Solutions to GAAP: Graded Questions Revenue from contracts with customers

Solution 4.1

a. General aspects of IFRS 15

Answer: (d)

Explanation:

Statement 1 is correct because 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.

Statement 2 is incorrect because 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

Statement 3 is correct. Revenue recognition and measurement involves the following 5-step process:
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.

Statement 4 is correct because 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

b. Identifying the contract

Answer: (b)

Explanation:

Statement 1 is incorrect because 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

Statement 2 is incorrect because a contract is defined as:

• an agreement between two or more parties
• that creates enforceable rights and obligations. IFRS 15 App A

© Service & Kolitz, 2024-2025 Chapter 4: Page 1

Solutions to GAAP: Graded Questions Revenue from contracts with customers

Solution 4.1 continued…

b. continued …

Statement 3 is incorrect because 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 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.

Statement 4 is incorrect because this criterion, being one of the 5 criteria for a contract to fall
within the scope of IFRS 15, is that it must be probable that the entity will collect the
consideration to which it expects to be entitled: a mere expectation is not sufficient.
Furthermore, the ‘consideration’ referred to in the previous sentence, does not need to be the full
contract price but, instead, is simply the portion thereof to which the entity expects to be entitled.

For your interest: The 5 criteria that must be met before we conclude that we have a contract:
• 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

c. Determining the transaction price

Answer: (e)

Explanation:

Statement 1 is incorrect because the transaction price will be C120 000, irrespective of how
much is considered 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 (b) 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.

Statement 2 is incorrect because although it is true that the variable consideration to be included
in the transaction price is calculated by estimating it using either the ‘most likely amount’ or
‘expected values’, we limit this estimate to an amount that is ‘highly likely of not resulting in a
significant reversal of revenue in the future’.

Statement 3 is incorrect because the effect of financing is only recognised if it is considered to be

significant. Furthermore, the financing component could benefit either the entity or its customer
and thus it is not always recognised as interest income but could be recognised as interest expense
instead.

Since all statements are incorrect, option (e) is correct.

© Service & Kolitz, 2024-2025 Chapter 4: Page 2

Solutions to GAAP: Graded Questions Revenue from contracts with customers

Solution 4.1 continued…

d. Allocating the transaction price

Answer: (e)

Statement 1 is correct.

Statement 2 is correct.

Statement 3 is incorrect because IFRS 15 does not dictate how the stand-alone selling price
should be estimated, but simply suggests three possible approaches that may be helpful. An entity
may use one of these approaches, a combination of these approaches, or may use any other
reasonable approach.

Statement 4 is incorrect because 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 on a standalone basis and product B was previously 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.
Since only statements 1 and 2 are correct, and this is not one of the options (a)-(d), option (e) is
correct.

e. Satisfying the performance obligations

Answer: (e)

Statement 1 is incorrect because a performance obligation is defined as a

• 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)

Statement 2 is correct.

Statement 3 is correct.

Statement 4 is incorrect because ‘work certified to date as a percentage of total work to be

certified’ is an example of an output method

Since only statements 2 and 3 are correct, and this is not one of the options (a)-(d), option (e) is
correct.

© Service & Kolitz, 2024-2025 Chapter 4: Page 3

Solutions to GAAP: Graded Questions Revenue from contracts with customers

Solution 4.2

a) Grape Limited: Early settlement discounts

Transaction price: C945 000

Transaction price = C1 050 000 (contract price) – C105 000 (expected early settlement discount)
= C945 000

Journal:
Debit Credit

Receivable (A) 100% x C1 050 000 1 050 000

Receivable: settlement discount allowance (-A) C105 000 105 000
Revenue from customer contract 945 000
Revenue from the Grape contract is satisfied at a point in time, net
of expected settlement discount

Explanation:

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 of C105 000, the entity expects to be
entitled to only C945 000 (C1 050 000 – C105 000). Thus, the revenue, measured at the transaction
price, must be presented as C945 000.

For your interest:

Note 1. The customer will be billed at C1 050 000 (and thus the receivable account must be debited
with C1 050 000) but the customer’s debtor balance presented in the statement of financial
position will be measured at the net amount of C945 000 (receivable account: 1 050 000 –
receivable allowance account: 105 000).
Note 2. If the customer fails to pay in time and forfeits his settlement discount, this settlement discount
allowance will be transferred to revenue.

b) Litchi Limited: Rebates

Transaction price: C630 000

Transaction price = C1 050 000 (contract price) – C420 000 (expected rebate)
= C630 000

Journal: Debit Credit

Receivable (A) C1 050 000 1 050 000

Refund liability (L) Given 420 000
Revenue from customer contract 630 000
Revenue from the Litchi contract is satisfied at a point in time,
net of expected rebate

Explanation:

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 of C420 000, the entity expects to be
entitled to only C630 000 (C1 050 000 – C420 000). Thus, the revenue, measured at the transaction
price, must be presented as C630 000.

© Service & Kolitz, 2024-2025 Chapter 4: Page 4

Solutions to GAAP: Graded Questions Revenue from contracts with customers

Solution 4.2 continued …

c) Peach Limited: Financing component (less than a year)

i) Financing is insignificant

Transaction price: C1 050 000

Transaction price = C1 050 000 (contract price) – C0 (significant financing component)

= C1 050 000

Journal: Debit Credit

Receivable (A) C1 050 000 1 050 000

Revenue from customer contract 1 050 000
Revenue from the Peach contract is satisfied at a point in time,
financing component exists but it is insignificant and results from
financing over a period less than one year

Explanation:

The transaction price was not adjusted for the financing component because the effect thereof was
considered insignificant. In addition, 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.

ii) Financing is significant

Transaction price: C1 050 000

Transaction price = C1 050 000 (contract price) – C0 (significant financing component is ignored
because the period of financing is less than a year)
= C1 050 000

Journal: Debit Credit

Receivable (A) C1 050 000 1 050 000

Revenue from customer contract 1 050 000
Revenue from the Peach contract is satisfied at a point in time,
financing component exists but it was ignored because, although
the effects thereof were significant, it resulted from financing
over a period less than one year (practical expedient)

Explanation:

The transaction price was not adjusted for the financing component because, although the effects
thereof were 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 (practical expedient).

