Topic: Revenue from Contracts with Customers (IFRS 15)

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CR – May 2024 – L3 – SC – Q6 – Revenue Recognition (IFRS 15)

Discuss IFRS 15 revenue recognition requirements and address consolidation impacts for two transactions.

Question

You are the chief accountant of Japa PLC, that prepares consolidated financial statements. The managing director who is not an accountant, has recently attended a workshop at which key corporate reporting issues were discussed.

The managing director remembers being taught the following at the workshop:

i. Financial statements of an entity should reflect the substance of its transactions.
ii. Revenue from contracts with customers should only be recognized when certain conditions have been satisfied. Transfer of legal title of the goods is not necessarily sufficient for an entity to recognize revenue from their sales.

The financial year-end of Japa PLC is August 31. In the year to August 31, 2021, the company entered into the following transactions:

Transaction 1

On March 1, 2021, Japa PLC sold a property to Kalokalo Bank LTD for N50 million. The market value of the property at the date of the sale was N100 million. However, Japa PLC continues to occupy the property rent-free. Japa PLC has the option to buy the property back from Kalokalo Bank LTD at the end of every month from March 31, 2021, until February 28, 2026. Japa PLC has not yet exercised this option.

The repurchase price will be N50 million plus N500,000 for every complete month that has elapsed from the date of sale to the date of repurchase. Kalokalo Bank LTD did not require Japa PLC to repurchase the property, and the facility will lapse after February 28, 2026.

The director of Japa PLC expects property prices to rise at around 5% each year for the foreseeable future.

Transaction 2

On September 1, 2020, Japa PLC sold one of its branches to Andrew Tourist Nig. LTD for N80 million. The net assets of the branch in the financial statements of Japa PLC immediately before the sale were N70 million. Andrew Tourist Nig. LTD is a subsidiary of Kalokalo Bank LTD and was specifically incorporated to carry out the purchase; it has no other business operations. Andrew Tourist Nig. LTD received the N80 million to finance this project from its parent (Kalokalo Bank LTD) in the form of a loan.

Japa PLC continues to control the operations of the branch and receives an annual operating fee from Andrew Tourist Nig. LTD. The annual fee is the operating profit of the branch for the 12 months to the previous August 31, less the interest payable on the loan taken out by Andrew Tourist Nig. LTD for the 12 months to the previous August 31. If this amount is negative, then Japa PLC must pay the negative amount to Andrew Tourist Nig. LTD.

Any payments to or by Japa PLC must be made by September 30 following the end of the relevant period.

In the year to August 31, 2021, the branch made an operating profit of N20 million, and interest payable by Andrew Tourist Nig. LTD on the loan for this period was N8 million.

Required:

(a) In accordance with IFRS 15 – Revenue from contracts with customers, discuss the conditions that need to be satisfied before revenue can be recognized. (5 Marks)

(b) Write a memo to the managing director of Japa PLC explaining how the transactions described above will be dealt with in the consolidated financial statements of Japa PLC for the year ended August 31, 2021, in accordance with IFRS 15. (10 Marks)

(Total 15 Marks)

Answer

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Tags: Consolidation, Contract with Customers, IFRS 15 Compliance, Revenue Recognition, Substance Over Form
Level: Level 3

Topic: Revenue from Contracts with Customers (IFRS 15)
Series: MAY 2024

FR – May 2022 – L2 – SB – Q5 – Revenue from Contracts with Customers (IFRS 15)

Compare contract liabilities and assets, stand-alone selling price vs. transaction price, and assess contract modification criteria.

Question

IFRS 15 – Revenue from Contracts with Customers defines a contract as an agreement between two or more parties that creates enforceable rights and obligations.

