with customers (IFRS 15)

• Some indicators of the transfer of control are:

a) The entity has a present right to payment for the asset.
b) The customer has legal title to the asset.
c) The entity has transferred physical possession of the asset.
d) The significant risks and rewards of ownership have been
transferred to the customer.
e) The customer has accepted the asset.
 Revenue from contracts with customers (IFRS 15)
1. Identify contract A contract is only in scope when:
a) the parties are committed to carrying
it out
b) each party’s rights to be transferred
can be identified
c) the payment terms can be identified
d) the contract has commercial
substance
e) it is probable the entity will collect
the consideration

A contract can be written, verbal or

implied
 Revenue from contracts with customers (IFRS 15)
2. Identify performance A performance is a promise to transfer
obligations. a good or service to a customer.
Performance obligations should be
accounted for separately provided the
good or service is not distinct.

Where a promised good or service is

not distnct, it is combined with others
until a distinct bundle of goods or
service in identified
 Revenue from contracts with customers (IFRS 15)
3. Determine The amount to which the entity expects
transaction price to be ′entitled′

Probability-weighted expected value or

most likley amount used for variable
consideration

Discounting not required where less than

one year
 Revenue from contracts with customers (IFRS 15)
4. Allocate Multiple deliverables: transaction price
transaction price to allocated to each separate performance
the performance obligations in proportion to the stand
obligations alone selling price of the good or
service underlying each performance
obligation.
 Revenue from contracts with customers (IFRS 15)
5. Recognise revenue ie when entity transfers control of a
when(or as) promised good or service to a costumer
performance
obligation is An entity must be able to reasonably
satisfied measure the outcome of a performance
obligation before the revenue can be
recognised.
 Contract Costs
The incremental costs of obtaining a contract eg sale commission
are recognised as an asset if the entity expects to recover those
costs.

Costs that would have been incurred regardless of the contract

being obtained are recognised as an expense as incurred.
 Contract Costs
Costs in fulfilling a contract are recognised as an asset if they meet
the following criteria:
a.the costs relate directly to an identifiable contract
b.the costs generate or enhance resources of the entity that will be
used in satisfying performance obligations in the future and
c.the costs are expected to be recovered

These costs are amortised on a systematic basis consistent with the

transfer to the customer of the goods or services to which the asset
relates.
The five-step model 1
 Example: identifying the separate performance obligation

Office Solutions, a limited company, has developed a

communications software package called CommSoft. Office
Solutions has entered into a contract with Logisticity to supply
the following:
a) Licence to use Commsoft
b) Installation service. This may require an upgrade to the
computer operating system, but the software package does
not need to be customised.
c) Technical support for three years
d) Three years of updates for Commsoft
Office Solutions is not the only company able to install
CommSoft, and the technical support can also be provided by
other companies. The software can function without the updates
and technical support.
Required：
Explain whether the goods or services provided to Logisticity are
distinct in accordance with IFRS 15 Revenue from contracts with
customers.
 Solution

• CommSoft was delivered before the other goods or services

and remains functional without the updates and the technical
support. It may be concluded that Logisticity can benefit from
each of the goods and services either on their own or together
with the other goods and services that are readily available.
• The promises to transfer each good and service to the
customer are separately identifiable. In particular, the
installation service does not significantly modify the software
itself and, as such, the software and the installation service are
separate outputs promised by Office Solutions rather than
inputs used to produce a combined output.
• In conclusion, the goods and services are distinct and amount
to four performance obligations in the contract under IFRS
15.
 Example: determining the transaction price

Taplop supplies laptop computers to large businesses. On 1 July

20X5, Taplop entered into a contract with TrillCo, under which
TrillCo was to purchase laptops at $500 per unit. The contract
states that if TrillCo purchases more than 500 laptops in a year,
the price per unit is reduced retrospectively to $450 per unit.
Taplop's year end is 30 June.
(a) As at 30 September 20X5, TrillCo had bought 70 laptops
from Taplop. Taplop therefore estimated that TrillCo's purchases
would not exceed 500 in the year to 30 June 20X6, and TrillCo
would therefore not be entitled to the volume discount.
(b) During the quarter ended 31 December 20X5, TrillCo
expanded rapidly as a result of a substantial acquisition, and
purchased an additional 250 laptops from Taplop. Taplop then
estimated that TrillCo's purchases would exceed the threshold for
the volume discount in the year to 30 June 20X6.
Required
• Calculate the revenue Taplop would recognise in:
a) Quarter ended 30 September 20X5
b) Quarter ended 31 December 20X5
• We need to apply the principles of IFRS 15 Revenue from
contracts with customers.
 Solution