© Service & Kolitz, 2024-2025 Chapter 4: Page 5

Solutions to GAAP: Graded Questions Revenue from contracts with customers

Solution 4.2 continued …

d) Tangerine Limited: Financing component (more than a year)

i) Financing is insignificant
Transaction price: C1 050 000
Transaction price = C1 050 000 (contract price) – C0 (significant financing component) = C1 050 000

Journal: Debit Credit

Receivable (A) C1 050 000 1 050 000
Revenue from customer contract 1 050 000
Revenue from the Tangerine contract is satisfied at a point in
time, financing component exists but it is insignificant

Explanation:
The transaction price is only adjusted for the financing component if:
• the period between transfer of goods/ services and date of settlement is greater than a year and
• the effects of the financing are considered to be significant.
Although the period of financing is greater than a year (2 years financing was given to Tangerine), the
effect of the financing is considered insignificant and thus the transaction price was not adjusted

ii) Financing is significant

Transaction price: C867 768

This is the present value of the contract price, calculated by discounting the contract price of C1 050 000 over
2 years using a discount rate of 10%. This can be calculated using a financial calculator, or as follows:
C1 050 000 ÷ 1.1 ÷ 1.1 = 867 768
Thus, we have, in effect, removed the significant financing component from the contract price:
Transaction price = C1 050 000 (contract price) – C182 232 (significant financing component) = C867 768

Journal: Debit Credit

Receivable (A) 867 768
Revenue from customer contract Cash price: PV of consideration 867 768
Revenue from the Tangerine contract is satisfied at a point in time
Receivable (A) 182 232
Revenue from interest income (I) 1 050 000 - 867 768 182 232
Interest income recognised on the significant financing component,
over the financing period, using the effective interest method

Explanation:
The transaction price is only adjusted for the financing component if:
• the period between transfer of goods/ services and date of settlement is greater than a year and
• the effects of the financing are considered to be significant.
Thus, since Fruits provided Tangerine with financing for a period of 2 years and the effects thereof were
considered significant, the transaction price must be adjusted for the effects of the financing component.
The interest income is recognised using the effective interest rate method, which involves recognising
interest income on a systematic basis, over the financial period. Thus, if the time between contract
inception and the financial year end was 6 months (and not 12 months as has been presented in the
journals above), interest income of C43 383 (867 679 x 10% x 6/12) would have been recognised in the
current financial period.

© Service & Kolitz, 2024-2025 Chapter 4: Page 6

Solutions to GAAP: Graded Questions Revenue from contracts with customers

Solution 4.3

MEMORANDUM
To: The accounting department
From: A. Student
Date: 30 June 20X7
Subject: The accounting treatment of the sale of bottles in the year ended 30 June 20X7

The following is an explanation of the accounting treatment of the sale of bottles during the year
ended 30 June 20X7.

The transaction price is the amount of consideration to which the entity expects to be entitled in
exchange for goods and services, excluding amounts collected on behalf of third parties. Thus, if
the entity expects that the customer will qualify for the discount, the entity expects to be entitled to
C270 000 (C300 000 – C30 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
C270 000 (C300 000 – C30 000) is allocated to the single performance obligation.

The journals that would be processed are as follows. An explanation of each of these journals
appears after the journals below.
Debit Credit
1 March 20X7
Receivable (A) Contract price 300 000
Receivable: settlement discount allowance (-A) Given 30 000
Revenue from customer contract Transaction price1 270 000
Revenue from customer contract satisfied at a point in time
1 April 20X7
Receivable: settlement discount allowance (-A) Given 30 000
Revenue from customer contract 30 000
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 20X7
Bank (A) Contract price 300 000
Receivable (A) 300 000
Receipt from customer is recorded
Note 1: Transaction price at contract inception: Contract price: 300 000 – Expected discount: 30 000= 270 000

Explanation of the journals:

Journal on 1 March 20X7:

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 1 March 20X7.

The receivable account is debited with the full price of C300 000 (this receivable asset records
how much the customer has agreed to pay) and the expected settlement discount of C30 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 C270 000, being the amount to which the entity expects to be entitled.

© Service & Kolitz, 2024-2025 Chapter 4: Page 7

Solutions to GAAP: Graded Questions Revenue from contracts with customers

Solution 4.3 continued …

Journal on 1 April 20X7 (or close of business on 31 March 20X7):

The customer had not yet paid as at 31 March 20X7 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 C300 000 (i.e. the transaction price is now C300 000
– it is no longer C270 000). Thus, the total revenue to be recognised from this performance
obligation, once completed, is C300 000 (not C270 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 20X7:

The customer settles his account (debit the bank account) and thus the receivable account is
reversed (credit the receivable account).

End of Memorandum

© Service & Kolitz, 2024-2025 Chapter 4: Page 8

Solutions to GAAP: Graded Questions Revenue from contracts with customers

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.
• a contract asset is an entity’s right that is still conditional; whereas
• a receivable is an entity’s right that is unconditional.

A contract liability represents the entity's obligation

© Service & Kolitz, 2024-2025 Chapter 4: Page 9

Solutions to GAAP: Graded Questions Revenue from contracts with customers

Solution 4.4 continued …

b) The 5-step process to revenue recognition

Revenue from a customer contract may only be recognised once steps 1-5 are complete:

Step 1: Identify that there is a contract with a customer

A single customer has been identified. It will be assumed that this customer meets the
requirements of a customer as prescribed in IFRS 15.