Required:
a. Compare with an example, where necessary:
i. Contract liabilities versus contract assets (2½ Marks)
ii. Stand-alone selling price versus transaction price (2½ Marks)

b. Under IFRS 15, highlight SIX criteria to assess a contract. (6 Marks)

c. Explain what is meant by contract modification and state TWO ways in which it can be accounted for. (4 Marks)

Answer

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Tags: Contract Assets, Contract Liabilities, Revenue Recognition, Stand-Alone Selling Price, Transaction Price
Level: Level 2

Topic: Revenue from Contracts with Customers (IFRS 15)
Series: MAY 2022

FR – NOV 2016 – L2 – Q7b – Revenue from Contracts with Customers (IFRS 15)

Question tests understanding of IAS 11's methods for determining stage of completion in construction contracts.

Question

Briefly explain TWO methods recognized by IAS 11 which can be used to determine the stage of completion of any contract.

Answer

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Tags: Construction Contracts, Contract Accounting, IAS 11, Revenue Recognition, Stage of Completion
Level: Level 2

Topic: Revenue from Contracts with Customers (IFRS 15)
Series: NOV 2016

FR – NOV 2016 – L2 – Q7a – Revenue from Contracts with Customers (IFRS 15)

Question tests understanding of how to account for long-term construction contracts, focusing on stage of completion and profit recognition.

Question

Alpha Plc started a 4-year contract to build a dam. Activities commenced on February 1, 2015. The total contract price amounted to N30billion, and it was estimated that work would be completed at a total cost of N23.75billion. In the construction agreement, the customer agreed to accept increase in wages tariffs in addition to the contract price.

The following information relates to contract activities for the financial year ended December 31, 2015.

(1) Cost for the year:

	N’million
Material	3,500
Labour	2,000
Operating Overheads	375
Subcontractors	450

(2) Current estimate of total contract costs indicates the following:

i. Material will be N450million higher than expected.

ii. Total labour cost will be N750million higher than expected. Of this amount only N600million will be the result of increase in wage tariffs. The remainder will be caused by inefficiencies.

iii. A savings of N75million is expected on operating overheads.

(3) During the year ended December 31 2015 the customer requested a variation to the original contract and it was agreed that the contract price would be increased by N2.250billion. The total estimated cost of this extra work is N1.875billion.

(4) By the end of year 2015, certificate issued by the quantity surveyors indicated a 25% stage of completion.

Required:

Calculate the profit to date based on:

i. Option A – Contract cost in proportion to estimated contract costs. (6 Marks)

ii. Option B – Percentage of work certified. (6 Marks)

Answer

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Tags: Contract Accounting, Contract Revenue, Profit Recognition, Stage of Completion
Level: Level 2

Topic: Revenue from Contracts with Customers (IFRS 15)
Series: NOV 2016

FR – Nov 2019 – L2 – Q6c – Revenue from Contracts with Customers (IFRS 15)

Explain the financial reporting treatment for returned products under IFRS 15.

Question

On September 20, 2019, Phonetell Nigeria Limited sold 100 units of Android PT-Tablet to a major customer for N200,000 each. The PT-Tablet costs Phonetell Nigeria Limited N160,000 each.

The terms of sales are that the customers have the right to return the tablets for a full refund within 3 months. On expiration of the 3 months period, the customer can no longer return the PT-Tablet, and payment becomes immediately due. Phonetell has entered into transactions of this type with these customers previously and can reliably estimate that 4% of the Android PT-Tablets are likely to be returned within the three-month period.

Required:

Explain how the above transactions would be reported in the financial statements of Phonetell Nigeria Limited for the year ended September 30, 2019.
(4 Marks)

Answer

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Tags: IFRS 15, Returns, Revenue Recognition, Variable Consideration
Level: Level 2

Topic: Revenue from Contracts with Customers (IFRS 15)
Series: NOV 2019

FR – Nov 2019 – L2 – Q6b – Revenue from Contracts with Customers (IFRS 15)

Calculate the revenue from the service contract with customers for Phonetell Nigeria Limited for the accounting years ended 2019 and 2020.

Question

Phonetell Nigeria Limited is a network service provider registered with the Nigeria Stock Exchange (NSE). The company has been operating in the country for the past 10 years.

On September 1, 2019, the company entered into a service contract with its customers to provide a special model handset and one year of service at a price of N250,000.

If the customers acquired the handset only, it would be sold at a price of N75,000, and if the network service is separately provided for one year duration, the customer will be made to pay the sum of N200,000 for the one-year duration.

