IFRS-15 REVENUE FROM CUSTOMERS PAST PAPERS

Question 1 (D-20)
For the purpose of this question, assume that the date today is 1 February 2020.
Financial statements of Hikmat Limited (HL) for the year ended 31 December 2019 are under
preparation. In this respect, following matters are under consideration:
On 1 September 2019, HL entered into a contract to develop a software for Doctor Limited (DL) for Rs.
150 million. HL ascertained that the promised development of software is a single performance
obligation satisfied over time. The terms of the contract include a penalty of Rs. 14 million if the
development of software is not completed before 29 February 2020. At the inception of the contract, HL
determined that the expected cost of completing the contract would be Rs. 90 million and the software
development would be completed before 29 February 2020.
Till 31 December 2019, HL incurred cost of Rs. 67.5 million. As the original contract was 75% complete,
HL has recognized revenue and profit of Rs. 112.5 million and Rs. 45 million respectively in the draft
financial statements.
However, HL and DL have amended the contract on 31 December 2019. As a result, the consideration
and expected cost increased by Rs. 70 million and Rs. 40 million respectively. The allowable time for
completion without penalty is increased by one month only. HL now expects that the development of
software would not be completed by 31 March 2020. The additional work is not distinct from services
under original contract. No adjustment has been made in HL’s financial statements in respect of the
amendment in the contract. (07)
Required:
Discuss how the above matters should be dealt with in HL’s financial statements for the year ended 31
December 2019. Show all calculations wherever possible.

Question 2 (D-19)
Lira and Co., Chartered Accountants (LCCA) is considering the impact of possible adoption of IFRS 15
‘Revenue from Contracts with Customers’ on its revenues. In this regard, the Finance Manager of LCCA
has sought your advice on the following matters:
(i) At LCCA’s year end, external audits of the financial statements of various clients are in progress. LCCA
usually raises bills for such audits on signing of the audit report when LCCA’s enforceable right to
payment has been established. However, in some other cases, LCCA has an enforceable right to
payment for the work done to date which is non-refundable unless LCCA fails to complete the audit. In
these cases, progress bills are raised by LCCA.
(ii) LCCA has a contract with a client to provide assistance to the client’s internal audit department for a
period of 3 years. The work is performed in complete coordination with client’s internal audit personnel
and any issues identified during the course of audit are immediately brought to the knowledge of the
client. Client’s internal audit plan is agreed in advance with LCCA. Only few internal audits are scheduled
in the months of July and August as compared to other months, due to post year end work load at
client’s other departments. LCCA deputes staff on need basis. Contract price is billed in six equal
instalments through bills raised in arrears at the end of each half year on 30 June and 31 December.

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(iii) LCCA provides/arranges employees on secondment basis to a local client and also to its network
firms abroad. In this respect, LCCA receives full amount each month and then disburses employees’
share.
The local client requests for the specific persons which are then hired by LCCA exclusively for the client.
LCCA is not responsible for ensuring that the services are performed by the employees in accordance
with the terms and conditions of the contract. Consideration received by LCCA is different for each
employee and is based on negotiations between employee and the client.
Network firms request for any suitable personnel for their field work. LCCA then selects from its existing
employees and seconds them to the network firms. Consideration received by LCCA for each employee
is same and is based on negotiations between LCCA and the network firm.

Required:
(a) In respect of (i) and (ii), discuss when revenue should be recognized by LCCA. For each situation
where revenue is to be recognized over time, suggest an appropriate method for measuring progress
towards complete satisfaction of the performance obligation. Assume that LCCA’s year end is 31
October. (10)
(b) In respect of (iii), discuss whether the revenue should be recorded as ‘Net amount’ (i.e. after
deducting employees’ share) or ‘Gross amount’. (08)

Question 3 (J-19)
Fiji Limited (FL) is involved in the manufacturing and trading of consumer goods. The following
transactions/events have occurred during 2018.
In December 2018, FL delivered 35,000 units of one of its products to Dutch Limited (DL) for Rs. 15
million. DL obtained the control upon delivery and immediately paid the full amount which was credited
to revenue. However, DL has been allowed to return unused units within 90 days and receive a full
refund. Such rights have not been granted by FL to any customer in the past. (04)

Required:
Discuss how the above transactions/events should be dealt with in FL’s books for the year ended 31
December 2018. (Show all calculations wherever possible. Also mention any additional information
needed to account for the above transactions/events)