a) Applying the requirements of IFRS 15 to TrillCo's

purchasing pattern at 30 September 20X5, Taplop should
conclude that it was highly probable that a significant
reversal in the cumulative amount of revenue recognised
($500 per laptop) would not occur when the uncertainty was
resolved, that is when the total amount of purchases was
known.
Consequently, Taplop should recognise revenue of 70 ×
$500 = $35,000 for the first quarter ended 30 September
20X5.
b) In the quarter ended 31 December 20X5, TrillCo's
purchasing pattern changed such that it would be legitimate
for Taplop to conclude that TrillCo's purchases would exceed
the threshold for the volume discount in the year to 30 June
20X6, and therefore that it was appropriate to reduce the
price to $450 per laptop.
Taplop should therefore recognise revenue of $109,000 for
the quarter ended 31 December 20X5. The amount is
calculated as from $112,500 (250 laptops × $450) less the
change in transaction price of $3,500 (70 laptops × $50
price reduction) for the reduction of the price of the laptops
sold in the quarter ended 30 September 20X5.
 Example:allocating the transaction price to the performance obligations

A mobile phone company gives customers a free handset when

they sign a two-year contract for provision of network services.
The handset has a stand-alone price of $100 and the contract is
for $20 per month.
Prior to IFRS 15, the company would recognise no revenue in
relation to the handset and a total of $240 per annum in relation
to the contract.
Under IFRS 15, revenue must be allocated to the handset
because delivery of the handset constitutes a performance
obligation. This will be calculated as follows:
$ %
Handset 100 17%
Contract – two years 480 83%
Total value 580 100%
As the total receipts are $480, this is the amount which
must be allocated to the separate performance obligations.
Revenue will be recognised as follows (rounded to nearest
$).
$
Year 1
Handset (480 × 17%) 82
Contract (480 – 82)/2 199
281
Year 2
Contract as above 199

So application of IFRS 15 has moved revenue of $41 from

Year 2 to Year 1.
The five-step model 2
 Example: applying the IFRS five-step model

On 1 January 20X4, Angelo enters into a twelve-month ‘pay

monthly’ contract for a mobile phone. The contract is with
TeleSouth, and terms of the plan are:
a) Angelo receives a free handset on 1 January 20X4
b) Angelo pays a monthly fee of $200, which includes
unlimited free minutes. Angelo is billed on the last day of
the month
Customers may purchase the same handset from TeleSouth for $500
without the payment plan. They may also enter into the payment
plan without the handset, in which case the plan costs them $175
per month.
The company’s year-end is 31 July 20X4.
Required
Show how TeleSouth should recognise revenue from this
plan in accordance with IFRS 15 Revenue from contracts
with customers. Your answer should give journal entries:
a) On 1 January 20X4
b) On 31 January 20X4
 Application of the five-step process to TeleSouth
I. Identify the contract with a customer. This is clear. TeleSouth
has a twelve-month contract with Angelo.
II. Identify the separate performance obligations in the contract.
In this case there are two distinct performance obligations:
(1) The obligation to deliver a handset
(2) The obligation to provide network services for twelve
months
(The obligation to deliver a handset would not be a distinct
performance obligation if the handset could not be sold
separately, but it is in this case because the handsets are sold
separately.)
III. Determine the transaction price. This is
straightforward: it is $2,400, that is 12 months × the
monthly fee of $200.
IV. Allocate the transaction price to the separate
performance obligations in the contract. The
transaction price is allocated to each separate
performance obligation in proportion to the standalone
selling price at contract inception of each performance
obligation, that is the stand-alone price of the handset
($500 and the stand-alone price of the network services
($175 × 12 =$2,100.00):
 Performance Stand-alone % of total Revenue (=relative selling
obligation selling price price =$2,400 × %)
$ $
Handset 500.00 19.2% 460.80
Network services 2,100.00 80.8% 1,939.20
Total 2,600.00 100% 2,400.00
V. Recognise revenue when (or as) the entity satisfies a
performance obligation, that is when the entity transfers
a promised good or service to a customer. This applies
to each of the performance obligations:
(1) When TeleSouth gives a handset to Angelo, it needs
to recognize the revenue of $460.80.
(2) When TeleSouth provides network services to
Angelo, it needs to recognize the total revenue of
$1,939.20. It’s practical to do it once per month as
the billing happens.
 Journal entries