Step 2: Identify the performance obligations

There is a single performance obligation, being to deliver widgets to the customer. There is
no information to suggest that the delivery itself is a separate performance obligation.

Step 3: Determine the transaction price

The transaction price is C6 per widget. This is the amount Msizi expects to be entitled to for
each widget delivered (there appears to be no portion thereof that is payable to third parties
– if there had been, then this would have had to be deducted from the C6).

Step 4: Allocate the transaction price to each performance obligation

As there is only one performance obligation (PO), the full transaction price will be allocated
to it.

Step 5: Recognise the transaction price as revenue when/as the performance obligations
are met
(i.e. the allocated transaction price is recognised as revenue in its entirety on a single
point in time, if the performance obligation is satisfied at a point in time, or is
recognised as revenue gradually over time, if the performance obligation is satisfied
over time).

This contract involves a single performance obligation that is satisfied at a point in time. We
are told that the performance obligation was met on 31 July 20X7 and thus the transaction
price is recognised on this date.

© Service & Kolitz, 2024-2025 Chapter 4: Page 10

Solutions to GAAP: Graded Questions Revenue from contracts with customers

Solution 4.4 continued ...

c) Explanation regarding the recognition of revenue:

Overview of cancellable versus non-cancellable contracts

Introduction:

There are three dates that we need to consider:

• 1 July 20X7: the date the contract is agreed to;
• 15 July 20X7: the date the consideration becomes payable; and
• 31 July 20X7: 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.

i) If the contract is cancellable

The contract is signed on 1 July 20X7 and the customer is expected to make payment on
15 July 20X7, however, if the contract is cancellable, both these dates are ignored:
• revenue may not be recognised on either the 1 July 20X7 or 15 July 20X7 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 1 July 20X7 or 15 July 20X7 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.

Msizi performed its obligations on 31 July 20X7, 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 July 20X7
Receivable (A) 300 000
Revenue from customer contract Transaction price: 50 000 units x C6 300 000
Revenue from customer contract satisfied at a point in time

Continued on the next page

© Service & Kolitz, 2024-2025 Chapter 4: Page 11

Solutions to GAAP: Graded Questions Revenue from contracts with customers

Solution 4.4 continued ...

c) continued…

ii) If the contract is non-cancellable

The contract is signed on 1 July 20X7, 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 15 July 20X7. See IFRS 15.IE199

The contract states that the customer must make payment on 15 July 20X7.
• Assuming the contract is non-cancellable, Msizi 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 15 July 20X7, Msizi must recognise a receivable.
• However, Msizi 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).

The following journal is thus processed:

Debit Credit
15 July 20X7
Receivable (A) 300 000
Contract liability Transaction price: 50 000 units x C6 300 000
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 July 20X7, 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).

The following journal is thus processed:

Debit Credit
31 July 20X7
Contract liability 300 000
Revenue from customer contract Transaction price: 50 000 units x C6 300 000
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

© Service & Kolitz, 2024-2025 Chapter 4: Page 12

Solutions to GAAP: Graded Questions Revenue from contracts with customers

Solution 4.5

a) If 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
expected discount; where this contract price was calculated as: 50 000 bars x C4 = C200 000).
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 20X7

1 August 20X7 Debit Credit

Receivable (A) 50 000 x C4 200 000
Receivable: discount allowance (-A) 200 000 x 10% 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:
Receivable: discount allowance (-A) 20 000
Receivable (A) 20 000
Discount is granted: reversing the discount allowance
account and thus reducing the receivable account
Bank (A) 180 000
Receivable (A) 180 000
Recognising the receipt and reversing the receivable
ii) Assuming discount is not granted on 1 September 20X7

1 August 20X7 Debit Credit

Receivable (A) 50 000 x C4 200 000
Receivable: discount allowance (-A) 200 000 x 10% 20 000
Revenue from customer contract (I) 180 000
Recognising the receivable and revenue on the date that the
PO is satisfied
1 September 20X7:
Receivable: discount allowance (-A) 20 000
Revenue from customer contract (I) 20 000
Discount is not granted: reversing the discount allowance
account and recognising it as revenue
Bank 200 000
Receivable (A) 200 000
Recognising the receipt and reversing the receivable

© Service & Kolitz, 2024-2025 Chapter 4: Page 13

Solutions to GAAP: Graded Questions Revenue from contracts with customers

Solution 4.5 continued ...

b) If 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 20X7

15 July 20X7 Debit Credit

Receivable (A) 50 000 x C4 200 000

Receivable: discount allowance (-A) 200 000 x 10% 20 000
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

Contract liability (L) 180 000

Revenue from customer contract (I) 180 000
Recognising the revenue and reversing the contract liability

1 September 20X7

Receivable: discount allowance (-A) 20 000

Receivable (A) 20 000
Discount is granted: reversing the discount allowance
account and thus reducing the receivable account

Bank 180 000

Receivable (A) 180 000
Recognising the receipt and reversing the receivable

© Service & Kolitz, 2024-2025 Chapter 4: Page 14

Solutions to GAAP: Graded Questions Revenue from contracts with customers

Solution 4.5 continued ...

b) continued…

ii) Assuming discount not granted on 1 September 20X7

15 July 20X1 Debit Credit

Receivable (A) 50 000 x C4 200 000

Receivable: discount allowance (-A) 200 000 x 10% 20 000
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 20X1

Contract liability (L) 180 000

Revenue from customer contract (I) 180 000
Recognising the revenue and reversing the contract liability

1 September 20X1

Receivable: discount allowance (-A) 20 000

Revenue from customer contract (I) 20 000
Discount is not granted: reversing the discount allowance
account and recognising it as revenue

Bank 200 000

Receivable (A) 200 000
Recognising the receipt and reversing the receivable

© Service & Kolitz, 2024-2025 Chapter 4: Page 15

Solutions to GAAP: Graded Questions Revenue from contracts with customers

Solution 4.6
Part A: Animania Properties contract

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, excluding any
amounts collected on behalf of third parties.