The financial year-end of Phonetell Nigeria Limited is September 30.

Required:

Calculate the revenue from this contract for the accounting years ended 2019 and 2020 in accordance with the provisions of IFRS 15.
(10 Marks)

Answer

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Tags: IFRS 15, Revenue Recognition, Service Contracts
Level: Level 2

Topic: Revenue from Contracts with Customers (IFRS 15)
Series: NOV 2019

FR – Nov 2019 – L2 – Q6a – Revenue from Contracts with Customers (IFRS 15)

Identify and explain the five-step model for recognizing revenue from contracts under IFRS 15.

Question

IFRS 15 on revenue from contracts with customers was issued for the purpose of ensuring that revenue is properly accounted for, better than what we have under IAS 18 and IAS 11.

Required:

i. Identify the FIVE-step model that needs to be followed by entities when recognizing revenue from contracts under IFRS 15.

ii. Explain how IFRS 15 is expected to improve the financial reporting of revenue.

Answer

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Tags: Five-Step Model, IFRS 15, Revenue Recognition
Level: Level 2

Topic: Revenue from Contracts with Customers (IFRS 15)
Series: NOV 2019

FR – Nov 2021 – L2 – Q3b – Revenue from Contracts with Customers (IFRS 15)

Explain the core principles of IFRS 15 for recognizing revenue from contracts with customers.

Question

IFRS 15 – Revenue from Contracts with Customers sets out principles to be applied in order to report useful information to users of financial statements about the nature, amount, timing, and uncertainty of revenue and cash flows arising from a contract with a customer.

Required:
(i) Explain the core principles upon which IFRS 15 is based. (2 Marks)
(ii) Briefly explain the five-step model involved in the application of the core principles. (5 Marks)

Answer

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Tags: Core Principles, IFRS 15, Performance Obligations, Revenue Recognition, Transaction Price
Level: Level 2

Topic: Revenue from Contracts with Customers (IFRS 15)
Series: NOV 2021

FR – Nov 2018 – L2 – SC – Q5 – Revenue from Contracts with Customers (IFRS 15)

Prepare the statement of profit or loss and financial position extracts based on the percentage of completion for a building contract over two years.

Question

Akawo Limited is a building contracting firm based in Abuja. ABC Limited awarded a contract to Akawo Limited to construct a residential building in Lagos. The agreed contract price is N80 million, and the completion date is December 31, 2017.

The following are details of transactions on the contract up to March 31, 2016:

Contract commenced on July 1, 2015
Contract costs incurred by March 31, 2016, include:
- Architects and surveyor’s fees: N1,000,000
- Materials: N6,200,000
- Direct labor costs: N7,000,000
- Overheads (40% of direct labor costs): N2,800,000
- Estimated cost to completion (excluding depreciation): N29,600,000
- Plant and machinery used exclusively on the contract: N7,200,000 (Depreciation based on period of use)
- Material on-site as at March 31, 2016: N600,000

The value of the plant at the end of the contract would be N1.2m and the basis of depreciation
is period of usage. Material on site as at March 31, 2016 is N600,000.

Progress payment made by ABC Limited to Akawo Limited amounted to N25.6m as at March
31, 2016.

The following information is also relevant to the contract as at March, 31 2017:

Cost incurred since the commencement of the contract to date-N40.8m.
Estimated cost to completion (excluding depreciation) N13.2m

ABC Limited paid additional N32.4m to Akawo Limited on March, 31 2017 Akawo Limited
uses percentage of completion to determine profit on a contract.

Required:
Prepare in relation to the building contract, the statement of profit or loss extracts for the years ended March 31, 2016, and 2017, and the statement of financial position extracts as at the year ended on those dates.

Answer

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Tags: Construction Contracts, Contract Accounting, Percentage of completion, Revenue Recognition
Level: Level 2

Topic: Revenue from Contracts with Customers (IFRS 15)
Series: NOV 2018

CR – May 2024 – L3 – SC – Q6 – Revenue Recognition (IFRS 15)

Discuss IFRS 15 revenue recognition requirements and address consolidation impacts for two transactions.