On 1 January 20X4
The entries in the books of TeleSouth will be:
DEBIT Receivable (unbilled revenue ) $460.80
CREDIT Revenue $460.80
Being recognition of revenue from the sale of the handset
On 31 January 20X4
The monthly payment from Angelo is split between amounts owing
for network services and amounts owing for the handset.
DEBIT Receivable (Angelo) $200
CREDIT Revenue (1,939.20/12) $161.60
CREDIT Receivable (unbilled revenue )(460.80/12) $38.40
Being recognition of revenue from monthly provision of network
services and ‘repayment’ of handset
Common types of transaction
 Warranties

If a customer has the option to purchase a warranty

separately from the product to which it relates, it constitutes
a distinct service and is accounted for as a separate
performance obligation. This would apply to a warranty
which provides the customer with a service in addition to the
assurance that the product complies with agreed-upon
specifications.
If the customer does not have the option to purchase the
warranty separately, for instance if the warranty is required
by law, that does not give rise to a performance obligation
and the warranty is accounted for in accordance with IAS
37.
 Example: principal versus agent

An entity operates a website that enables customers to

purchase goods from a range of suppliers. The suppliers
deliver directly to the customers, who have paid in advance,
and the entity receives a commission of 10% of the sales
price.
The entity's website also processes payments from the
customer to the supplier at prices set by the supplier. The
entity has no further obligation to the customer after
arranging for the products to be supplied.
Is the entity a principal or an agent?
The following points are relevant:
a) Goods are supplied directly from the supplier to the
customer, so the entity does not obtain control of the
goods.
b) The supplier is primarily responsible for fulfilling the
contract.
c) The entity's consideration is in the form of
commission.
d) The entity does not establish prices and bears no credit
risk.
The entity would therefore conclude that it is acting as an
agent and that the only revenue to be recognised is the
amounts received as commission.
 Repurchase agreements

Under a repurchase agreement an entity sells an asset and

promises, or has the option, to repurchase it. Repurchase
agreements generally come in three forms.
(a) An entity has an obligation to repurchase the asset (a
forward contract).
(b) An entity has the right to repurchase the asset (a call
option).
(c) An entity must repurchase the asset if requested to do
so by the customer (a put option).
 Example: contract with a call option

An entity enters into a contract with a customer for the sale

of a tangible asset on 1 January 20X7 for $1 million. The
contract includes a call option that gives the entity the right
to repurchase the asset for $1.1 million on or before 31
December 20X7.
This means that the customer does not obtain control of the
asset, because the repurchase option means that it is limited
in its ability to use and obtain benefit from the asset.
As control has not been transferred, the entity accounts for
the transaction as a financing arrangement, because the
exercise price is above the original selling price. The entity
continues to recognise the asset and recognises the cash
received as a financial liability. The difference of $0.1
million is recognised as interest expense.
If on 31 December 20X7 the option lapses unexercised, the
customer now obtains control of the asset. The entity will
derecognise the asset and recognise revenue of $1.1 million
(the $1 million already received plus the $0.1 million
charged to interest).
 Example: contract with a put option

An entity enters into a contract with a customer for the sale

of a tangible asset on 1 January 20X7 for $1 million. The
contract includes a put option that obliges the entity to
repurchase the asset at the customer's request for $900,000
on or before 31 December 20X7, at which time the market
value is expected to be $750,000.
In this case the customer has a significant economic
incentive to exercise the put option because the repurchase
price exceeds the market value at the repurchase date. This
means that control does not pass to the customer. Since the
customer will be exercising the put option, this limits its
ability to use or obtain benefit from the asset.
In this situation the entity accounts for the transaction as a
lease in accordance with IAS 17. The asset has been leased
to the customer for the period up to the repurchase and the
difference of $100,000 will be accounted for as payments
received under an operating lease.
 Bill-and-hold arrangements