The determination of the transaction price involves the assessment of 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.

The contract price does not involve amounts collected on behalf of third parties, 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 C24 000 000 together with a further performance bonus
of C2 400 000 if the construction is completed within a 24-month period. The possibility of a
bonus means that the contract includes not only fixed consideration (C24 000 000) but also
variable consideration (C2 400 000).

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:

• Bob Construction completes it within 24 months, in which case it will earn the bonus (bonus
= C2 400 000); or
• Bob Construction does not complete it within 24 months, in which case it will not earn the
bonus (bonus = C0).

Since there are only two possible outcomes, we use the ‘most likely amount’ method.

© Service & Kolitz, 2024-2025 Chapter 4: Page 16

Solutions to GAAP: Graded Questions Revenue from contracts with customers

Solution 4.6 continued …

Part A continued …

Since Bob Construction 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 400 000 (on the basis that it has the higher likelihood of occurring). The
transaction price is therefore C26 400 000 (fixed consideration: C24 000 000 + variable
consideration: C2 400 000).

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 simply 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.

Comment:
The fact that the customer is required to make progress payments during the course of construction
would be relevant information when assessing whether or not the performance obligation is
satisfied at a point in time or over time.

© Service & Kolitz, 2024-2025 Chapter 4: Page 17

Solutions to GAAP: Graded Questions Revenue from contracts with customers

Solution 4.6 continued ...

Part B: Goofy Property Holdings

a) Discussion

Determining the transaction price

The transaction price in a contract with a customer is the consideration to which the entity expects
to be entitled in exchange for the transfer of the promised goods and services, excluding any
amounts collected on behalf of third parties.

The determination of the transaction price involves the assessment of 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.

The contract price has been determined at C2 880 000, being fixed consideration: it does not
involve variable consideration. It also does not include amounts collected on behalf of third
parties, non-cash consideration and nor does it include consideration payable to the customer.
However, it does involve financing since the timing of the transfer of goods to the customer
(machinery) differs from 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 Bob Construction (BBC) is providing finance to the customer, Goofy
Property Holdings (GPH) (i.e. GPH 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 income 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 Bob Construction 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.

However, since the period between the transfer of the machine and the final payment is more than
a year (in this case, the period is three years), this practical expedient is not available to BBC.
Thus, BBC must decide if the effect of the financing is considered to be significant.

If BBC concludes that the effect of the financing is considered to be insignificant, then the
transaction price would be determined to be C2 880 000.

However, if BBC concludes that the effect of the financing is considered to be significant, then
the transaction price would be determined by excluding the financing component. In other words,
the transaction price would thus be measured at the cash selling price of C2 250 000 (given). The
difference between the contract price of C2 880 000 and the transaction price of C2 250 000 will
be recognised as interest income using the effective interest rate method (in accordance with IFRS
9 Financial instruments).

In order to satisfy this requirement, the implicit interest rate needs to be calculated for the
transaction. The implicit interest rate is calculated overleaf.

© Service & Kolitz, 2024-2025 Chapter 4: Page 18

Solutions to GAAP: Graded Questions Revenue from contracts with customers

Solution 4.6 continued ...

Part B: continued …

a) continued …

The implicit interest rate is calculated (using a financial calculator) as follows:

N=3
PV = C2 250 000
PMT = -C960 000 (C2 880 000 / 3 annual payments)
Comp I = 13.4368%

The revenue from interest would then be measured using the effective interest rate method, shown
in the following effective interest rate table:

Opening Interest at Closing

Year balance 13,4368% Instalment balance
(1) (2) (3)
Year 1 (20X6) 2 250 000 302 328 (960 000) 1 592 328
(2)
Year 2 (20X7) 1 592 328 213 958 (960 000) 846 286
(2)
Year 3 (20X8) 846 286 113 714 (960 000) 0
(1) The C2 250 000 is recognised as revenue from the customer contract in January 20X6 (IFRS 15).
(2) The interest of C302 328, C213 958 and C113 714 is recognised as income from interest in each of the
three years, using the above effective interest rate method (IFRS 9).
(3) The annual instalment = C2 880 000 / 3 instalments = C960 000.

Allocating the transaction price

Since there is only one performance obligation (the transfer of machinery), the entire transaction
price of C2 250 000 is allocated to this single performance obligation.

b) Journals

01 January 20X6 Debit Credit

Accounts receivable (A) Transaction price 2 250 000
Revenue from customer contract (I) 2 250 000
Recording the sale of the machinery on deferred payment terms

31 December 20X6
Accounts receivable (A) C2 250 000 x 13.4368% 302 328
Revenue from interest (I) 302 328
Recording interest income using the effective interest rate

Bank (A) 960 000

Accounts receivable (A) 960 000
First instalment paid by customer – C2 880 000/3

© Service & Kolitz, 2024-2025 Chapter 4: Page 19

Solutions to GAAP: Graded Questions Revenue from contracts with customers

Solution 4.7
The contract price is C550 000 (550 000 widgets x C1 per widget). However, the transaction price
(TP) is determined, at contract inception (1 February 20X3), based on the consideration that the
entity expects to be entitled to. In this example, the contract price equals the transaction price (the
contract does not involve variable consideration, a significant financing component, non-cash
consideration or consideration to be paid to a customer).