Question

The managing director remembers being taught the following at the workshop:

The financial year-end of Japa PLC is August 31. In the year to August 31, 2021, the company entered into the following transactions:

Transaction 1

The director of Japa PLC expects property prices to rise at around 5% each year for the foreseeable future.

Transaction 2

Any payments to or by Japa PLC must be made by September 30 following the end of the relevant period.

In the year to August 31, 2021, the branch made an operating profit of N20 million, and interest payable by Andrew Tourist Nig. LTD on the loan for this period was N8 million.

Required:

(a) In accordance with IFRS 15 – Revenue from contracts with customers, discuss the conditions that need to be satisfied before revenue can be recognized. (5 Marks)

(Total 15 Marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Consolidation, Contract with Customers, IFRS 15 Compliance, Revenue Recognition, Substance Over Form
Level: Level 3

Topic: Revenue from Contracts with Customers (IFRS 15)
Series: MAY 2024

FR – May 2022 – L2 – SB – Q5 – Revenue from Contracts with Customers (IFRS 15)

Compare contract liabilities and assets, stand-alone selling price vs. transaction price, and assess contract modification criteria.

Question

IFRS 15 – Revenue from Contracts with Customers defines a contract as an agreement between two or more parties that creates enforceable rights and obligations.

Required:
a. Compare with an example, where necessary:
i. Contract liabilities versus contract assets (2½ Marks)
ii. Stand-alone selling price versus transaction price (2½ Marks)

b. Under IFRS 15, highlight SIX criteria to assess a contract. (6 Marks)

c. Explain what is meant by contract modification and state TWO ways in which it can be accounted for. (4 Marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Contract Assets, Contract Liabilities, Revenue Recognition, Stand-Alone Selling Price, Transaction Price
Level: Level 2

Topic: Revenue from Contracts with Customers (IFRS 15)
Series: MAY 2022

FR – NOV 2016 – L2 – Q7b – Revenue from Contracts with Customers (IFRS 15)

Question tests understanding of IAS 11's methods for determining stage of completion in construction contracts.

Question

Briefly explain TWO methods recognized by IAS 11 which can be used to determine the stage of completion of any contract.

Answer

Find Related Questions by Tags, levels, etc.

Tags: Construction Contracts, Contract Accounting, IAS 11, Revenue Recognition, Stage of Completion
Level: Level 2

Topic: Revenue from Contracts with Customers (IFRS 15)
Series: NOV 2016

FR – NOV 2016 – L2 – Q7a – Revenue from Contracts with Customers (IFRS 15)

Question tests understanding of how to account for long-term construction contracts, focusing on stage of completion and profit recognition.

Question

The following information relates to contract activities for the financial year ended December 31, 2015.

(1) Cost for the year:

	N’million
Material	3,500
Labour	2,000
Operating Overheads	375
Subcontractors	450

(2) Current estimate of total contract costs indicates the following:

i. Material will be N450million higher than expected.

ii. Total labour cost will be N750million higher than expected. Of this amount only N600million will be the result of increase in wage tariffs. The remainder will be caused by inefficiencies.

iii. A savings of N75million is expected on operating overheads.

(4) By the end of year 2015, certificate issued by the quantity surveyors indicated a 25% stage of completion.

Required:

Calculate the profit to date based on:

i. Option A – Contract cost in proportion to estimated contract costs. (6 Marks)

ii. Option B – Percentage of work certified. (6 Marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Contract Accounting, Contract Revenue, Profit Recognition, Stage of Completion
Level: Level 2

Topic: Revenue from Contracts with Customers (IFRS 15)
Series: NOV 2016

FR – Nov 2019 – L2 – Q6c – Revenue from Contracts with Customers (IFRS 15)

Explain the financial reporting treatment for returned products under IFRS 15.

Question

On September 20, 2019, Phonetell Nigeria Limited sold 100 units of Android PT-Tablet to a major customer for N200,000 each. The PT-Tablet costs Phonetell Nigeria Limited N160,000 each.