Under a bill-and-hold arrangement goods are sold but

remain in the possession of the seller for a specified period,
perhaps because the customer lacks storage facilities.
An entity will need to determine at what point the customer
obtains control of the product. For some contracts, control
will not be transferred until the goods are delivered to the
customer. For others, a customer may obtain control even
though the goods remain in the entity's physical possession.
In this case the entity would be providing custodial services
(which may constitute a separate performance obligation) to
the customer over the customer's asset.
For a customer to have obtained control of a product in a bill
and hold arrangement, the following criteria must all be met:
a) The reason for the bill-and-hold must be substantive
(for example, requested by the customer).
b) The product must be separately identified as belonging
to the customer.
c) The product must be ready for physical transfer to the
customer.
d) The entity cannot have the ability to use the product or
to transfer it to another customer.
 Example: bill and hold arrangement

An entity enters into a contract with a customer on 1 January

20X8 for sale of a machine and spare parts. It takes two
years to manufacture these and on 31 December 20X9 the
customer pays for both the machine and the spare parts but
only takes physical possession of the machine. The customer
inspects and accepts the spare parts but requests that they
continue to be stored at the entity's warehouse.
There are now three performance obligations – transfer of
the machine, transfer of the spare parts and the custodial
services. The transaction price is allocated to the three
performance obligations and revenue is recognised when
(or as) control passes to the customer.
The machine and the spare parts are both performance
obligations satisfied at a point in time, and for both of them
that point in time is 31 December 20X9. In the case of the
spare parts, the customer has paid for them, the customer
has legal title to them and the customer as control of them
as they can remove them from storage at any time.
The custodial services are a performance obligation
satisfied over time, so revenue will be recognised over the
period during which the spare parts are stored.
Example
 B67
On 25 June 20X9 Cambridge received an order from a new
customer, Circus, for products with a sales value of $900,000.
Circus enclosed a deposit with the order of $90,000.
On 30 June Cambridge had not completed credit checks on Circus
and had not despatched any goods.
Cambridge is considering the following possible entries for this
transaction in its financial statements for the year ended 30 June
20X9.
(i) Include $900,000 in revenue for the year
(ii) Include $90,000 in revenue for the year
(iii) Do not include anything in revenue for the year
(iv) Create a trade receivable for $810,000
(v) Show $90,000 as a current liability
 B67
According to IFRS 15 Revenue from contracts with customers,
how should Cambridge record this transaction in its financial
statements for the year ended 30 June 20X9?
A. (i) and (iv)
B. (ii) and (v)
C. (ii) and (iv)
D. (iii) and (v) (2 marks)
 B67
Answer D
No sale has taken place as control of the goods has not been
transferred, but Cambridge must show that it is holding $90,000
which belongs to Circus.
 B70
Consignment inventory is an arrangement whereby inventory is held by one
party but owned by another party. It is common in the motor trade.
Which TWO of the following indicate that the inventory in question is
consignment inventory?
Manufacturer can require dealer to return the inventory
Dealer has no right of return of the inventory
Manufacturer bears obsolescence risk
Dealer bears slow movement risk (2 marks)
 B70
Answer
The correct answers are:
Manufacturer can require dealer to return the inventory
Manufacturer bears obsolescence risk
These both indicate that the manufacturer retains ownership of the inventory.
The other options would indicate that the risks and rewards have been
transferred to the dealer.
 B72
Newmarket's revenue as shown in its draft statement of profit or loss for
the year ended 31 December 20X9 is $27 million. This includes $8
million for a goods sold on 31 December 20X9 on which Newmarket will
incur ongoing service and support costs for two years after the sale.
The supply of the goods and the provision of service and support are
separate performance obligations under the terms of IFRS 15 Revenue
from contracts with customers.
The cost of providing service and support is estimated at $800,000 per
annum. Newmarket applies a 30% mark-up to all service costs.
At what amount should revenue be shown in the statement of profit or
loss of Newmarket for the year ended 31 December 20X9? (Ignore the
time value of money.)
$ (2 marks)
 B72
Answer $24,920,000
$'000
Revenue per draft profit or loss 27,000
Servicing costs (800 × 2 × 130%) (2,080)
24,920
 B68
Repro, a company which sells photocopying equipment, has prepared its
draft financial statements for the year ended 30 September 20X4. It has
included the following transactions in revenue at the stated amounts below.
Which of these has been correctly included in revenue according to
IFRS 15 Revenue from contracts with customers?
A.Agency sales of $250,000 on which Repro is entitled to a commission
B.Sale proceeds of $20,000 for motor vehicles which were no longer
required by Repro
C.Sales of $150,000 on 30 September 20X4. The amount invoiced to and
received from the customer was $180,000, which included $30,000 for
ongoing servicing work to be done by Repro over the next two years
•Sales of $200,000 on 1 October 20X3 to an established customer which,
(with the agreement of Repro), will be paid in full on 30 September 20X5.
Repro has a cost of capital of 10%. (2 marks)
 B68
Answer C
The amount to recognise in revenue is $150,000 as the servicing amount of
$30,000 has not yet been earned. This would be recognised as deferred
income.
Performance obligations
satisfied over time
 Performance obligations satisfied over time
An entity may transfer a good or service over time thus the revenue
would be recognised over time
Where the entity undertakes a contract with performance
obligations satisfied over time, such as construction of a building,
the entity must determine what to include as revenue and costs in
each accounting period.
 Performance obligations satisfied over time
An entity must determine the amounts to include as revenue and
costs in each accounting period where performance obligations are
satisfied over time.