28 February 20X3: Debit Credit

Receivable (A) TP: 550 000 widgets x C1 x 100% 550 000

Revenue (I) 550 000
Recognising revenue and a receivable when PO satisfied (i.e. when
the customer obtains control)

Impairment – credit loss (E) TP: 550 000 x 50% (lifetime 137 500
Receivable: loss allowance (-A) expected credit loss) x 50%(POD) 137 500
Recognising a separate loss allowance based on expected credit losses

15 March 20X3:

Impairment – credit loss (E) TP550 000 x 60% – 137 500 192 500
Receivable: loss allowance (-A) 192 500
Remeasuring the loss allowance to reflect information received regarding
the customer’s liquidity problems

5 August 20X3:

Bank Given 165 000

Receivable (A) 165 000
Recognising the receipt from the customer

Impairment – credit loss (E) Receivable balance: (550 000 – 55 000

Receivable: loss allowance (-A) received: 165 000) – Loss allowance 55 000
balance (137 500 + 192 500)
Remeasuring the loss allowance on date of the receipt from the customer
based on the fact that the entity does not expect to receive the remaining
balance still owed by the customer (385 000): the loss allowance balance
thus needs to be increased from 330 000 to 385 000

Receivable: loss allowance (-A) 137 500 + 192 500 + 55 000 385 000
Receivable (A) 550 000 – 165 000 385 000
Derecognising the receivable and its related allowance account

© Service & Kolitz, 2024-2025 Chapter 4: Page 20

Solutions to GAAP: Graded Questions Revenue from contracts with customers

Solution 4.7 continued…

Explanation of each journal (for your interest)

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.
• In terms of IFRS 9 Financial instruments, a loss allowance must be recognised on initial recognition.
As this is a trade receivable, the simplified method must be used in terms of IFRS [Link]. Thus, the
loss allowance is equal to the lifetime expected credit losses (transaction price x lifetime expected credit
losses x probability of default).

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
a ‘receivable 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 (prior to the receipt of C165 000) was reflected at a net amount of C220 000
(receivable: 550 000 – loss allowance: 330 000 = 220 000) 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 derecognises the customer’s receivable
account and the related receivable loss allowance account (effectively reversing the loss allowance
account against the related receivable account).

P.S. If Macrobyte had not considered the payment from the customer to be the final settlement and, instead,
intended to pursue the customer for further payments, then the third journal on 5 August 20X3
(derecognizing the receivable) would not have been processed. In other words, the journals on 5 August
20X3 would simply have been as follows:

5 August 20X3: Debit Credit

Bank Given 165 000

Receivable (A) 165 000
Recognising the receipt from the customer

Impairment – credit loss (E) Receivable balance: (550 000 – 55 000

Receivable: loss allowance (-A) received: 165 000) – Loss allowance 55 000
balance (137 500 + 192 500)
Remeasuring the loss allowance on date of the receipt from the customer
based on the fact that the entity does not expect to receive the remaining
balance still owed by the customer (385 000): the loss allowance balance
thus needs to be increased from 330 000 to 385 000

© Service & Kolitz, 2024-2025 Chapter 4: Page 21

Solutions to GAAP: Graded Questions Revenue from contracts with customers

Solution 4.8

a) Discussion: identification of the performance obligations

Answer: The design and manufacture of the plant comprise one 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 Siboniso
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.

© Service & Kolitz, 2024-2025 Chapter 4: Page 22

Solutions to GAAP: Graded Questions Revenue from contracts with customers

Solution 4.8 continued ...

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 Thando 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 186).

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 Thando Limited:
• Thando had become obliged to pay for the plant;
• Thando had obtained legal title over the plant;
• Thando 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 Siboniso Limited:
• had invoiced Thando 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 Thando Limited requested that Siboniso
Limited retain possession;
• the plant is separately identified as having been sold to Thando (the sale agreement has been
signed thus providing legal proof that this particular plant has been sold to Thando 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 Siboniso Limited.

Continued on the next page…

© Service & Kolitz, 2024-2025 Chapter 4: Page 23

Solutions to GAAP: Graded Questions Revenue from contracts with customers

Solution 4.8 continued ...

b) continued ...

Conclusion:

We conclude that control passed to Thando 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, Siboniso 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

Bank (A) Given 770 000
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

© Service & Kolitz, 2024-2025 Chapter 4: Page 24

Solutions to GAAP: Graded Questions Revenue from contracts with customers

Solution 4.8 continued ...

c) Discussion bill and hold sale (storage significant)

Thando 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,
Siboniso 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.

© Service & Kolitz, 2024-2025 Chapter 4: Page 25

Solutions to GAAP: Graded Questions Revenue from contracts with customers

Solution 4.8 continued ...

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.

© Service & Kolitz, 2024-2025 Chapter 4: Page 26

Solutions to GAAP: Graded Questions Revenue from contracts with customers

Solution 4.8 continued ...

c) continued ...

Thus, the journals for the year ended 28 February 20X1 are as follows:

8 January 20X1 Debit Credit

Bank (A) Given 770 000
Revenue from customer contract (I) Working above 740 000
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
Revenue from customer contract (I) 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
Revenue from customer contract (I) 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 Siboniso 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.

© Service & Kolitz, 2024-2025 Chapter 4: Page 27

Solutions to GAAP: Graded Questions Revenue from contracts with customers

Solution 4.9

Part A

Journals:

1 January 20X8 Debit Credit

Bank (A) Given 48 000
Contract liability (L) 48 000
Recognising the receipt from the customer and the related contract liability
for the future services

31 December 20X8
Contract liability (L) W2 10 105
Revenue from customer contract (I) 10 105
Recognising the revenue from the first of the three services

31 December 20X9
Contract liability (L) 15 158
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 separate POs (i.e. the 3 annual services), each of which
was a PO satisfied at a point in time, based on their relative standalone selling prices. The relative stand-
alone selling prices were not given and thus 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,
calculated as a mark-up on cost of 20%).