Question 4 (J-18)
Draft consolidated financial statements of Hawks Limited (HL) for the year ended 31 December 2017
show the following amounts:
Rs. in million
Total assets 2,500
Total liabilities 1,610
Total comprehensive income 659
During the process of finalisation, following matters have been noted
HL signed a contract with one of its customers, Rhino Limited (RL). Under the terms of the contract, HL is
required to:

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 produce a series of 5 television advertisements. Each completed advertisement has to be
approved by an independent agency for a minimum 3-star rating. After approval, copy of the
advertisement would be provided to RL who can then use it for other campaigns. HL has no
enforceable right to payment against any under production advertisement.
 arrange airtime of 120 minutes for broadcasting of each advertisement. The primary
responsibility for broadcasting of these advertisements lies with HL.
HL is entitled to Rs. 80 million for the whole contract and bonus of Rs. 2 million for each advertisement if
a 5-star rating is attained.
HL considers all advertisements as equal units. The expected cost of producing each advertisement and
its broadcasting is Rs. 5 million and Rs. 9 million respectively. HL expects to earn mark-up of 30% and
20% respectively on similar services to other clients. Historically, advertisements produced by HL have
received the minimum 3-star rating but 5-star rating is received occasionally.
As at 31 December 2017:
 production of 3 advertisements has been completed. Two of them have received 5-star rating
whereas one has received 3-star rating. HL expects that at least one of the remaining
advertisements would get 5-star ratings.
 broadcasting of first two advertisements has been completed whereas 70% time of the third
advertisement has been broadcasted. Bookings have been made for the broadcasting of
remaining time of third advertisement and entire time of fourth advertisement.
 details of the actual cost incurred on this project are as follows:

Advertisement Production cost Broadcasting cost

----------- Rs. in million -----------
1 4.7 8.5
2 5.6 9.2
3 4.8 8.9
4 3.1* 9.0
* in process
All the above costs have been paid and charged to profit or loss account. HL had received Rs. 40 million
from RL by 31 December 2017 which has been credited to advance from customers account. (08)

Required:
Determine the revised amounts of total assets, total liabilities and total comprehensive income after
incorporating impact of the above adjustments, if any.

Question 5 (J-17)
On 15 December 2014, Builders and Developers (BnD) announced a project to build and sell a 5-storey
building on a piece of land acquired at a cost of Rs. 50 million. In the last week of December 2014, BnD
was approached by Jannat Homes (JH) with the offer to acquire the entire building. JH also suggested
that BnD may continue to provide maintenance services for five years after the handover of building.
The agreement was signed on 1 January 2015. As per the agreement, the entire contract amount of Rs.
275 million (in respect of the building and five years maintenance charges) was paid by JH on signing the
agreement.

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According to the terms of the agreement, the construction work was to be completed within 18 months
and control of the building was to be transferred immediately thereafter.
The control was transferred as agreed. The expenditures incurred on construction of the building from 1
January 2015 to 30 June 2016 (evenly throughout the period) were as follows:
Rs. in million
Direct materials 80.20
Direct labour 32.60
Other costs directly related to the contract 5.80

During the period 1 July 2016 to 31 December 2016, BnD incurred Rs. 3 million for providing
maintenance services relating to the building. BnD expects this rate of expenditure to continue in future
also.
BnD’s incremental borrowing rate is 9% per annum. It normally earns a profit of 30% of cost, on the
provision of maintenance services.

Required:
Prepare relevant extracts from statements of financial position and comprehensive income of BnD for
the years ended 31 December 2015 and 2016. (18)

Question 6 (D-16)
On 1 July 2014 Track Limited (TL) sold its property to Strong Bank Limited (SBL) for Rs. 600 million. The
net carrying amount and market value of the property on 1 July 2014 were Rs. 240 million and Rs. 800
million respectively. The remaining useful economic life of the property was 15 years. Under the terms
of agreement, TL continues to occupy the property and is also responsible for its maintenance. As
consideration of occupation rights,
TL pays rent of Rs. 90 million per annum, payable in arrears. TL has the option to repurchase the
property on 30 June 2016 at Rs. 550 million. TL charges depreciation on straight-line basis.
TL’s cost of equity is 10% whereas incremental borrowing rate is 11.052% per annum. Applicable income
tax rate is 30%.

Required:
(a) Prepare accounting entries to record the above transaction for the year ended 30 June 2015 and give
brief explanation of the accounting treatment worked out by you with reference to the relevant
International Financial Reporting Standards. (11)
(b) Prepare accounting entries to record the transactions for the year ended 30 June 2016 if TL does not
exercise the option to repurchase the property on 30 June 2016. (06)

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Solution 1
As the remaining goods and services to be provided using the modified contract are not distinct from
the goods and services transferred on or before the date of contract modification; that is, the contract
remains a single performance obligation.