Appropriate methods include:

Output methods - on the basis of value to customer of goods or

services transferred to date relative to the remaining goods or
services promised under the contract eg

I. surveys of performance completed to date

II. appraisals of results achieved
III. time elapsed
IV. units produced or delivered
 Performance obligations satisfied over time
Input methods - on the basis of the entity's efforts or inputs to the
satisfaction of a performance obligation relative to the total
expected inputs eg
I. resources consumed
II. labour hours expended
III. costs incurred
IV. time elapsed
V. machine hours used
 Performance obligations satisfied over time
Examples:

Constructing a:
•Bridge
•Building
•Dam
•Ship.
 Performance obligations satisfied over time
Where the entity undertakes a contract with performance
obligations satisfied over time, such as construction of a building,
the entity must determine what to include as revenue and costs in
each accounting period.
 Performance obligations satisfied over time
The amount of payment the entity is entitled to corresponds to the
mount of performance complete to date which approximates to the
costs incurred in satisfying the performance obligations plus a
reasonable profit margin.

The revenue and costs are recogrised based on the proportion of

work completed
 B61
A company entered into a contract on 1 January 20X5 to build a factory.
The total contract revenue was $2.8 million. At 31 December 20X5 the
contract was certified as 35% complete. Costs incurred during the year
were $740,000 and costs to complete are estimated at $1.4 million.
$700,000 has been billed to the customer but not yet paid.
What amount will be recognised as a contract asset or liability in
respect of this contract in the statement of financial position as at 31
December 20X5?
A.$271,000 contract asset
B.$509,000 contract asset
C.$271,000 contract liability
•$509,000 contract liability (2 marks)
 B61
Answer A
$
Costs incurred to date 740,000
Recognised profits (W) 231,000
Amounts invoiced (700,000)
Contract asset 271,000
Working
Total contract revenue 2,800,000
Costs to date (740,000)
Costs to complete (1,400,000)
Total expected profit 660,000
Profit to date (660,000 35%) 231,000
B61
 B64
The following details apply to a contract where performance obligations
are satisfied over time at 31 December 20X5.
$
Total contract revenue 120,000
Costs to date 48,000
Estimated costs to completion 48,000
Amounts invoiced 50,400
The contract is agreed to be 45% complete at 31 December 20X5.
What amount should appear in the statement of financial as at 31
December 20X5 as a contract asset?
A.$8,400
B.$48,000
C.$6,000
•$50,400 (2 marks)
 B64
Answer A
$
Costs incurred to date 48,000
Recognised profits (W) 10,800
Amounts invoiced (50,400)
Contract asset 8,400
Working
Total contract revenue 120,000
Costs to date (48,000)
Costs to complete (48,000)
Total expected profit 24,000
Profit to date (24,000 × 45%) 10,800
Performance obligations
satisfied over time 2
 Performance obligations satisfied over time
If the contract is expected to make a loss, the expected loss is
recognised immediately.
 Contract liability
If contract asset working gives rise to a net amount due to the
customer this is separately disclosed under current liabilities.
 B66
Springthorpe entered into a three-year contract on 1 January 20X2 to
build a factory. This is a contract where performance obligations are
satisfied over time. The percentage of performance obligations
satisfied is measured according to certificates issued by a surveyor.
The contract price was $12 million. At 31 December 20X2 details of
the contract were as follows.
$m
Costs to date 6
Estimated costs to complete 9
Amounts invoiced 4
Certified complete 40%
 B66
What amount should appear in the statement of financial
position of Springthorpe as at 31 December 20X2 as contract
assets/liabilities in respect of this contract?
A.$1 million contract liability
B.$2 million contract liability
C.$1 million contract asset
D.$2 million contract asset (2 marks)
 B66
Answer A
$m
Contract price 12
Total costs (6 + 9) (15)
Foreseeable loss (3)
Costs to date 6
Foreseeable loss (3)