Estimated Allocation of
Mark up %
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

Notice that, although the TP must technically be allocated to each of the 3 POs based on their
relative stand-alone selling prices (SASPs), this solution estimated the SASPs using the
‘expected cost-plus appropriate margin’ approach, where the profit margin was a standard 20%
for each of the 3 POs (i.e. for each of the 3 services). This means that the same allocation of the
transaction price could have been achieved by allocating the transaction price based on the costs
of each PO as follows (IMPORTANT: the following table is for your information only - you
should not set out your answer in this way since it may suggest that you do not understand that the
TP should be allocated to multiple POs using their relative SASPs!):

Costs Workings Revenue allocation

First service C12 000 C12 000/57 000 x C48 000 C10 105
Second service C18 000 C18 000/57 000 x C48 000 C15 158
Third service C27 000 C27 000/57 000 x C48 000 C22 737
C57 000 C48 000 (W1)

© Service & Kolitz, 2024-2025 Chapter 4: Page 28

Solutions to GAAP: Graded Questions Revenue from contracts with customers

Solution 4.9 continued ...

Part A continued …

Explanation (not required, included for informative purposes):

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.

Where a contract involves more than one performance obligation (PO), the contract’s transaction
price must be allocated to each of the performance obligations based on the stand-alone selling
prices (SASPs) of each PO.

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 effect of financing was considered to be
insignificant and thus the transaction price was not adjusted. In other words, we conclude that the
contract price of C48 000 equals the transaction price.

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 of C20 400 inherent in the contract price 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.

© Service & Kolitz, 2024-2025 Chapter 4: Page 29

Solutions to GAAP: Graded Questions Revenue from contracts with customers

Solution 4.9 continued ...

Part B

a) In order to determine how many performance obligations are evidenced in this contract, the
entity will have to draw conclusions after analysing the facts and circumstances. In this regard,
the entity ought to consider whether:
• the services are considered capable of being distinct; and
• the services are distinct in the context of the contract.

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. As such each year of service is not capable of being distinct and
each year of service is not distinct in the context of the contract.

The three annual services are thus a single performance obligation.

b) Journals

01 January 20X8 Debit Credit

Bank (A) Given 48 000
Contract liability (L) 48 000
Recognising the receipt from the customer and the related contract
liability for the future services

31 December 20X8
Contract liability (L) W1 10 105
Revenue from customer contract (I) 10 105
Recognising the revenue from the first of the three services

31 December 20X9 (for illustrative purposes only)

Contract liability (L) 15 158
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 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)

© Service & Kolitz, 2024-2025 Chapter 4: Page 30

Solutions to GAAP: Graded Questions Revenue from contracts with customers

Solution 4.9 continued ...

Part B continued…

b) continued …

Explanation (not required, include for informative purposes):

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 effect of financing was 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 although a variety of methods are possible.

Comment:

Let’s compare Part A and Part B:

• In Part A, we have 3 POs and thus the TP must be allocated to each PO based on its relative SASP.
Each of these POs was a PO satisfied at a point in time and thus the portion of the TP allocated to
that PO would simply be recognised as revenue when that PO was satisfied.
• In Part B, we have 1 PO and thus the entire TP is allocated to that PO. This PO is a PO satisfied
over time and thus the TP is recognised as revenue based on the PO’s stage of completion. In this
solution, we chose to calculate the stage of completion based on the expected costs.

Please note that, since the SASPs in Part A were estimated based on a standard 20% mark-up on costs,
the allocation of the TP looks identical in both part A and part B, but this will not always be the case,
(e.g. had Part A stated that the entity worked on a 20% mark-up for service 1 and 30% mark-up for
service 2 and 40% mark-up for service 3, then the answer would have differed).

© Service & Kolitz, 2024-2025 Chapter 4: Page 31

Solutions to GAAP: Graded Questions Revenue from contracts with customers

Solution 4.10

a) Option 1: Journals involving a warranty (assurance-type)

01 January 20X9 Debit Credit

Bank (A) 300 000
Revenue from customer contract (I) 300 000
Recognising the receipt from the customer as revenue
Cost of sales (E) 87 000
Inventory (A) 87 000
Recognising the cost of the goods sold
31 December 20X9 (cumulative journal)
Bank (A) 300 000 x 3,5% x 12/12 10 500
Interest income (A) 10 500
Recognising interest as income (not revenue in terms of IFRS 15!)

Explanation (not required, included purely for your interest)

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.

© Service & Kolitz, 2024-2025 Chapter 4: Page 32

Solutions to GAAP: Graded Questions Revenue from contracts with customers

Solution 4.10 continued...

b) Option 2: Journals involving a right of return

01 January 20X9 Debit Credit

Bank (A) Given 300 000
Contract liability (L) 300 000
Recognising the receipt from the customer as a refund liability due
to the right of return
Right of return asset (A) Given 87 000
Inventory (A) 87 000
Recognising the cost of the inventory sold as a right of return asset

1 October 20X9
Contract liability (L) 300 000
Revenue from customer contract (I) 300 000
Cost of sales (E) 87 000
Right of return asset (A) 87 000
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 20X9 (cumulative journal)

Bank (A) 300 000 x 3,5% x 12/12 10 500
Interest income (A) 10 500
Recognising interest as income (not revenue in terms of IFRS 15!)

Explanation (not required, included purely for your interest)

When dealing with a right of return, we are dealing with variable consideration. This is because
we are 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, Pavilion Limited has no past experience on which to predict the possibility of the
goods being returned. Consequently, assuming that the sale amount of C300 000 is considered
material, the inability to predict means that Pavilion Limited cannot conclude that there is a high
probability that a significant reversal of cumulative revenue will not occur in the future.
Thus, Pavilion Limited 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.