Consequently, HL should account for the contract modification as if it were part of the original contract.
HL should update its measure of progress on the basis of revised expected cost of completion. HL should
also revise transaction price under the contract by including the additional consideration and deducting
the amount of penalty as HL expects that work would not be completed by 31 March 2020.

At 31 December 2019, HL should make a cumulative catch-up adjustment as follows.

HL should decrease revenues and profit by Rs. 5.6 million (112.5 – 106.9)

Solution 2
(a) As per para 35 of IFRS 15, an entity should recognize revenue ‘over time’ if one of the following
criteria is met:

(i) the client/customer simultaneously receive and consumes the benefits provided by the entity’s
performance as the entity performs.
(ii) the entity’s performance creates or enhances an asset that the customer controls as the asset is
created or enhanced.
(iii) the entity’s performance does not create an asset with an alternative use and the entity has an
enforceable right to payment for performance completed to date.
If performance obligation is not satisfied over time, an entity satisfies the performance obligation at a
point in time.

EXTERNAL AUDIT:

Performance of Audit services by LCCA does not meet the criteria (i) or (ii) above.
The first part of criteria (iii) is met for all audit services as partially completed audit by LCCA does not
create an asset with an alternative use.
Therefore, LCCA should recognize revenue:

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at a ‘point in time’ where LCCA’s enforceable right to payment is established only after signing of audit
report.
In these cases, revenue for audit services should only be recognized when the control of services has
been transferred i.e. when audit report has been signed and delivered to the client.
‘over time’ where LCCA has enforceable right to payment for work done to date.
An appropriate method for measuring progress and recognizing partial revenue for the audits in
progress at the year-end could be input method (for example: hours utilized/ cost incurred/resources
consumed) or output method (for example: milestones achieved).

INTERNAL AUDIT SERVICES:

As the work is performed in complete coordination with client and any identified issues are immediately
brought to the knowledge of the client, it can be concluded that the client simultaneously receives and
consumes the benefits provided by the LCCA’s performance. Therefore, LCCA should recognize the
revenues ‘over time’.

The revenue would be recognized over time even when LCCA does not have any enforceable right to
payment for the 4 month (July to October) of work completed as at year.

An appropriate method could be output method where revenue is recognized on the basis of output
method (For example: milestones achieved / audits completed) or input method (for example: hours
utilized/ cost incurred/resources consumed).

(b) SECONDMENT:

Revenue should be recognized by LCCA as:

Gross amount if working as a principal
Net amount if working as an agent
LCCA would be a principal if it controls the specified goods or services before that good or service is
transferred to a customer.
Indicators of transfer of control are:
Entity is primarily responsible for fulfilling the promise.
Entity has inventory risk.
Entity has discretion in establishing the price.
In respect of employees seconded to local client, LCCA does not obtain control as:
LCCA is not primarily responsible for fulfilling the promise.
LCCA does not have inventory risk as LCCA does not have the ability to direct the use of those
employees to other assignments. Or Employees are specifically hired for the client.
LCCA does not have discretion in establishing the price.

So LCCA is acting as an agent and should recognize revenue on “Net basis”.

In respect of employees seconded to network firms, LCCA has control over its existing employees as:

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It can direct such employees to other assignment,
It has inventory risk because it has to bear the cost of employees if not used at any assignment, and
It has price discretion.

So LCCA is acting as a principal and should recognize gross amount from network firms as revenue. The
cost of employees would be recognized as cost of fulfilling the contract.

Solution 3
FL should not recognize any revenue when the control of the product is transferred because the
existence of right to return and the lack of relevant historical evidence means that FL cannot conclude
that it is highly probable that a significant reversal in the amount of cumulative revenue will not occur.
Consequently, the revenue would be recognized after expiry of the right to return.
Till then the amount received would be recorded as liability/ contract liability / deferred revenue.
While inventories would be transferred from stock to “Right to recover product to be returned” asset
account at its cost.

Solution 4

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Solution 5

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Solution 6

Brief explanation of the accounting treatment:

In the given situation the asset has been sold but the right to use has been retained along with the
right to repurchase the asset (call option).
In such situation the transaction can either be treated as a lease or as a financing transaction.
However, since in the given situation the present value of outflows (rentals and repurchased price) i.e.
Rs. 610.45 million (W-3) is higher than original selling price, the transaction is to be treated as a
financing transaction.

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