Amounts invoiced (4)
Contract liability (1)
 Information relevant to questions B78-B82
Bridgenorth has undertaken a $5 million contract to repair a railway tunnel.
The contract was signed on 1 April 20X8 and the work is expected to take two
years. This is a contract where performance obligations are satisfied over time
and progress in satisfying performance obligations is to be measured
according to % of work completed as certified by a surveyor. Bridgenorth has
an enforceable right to payment for performance completed to date.
At 31 December 20X9 the details of the contract were as follows:
20X9 20X8
$ $
Total contract value 5,000,000 5,000,000
Costs to date 3,600,000 2,300,000
Estimated costs to completion 700,000 2,100,000
Work invoiced to date 3,000,000 2,000,000
Cash received to date 2,400,000 1,500,000
% certified complete 75% 40%
 B78
What is the profit recognised for the year ended 31 December 20X8?
$
 B78
Answer $240,000
$
Revenue 40% 5,0000,000 = 2,000,000
Expenses 40% X (2,300,000 + 2,100,000) = (1,760,000)
240,000
 B79
What amount would have been included in trade receivables at 31
December 20X8?
$
 B79
Answer $500,000
Work invoiced less cash received
 B80
What is the contract asset to be recognised at 31 December 20X9?
$
 B80
Answer $1,125,000
$
Costs to date 3,600,000
Profit to date ((5,000,000 – 4,300,000) × 75%) 525,000
4,125,000
Less amounts invoiced (3,000,000)
1,125,000
 B81
Bridgenorth measures performance obligations completed by
reference to percentage of completion.
Which one of these would also be an acceptable method of
measuring the performance obligations completed?
Work invoiced to date as a % of total contract price
Cash received to date as a % of total contract price
Costs incurred as a % of total expected costs
Time spent as a % of total expected contract time
 B81
Answer
The correct answer is:
Costs incurred as a % of total expected costs.
This is a valid measure of the inputs expended to satisfy the
performance obligation.
 B82
If at 31 December 20X8 Bridgenorth had completed only 10% of the
contract for costs of $400,000 and felt that it was too early to predict
whether or not the contract would be profitable, what amount, if any,
could Bridgenorth have recognised as revenue?
$
 B82
Answer $400,000
Bridgenorth can recognise revenue to the extent of costs incurred to
date.
 Disclosure
Statement of profit or loss and other comprehensive income
$
Revenue (x% × total contract revenue) X
Cost of sales: (x% × total contract cost) (X)
expected loss (if any) (X)
Profit/(loss) on contract for the year X/(X)

Statement of financial position

Contract asset $
Contract costs incurred to date X
Recognised profits less recognised losses to date X
X
Less: receivables (amounts invoiced) (X)
X/(X)
Trade receivables $
Amounts invoiced X
Less: cash received (X)
X
Government grants (IAS 20)
 Recognition
Grants are not recognised until there is reasonable assurance that
the conditions will be complied with and the grants will be
received.
 Accounting treatment - Grants relating to income
Grants relating to income are shown in profit or loss either
separately or as part of 'other income' or alternatively deducted
from the related expense.
 Accounting treatment - Grants relating to assets
Government grants relating to assets are presented in the statement
of financial position either:
a)As deferred income; or
b)By deducting the grant in calculating the carrying amount of the
asset.

Any deferred credit is amortised to profit or loss over the asset's

useful life.
Example: accounting for grants related to assets

A company receives a 20% grant towards the cost of a

new item of machinery, which cost $100,000. The
machinery has an expected life of four years and a nil
residual value. The expected profits of the company,
before accounting for depreciation on the new machine
or the grant, amount to $50,000 per annum in each year
of the machinery's life.
 Solution (a)
Reducing the cost of the asset
Year1 Year2 Year3 Year4 Total
$ $ $ $ $
Profit before depreciation 50,000 50,000 50,000 50,000 200,000
Depreciation* 20,000 20,000 20,000 20,000 80,000
Profit 30,000 30,000 30,000 30,000 120,000