© Service & Kolitz, 2024-2025 Chapter 4: Page 33

Solutions to GAAP: Graded Questions Revenue from contracts with customers

Solution 4.10 continued ...

c) Option 3: Journals involving a warranty (service-type)

01 January 20X9 Debit Credit

Bank (A) Given 300 000

Contract liability (L) 42 857
Revenue from customer contract 257 143
Recognising the receipt from the customer as revenue and a refund
liability (see W1)

Cost of sales (E) Given 87 000

Inventory (A) 87 000
Recognising the cost of the inventory sold as a right of return asset

31 December 20X9

Contract liability (L) 42 857

Revenue from customer contract (I) 42 857
Recognising the revenue from the customer contract upon forfeiture of
warranty

31 December 20X9 (cumulative journal)

Bank (A) 300 000 x 3,5% x 12/12 10 500

Interest income (A) 10 500
Recognising interest as income (not revenue in terms of IFRS 15!)

The transaction price of C300 000 is allocated to the 2 performance obligations.

Costs Workings Revenue allocation

Goods C300 000 C300 000 x (C300 000/ C350 000) C257 143
Warranty C50 000 C300 000 x (C50 000/ C350 000) C42 857
C350 000 C300 000 (W1)

© Service & Kolitz, 2024-2025 Chapter 4: Page 34

Solutions to GAAP: Graded Questions Revenue from contracts with customers

Solution 4.10 continued ...

Explanation (not required, included purely for your interest)

As explained in part (a), 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).

As per the discussion in part A, service-type warranties, are accounted for in terms of IFRS 15
whereas assurance-type warranties are not. Furthermore, service-type warranties 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 a service-type warranty obligation.

In the scenario provided, the warranty is a service-type warranty:

• If the goods are found to be defective within 12-months of purchase, they may be returned for
a refund, suggesting it is an assurance-type warranty; however,
• This warranty is sold separately and thus it will be automatically accounted for as a service-
type warranty.

In other words, the 1-year warranty in this contract could have been purchased separately by a
customer, and thus this warranty is automatically accounted for as a service-type warranty. This
will mean that the entire transaction price must be recognised as revenue in terms of IFRS 15 and
will be allocated between two performance obligations:
• the goods: with an allocation of C257 143; and
• the warranty: with an allocation of C42 857 (see W1)

The revenue from the goods will be recognised when the goods are delivered (being a performance
obligation satisfied at a point in time) and the revenue from the warranty (service) will be
recognised over the 12-month period (being a performance obligation satisfied over time).

© Service & Kolitz, 2024-2025 Chapter 4: Page 35

Solutions to GAAP: Graded Questions Revenue from contracts with customers

Solution 4.11
Journals

Rose Florists

31 January 20X9 Debit Credit

Accounts receivable (A) 184 000 x C6.00 1 104 000
Refund liability (L) 184 000 x (C6.00 – C5.40) 110 400
Revenue from customer contract (I) 184 000 x C5.40 993 600
Transaction with Rose Florists:
Recognising the receivable and the related revenue and contract liability,
subject to a potential volume rebate (Rose Florists will only settle in March
20X9)

Lily Florists

31 January 20X9 Debit Credit

Bank (A) 99 000 x C6.00 594 000
Refund liability (L) 99 000 x (C6.00 – C5.75) 24 750
Revenue from customer contract (I) 99 000 x C5.75 569 250
Transaction with Lily Florists:
Recognising the receivable and the related revenue and refund liability,
subject to a potential volume rebate (the question told us that clients are
normally expected to pay on the day: whereas we are told that Lily paid in
advance and Rose will be paying in arrears, no information was given to
suggest that Lily would be paying in advance or in arrears, thus we assume
this transaction was received in cash, thus we debit bank)

Orchid Florists

31 January 20X9 Debit Credit

Bank (A) C1 600 000 1 600 000
Refund liability (L) C1 600 000 – C207 000 1 393 000
Revenue from customer contract (I) 34 500 x C6.00 207 000
Transaction with Orchid Florists:
Recording the receipt from the customer and the related revenue and
refund liability (no potential rebate currently expected) (we are told that
Orchid paid a large sum in advance – C207 000 of which related to
revenue for the delivery of flowers (a satisfied PO) and the balance of
C1 393 000 related to future orders not yet placed – since no orders have
yet been received, the entity has no obligation to deliver goods or services
and thus the C1 393 000 does not meet the definition of a contract liability
and should thus be recognised as a refund liability)

© Service & Kolitz, 2024-2025 Chapter 4: Page 36

Solutions to GAAP: Graded Questions Revenue from contracts with customers

Solution 4.11 continued ...

Explanation of the journals

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 Orchid Florists’ and Rose Florists’ contracts); and
• we would need to carefully measure any consideration that is considered to be variable (Posy’s
pricing structure explicitly states how the prices would vary depending on annual volumes
purchased, and thus, since Posy 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.

Rose Florists:

Rose Florists purchased 184 000 units from Posy in January 20X9 and is thus, based on the pricing
model, charged C6,00 per unit.

However, Rose Florists is expected to purchase 2 225 000 units during the calendar year and thus,
according to the pricing model, which is based on cumulative purchases over the year, the price
that Posy expects to charge Rose Florists per unit is only C5,40 (in other words, Posy expects to
have to provide Rose Florists with a rebate some time before year end).

This means that if we recognised revenue based on C6,00 per unit, there would be a high
probability of a significant reversal of revenue by year-end. Thus, we must constrain the invoice
price of C6,00 to C5,40, 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 184 000 units will be based on a transaction
price of C5,40 per unit even though the actual price charged on the invoice is C6,00 per unit. This
C6,00 per unit is used to recognise the receivable. The difference of C0,60 per unit (C6,00 – C5,40)
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:

31 January 20X9 Debit Credit

Accounts receivable (A) 184 000 x C6.00 1 104 000
Refund liability (L) 184 000 x (C6.00 – C5.40) 110 400
Revenue from customer contract (I) 184 000 x C5.40 993 600
Recognising the Rose Florists receivable and the related revenue and
refund liability, subject to a potential volume rebate

© Service & Kolitz, 2024-2025 Chapter 4: Page 37

Solutions to GAAP: Graded Questions Revenue from contracts with customers

Solution 4.11 continued ...