Required:

Explain how the above transactions would be reported in the financial statements of Phonetell Nigeria Limited for the year ended September 30, 2019.
(4 Marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: IFRS 15, Returns, Revenue Recognition, Variable Consideration
Level: Level 2

Topic: Revenue from Contracts with Customers (IFRS 15)
Series: NOV 2019

FR – Nov 2019 – L2 – Q6b – Revenue from Contracts with Customers (IFRS 15)

Calculate the revenue from the service contract with customers for Phonetell Nigeria Limited for the accounting years ended 2019 and 2020.

Question

Phonetell Nigeria Limited is a network service provider registered with the Nigeria Stock Exchange (NSE). The company has been operating in the country for the past 10 years.

On September 1, 2019, the company entered into a service contract with its customers to provide a special model handset and one year of service at a price of N250,000.

The financial year-end of Phonetell Nigeria Limited is September 30.

Required:

Calculate the revenue from this contract for the accounting years ended 2019 and 2020 in accordance with the provisions of IFRS 15.
(10 Marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: IFRS 15, Revenue Recognition, Service Contracts
Level: Level 2

Topic: Revenue from Contracts with Customers (IFRS 15)
Series: NOV 2019

FR – Nov 2019 – L2 – Q6a – Revenue from Contracts with Customers (IFRS 15)

Identify and explain the five-step model for recognizing revenue from contracts under IFRS 15.

Question

IFRS 15 on revenue from contracts with customers was issued for the purpose of ensuring that revenue is properly accounted for, better than what we have under IAS 18 and IAS 11.

Required:

i. Identify the FIVE-step model that needs to be followed by entities when recognizing revenue from contracts under IFRS 15.

ii. Explain how IFRS 15 is expected to improve the financial reporting of revenue.

Answer

Find Related Questions by Tags, levels, etc.

Tags: Five-Step Model, IFRS 15, Revenue Recognition
Level: Level 2

Topic: Revenue from Contracts with Customers (IFRS 15)
Series: NOV 2019

FR – Nov 2021 – L2 – Q3b – Revenue from Contracts with Customers (IFRS 15)

Explain the core principles of IFRS 15 for recognizing revenue from contracts with customers.

Question

Required:
(i) Explain the core principles upon which IFRS 15 is based. (2 Marks)
(ii) Briefly explain the five-step model involved in the application of the core principles. (5 Marks)

Answer

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Tags: Core Principles, IFRS 15, Performance Obligations, Revenue Recognition, Transaction Price
Level: Level 2

Topic: Revenue from Contracts with Customers (IFRS 15)
Series: NOV 2021

FR – Nov 2018 – L2 – SC – Q5 – Revenue from Contracts with Customers (IFRS 15)

Prepare the statement of profit or loss and financial position extracts based on the percentage of completion for a building contract over two years.

Question

The following are details of transactions on the contract up to March 31, 2016:

Contract commenced on July 1, 2015
Contract costs incurred by March 31, 2016, include:
- Architects and surveyor’s fees: N1,000,000
- Materials: N6,200,000
- Direct labor costs: N7,000,000
- Overheads (40% of direct labor costs): N2,800,000
- Estimated cost to completion (excluding depreciation): N29,600,000
- Plant and machinery used exclusively on the contract: N7,200,000 (Depreciation based on period of use)
- Material on-site as at March 31, 2016: N600,000

The value of the plant at the end of the contract would be N1.2m and the basis of depreciation
is period of usage. Material on site as at March 31, 2016 is N600,000.

Progress payment made by ABC Limited to Akawo Limited amounted to N25.6m as at March
31, 2016.

The following information is also relevant to the contract as at March, 31 2017:

Cost incurred since the commencement of the contract to date-N40.8m.
Estimated cost to completion (excluding depreciation) N13.2m

ABC Limited paid additional N32.4m to Akawo Limited on March, 31 2017 Akawo Limited
uses percentage of completion to determine profit on a contract.

Answer

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Tags: Construction Contracts, Contract Accounting, Percentage of completion, Revenue Recognition
Level: Level 2