*The depreciation charge on a straight line basis,

for each year, is ¼ of $(100,000-20,000) = $20,000.
Statement of financial position at year end (extract)
$ $ $ $
Non-current asset 80,000 80,000 80,000 80,000
Depreciation 25% 20,000 40,000 60,000 80,000
Carrying amount 60,000 40,000 20,000 -
 Solution (b)
Treating the grant as deferred income
Year1 Year2 Year3 Year4 Total
$ $ $ $ $
Profit as above 50,000 50,000 50,000 50,000 200,000
Depreciation (25,000) (25,000) (25,000) (25,000) (100,000)
Grant 5,000 5,000 5,000 5,000 20,000
Profit 30,000 30,000 30,000 30,000 120,000
Statement of financial position at year end (extract)

Non-current asset at cost 100,000 100,000 100,000 100,000

Depreciation 25% (25,000) (50,000) (75,000) (100,000)
Carrying amount 75,000 50,000 25,000 -
Government grant
Deferred income 15,000 10,000 5,000 -
 B71
A company receives a government grant of $500,000 on 1 April 20X7 to
facilitate purchase on the same day of an asset which costs $750,000. The
asset has a five year useful life and is depreciated on a 30% reducing
balance basis. Company policy is to account for all grants received as
deferred income.
What amount of income will be recognised in respect of the grant in the
year to 31 March 20X9?
$ (2 marks)
 B71
Answer $105,000
$
Grant received 1.4.X7 500,000
Recognised year to 31.3.X8 (500,000 × 30%) (150,000)
Balance 31.3.X8 350,000
Recognised year to 31.3.X9 (350,000 × 30%) 105,000
 Lecture example
Maddoc purchased a new item of plant for $800,000 on 1 January
20X2, and expected to use it for 5 years with a zero residual value.
The government awarded Maddoc a grant of $300,000 towards the
cost of the plant on the same date.

Maddoc treated the grant as deferred income and has a 30 June

year end.

Required
How much is recognised in Non-current liabilities in respect of the
grant as at 30 June 20X2?
•$60,000
•$30,000
•$210,000
•$270,000
 Lecture example
Answer C
The grant is treated as deferred income:
$
1 January 20X2 Cash received 300,000
20X1-20X2 year Credited to profit or loss (300,000/ 5 X 6/12) (30,000)
30 June 20X2 c/d 270,000

The $270,000 deferred income at 30 June 20X2 must be split into current and non-current
elements:
20X2-20X3 year Credited to profit or loss (300,000/ 5) = current amount (60,000)
30 June 20X3 c/d = non-current amount at 30 June 20X2 210,000
 B62
Which of the following are acceptable methods of accounting for a
government grant relating to an asset in accordance with IAS 20
Accounting for Government Grants and Disclosure of Government
Assistance?
(i)Set up the grant as deferred income
(ii)Credit the amount received to profit or loss
(iii)Deduct the grant from the carrying amount of the asset
(iv)Add the grant to the carrying amount of the asset
A. (i) and (ii)
B. (ii) and (iv)
C. (i) and (iii)
(i) (iii) and (iv) (2 marks)
 B62
Answer C
The grant can be treated as deferred income or deducted from the
carrying amount of the asset. It cannot be credited directly to profit or
loss.
Accounting treatment - Repayment of grants
A government grant that becomes repayable is accounted for as a
change in accounting estimate in accordance with IAS 8.

Repayment of grants relating to income are applied first against

any unamortised deferred credit and then in profit or loss.

Repayments of grants relating to assets are recorded by increasing

the carrying amount of the asset or reducing the deferred income
balance. Any resultant cumulative extra depreciation is recognised
in profit or loss immediately.
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OT1
 B63
On 1 October 20X2 Pricewell entered into a contract to construct a bridge
over a river. The total contract revenue was $50 million and construction is
expected to be completed on 30 September 20X4.
Costs to date are:
$m
Materials, labour and overheads 12
Specialist plant acquired 1 October 20X2 8
The sales value of the work done at 31 March 20X3 has been agreed at $22
million and the estimated cost to complete (excluding plant depreciation) is
$10 million. The specialist plant will have no residual value at the end of the
contract and should be depreciated on a monthly basis. Pricewell recognises
satisfaction of performance obligations on the percentage of completion basis
as determined by the agreed work to date compared to the total contract price.
 B63
What is the profit to date on the contract at 31 March 20X3?
A.$8,800,000
B.$13,200,000
C.$11,440,000
D.$10,000,000 (2 marks)
 B63
Answer A
$'000
Total contract revenue 50,000
Costs to date (12,000)
Specialist plant (8,000)
Costs to complete (10,000)
Total profit on contract 20,000
Profit to date = $20m × 22 / 50 = $8,800,000
 B69
Yling entered into a contract in respect of which performance obligations are
satisfied over time on 1 January 20X4. The contract is expected to last 24
months. The price which has been agreed for the contract is $5 million. At
30 September 20X4 the costs incurred on the contract were $1.6 million and
the estimated remaining costs to complete were $2.4 million. On 20
September 20X4 Yling received a payment from the customer of $1.8
million which was equal to the total of the amounts invoiced. Yling
calculates the stage of completion of its performance obligations on
contracts on the basis of amounts invoiced to the contract price.
What amount would be reported in Yling's statement of financial position as
at 30 September 20X4 as the contract asset arising from the above contract?
Nil
$160,000
$800,000
$200,000 (2 marks)
 B69
Answer $160,000
Expected profit = ($5m – ($2.4m + $1.6m) = $1m
Profit to date = ($1m × (1.8m/5)) = $0.36m
Contract asset:
$'000
Costs to date 1,600
Profit to date 360
Less amounts invoiced (1,800)
160
 Information relevant to questions B73-B77
Derringdo is a broadband provider which receives government assistance
to provide broadband to remote areas. Derringdo invested in a new server
at a gross cost of $800,000 on 1 October 20X2. The server has an
estimated life of ten years with a residual value equal to 15% of its gross
cost. Derringdo uses straight-line depreciation on a time apportioned
basis.
The company received a government grant of 30% of its cost price of the
server at the time of purchase. The terms of the grant are that if the
company retains the asset for four years or more, then no repayment
liability will be incurred. Derringdo has no intention of disposing of the
server within the first four years. Derringdo's accounting policy for
capital-based government grants is to treat them as deferred credits and
release them to income over the life of the asset to which they relate.
 B73
What is the net amount that will be charged to operating expenses in
respect of the server for the year ended 31 March 20X3?
A.$10,000
B.$28,000
C.$22,000
D.$34.000
 B73
Answer C
$
Operating expenses
Depreciation charge (800,000 × 85% × 10% × 6/12)) 34,000
Release of grant (240,000 × 10% × 6/12) (12,000)
22,000
 B74
What amount will be presented under non-current liabilities at 31
March 20X3 in respect of the grant?
A.$228,000
B.$216,000
C.$240,000
D.$204,000
 B74
Answer D
Deferred income $
Grant received ($800,000 X 30%) 240,000
Release for this year ($240,000 X 10% X 6/12) (12,000)
Total balance at year-end 228,000
Presentation
Current liability ($240,000 X 10%) 24,000
Non-current liability (balance) 204,000
228,000
 B75
Derringdo also sells a package which gives customers a free laptop when
they sign a two-year contract for provision of broadband services. The
laptop has a stand-alone price of $200 and the broadband contract is for
$30 per month.
In accordance with IFRS 15 Revenue from contracts with customers,
what amount will be recognised as revenue on each package in the
first year?
A.$439
B.$281
C.$461
D.$158
 B75
Answer A
Year 1 $
Laptop (W) 158
Broadband (562 (W) /2) 281
439
Working
Laptop 200 22% 158
Broadband (30 × 12 × 2) 720 78% 562
920 100% 720
 B76
Determining the amount to be recognised in the first year is an
example of which step in the IFRS 15 5-step model?
A.Determining the transaction price
B.Recognising revenue when a performance obligation is satisfied
C.Identifying the separate performance obligations
D.Allocating the transaction price to the performance obligations
 B76
Answer D
Allocating the transaction price to the performance obligations
 B77
Derringdo is carrying out a transaction on behalf of another entity and the
finance director is unsure whether Derringdo should be regarded as an
agent or a principal in respect of this transaction.
Which one of the following would indicate that Derringdo is acting as
an agent?
A.Derringdo is primarily responsible for fulfilling the contract.
B.Derringdo is not exposed to credit risk for the amount due from the
customer.
C.Derringdo is responsible for negotiating the price for the contract.
D.Derringdo will not be paid in the form of commission.
 B77
Answer B
The other options would all suggest that Derringdo was the principal.
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