Lily Florists

Lily Florists purchased 99 000 units from Posy in January 20X9 and is thus, based on the pricing
model, charged C6,00 per unit.

However, Lily Florists is expected to purchase 980 000 units during the calendar year and thus,
according to the pricing model, which is based on cumulative purchases over the year, the price
that Posy expects to charge Lily Florists per unit is only C5,75 (in other words, Posy expects to
have to provide Lily Florists with a rebate of C0,25 per unit some time before year end).

This means that if we recognised revenue based on C6,00 per unit, there would be a high
probability of a significant reversal of revenue by year-end. Thus, we must constrain the invoice
price of C6,00 to C5,75, 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 99 000 units will be based on a transaction
price of C5,75 per unit even though the actual price charged on the invoice is C6,00 per unit. This
C6,00 per unit is used to recognise the receivable. The difference of C0,25 per unit (C6,00 – C5,75)
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 journal is as follows:

31 January 20X9 Debit Credit

Bank (A) 99 000 x C6.00 594 000
Refund liability (L) 99 000 x (C6.00 – C5.75) 24 750
Revenue from customer contract (I) 99 000 x C5.75 569 250
Recognising the Lily Florists receivable and the related revenue and
refund liability, subject to a potential volume rebate

Orchid Florists

Orchid Florists purchased 34 500 units from Posy in January 20X9 and is thus, based on the pricing
model, charged C6,00 per unit.

Orchid Florists is expected to purchase 475 800 units during the calendar year. Consequently, the
price expected to be charged to Orchid Florists is C6,00 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, Orchid Florists has paid for further units in advance. The amount paid in advance is
allocated to a refund liability account as Posy 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.

© Service & Kolitz, 2024-2025 Chapter 4: Page 38

Solutions to GAAP: Graded Questions Revenue from contracts with customers

Solution 4.11 continued ...

In the case of Orchid Florists, however, the financing benefit enjoyed by Posy 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 flowers is not more than one year. the
receipt of the C1 600 000 relates to both:
• the sale of flowers in January (i.e. the period between the date of receipt of consideration and
the date of delivery of the flowers is less than a month); and
• future expected sale of flowers during the remainder of the same year (i.e. the period between
the date of receipt of consideration and the date of expected delivery of the flowers is less than
a year).

Thus, the journal is as follows:

31 January 20X9 Debit Credit

Bank (A) C1 600 000 1 600 000
Refund liability (L) C1 600 000 – C207 000 1 393 000
Revenue from customer contract (I) 34 500 x C6.00 207 000
Recognising the receipt from Orchid Florists and the related revenue and
refund liability (no potential volume rebate expected)

© Service & Kolitz, 2024-2025 Chapter 4: Page 39

Solutions to GAAP: Graded Questions Revenue from contracts with customers

Solution 4.12

Part A

a) Allocation of transaction price to items within a bundle (calculations)

Allocation of transaction prices of each bundle

Magazine bundle Standalone selling price Allocation of TP

Vuvuzela magazine C25 (25/43 x C39) C22,67
Dabble magazine C18 (18/43 x C39) C16,33
C43 C39,00

Newspaper bundle Standalone selling price Allocation of TP

Special Ed. newspaper C12 (12/26 x C21) C 9,69
Mainstream newspaper C14 (14/26 x C21) C11,31
C26 C21,00

Festive bundle Standalone selling price Allocation of TP

Vuvuzela magazine C25,00 (25/72.48 x C63) C21,73
Dabble magazine C18,00 (18/72.48 x C63) C15,65
Special Ed. newspaper C12,00 (12/72.48 x C63) C10,43
Mainstream newspaper C14,00 (14/72.48 x C63) C12,17
Digital newspaper C 3,48 (3.48/72.48 x C63) C 3,02
C72,48 C63,00

The stand-alone selling price for the digital newspaper was estimated using the entity’s cost plus
its required 16% profit mark-up: Cost: C3 + Profit: (C3 x 16%) = C3.48

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 digital newspaper was not available
(since it is not sold separately) and thus had to be estimated before we could allocate the
transaction price of the festive bundle. The stand-alone selling price for the digital newspaper
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 margin 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.

© Service & Kolitz, 2024-2025 Chapter 4: Page 40

Solutions to GAAP: Graded Questions Revenue from contracts with customers

Solution 4.12 continued …

Part A 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.

Fleet Street normally sells two types of bundled products (the magazine bundle and the newspaper
bundle), but in the festive season, it sells a third type of bundle (the festive bundle). The magazine
bundle has a retail price of C39, the newspaper bundle has a retail price of C21 and the festive
bundle has a retail price of C63. 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 digital newspaper (i.e. it had not
previously been sold separately), this stand-alone selling price must be estimated. The stand-alone
selling price for the digital newspaper 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: C3 +
Profit: (C3 x 16%) = C3.48).

© Service & Kolitz, 2024-2025 Chapter 4: Page 41

Solutions to GAAP: Graded Questions Revenue from contracts with customers

Solution 4.12 continued …

Part B

Journals in 20X1
Debit Credit
31 December 20X1

Bank (A) 100 x C63 6 300

Revenue – Dabble magazine sales 100 x C15,65 (see Part A) 1 565
Revenue – Special ed. newspaper sales 100 x C10,43 (see Part A) 1 043
Revenue – Mainstream newspaper sales 100 x C12,17 (see Part A) 1 217
Revenue – Digital access sales 100 x C3,02 (see Part A) x 60% 181
Contract liability – Digital access 100 x C3,02 (see Part A) x 40% 121
Contract liability – Vuvuzela magazine 100 x C21,73 (see Part A) 2 173
Recognising the receipt from customers for 100 festive bundles,
recognising part as revenue and part as a contract liability depending on
the extent to which the performance obligation had been satisfied

© Service & Kolitz, 2024-2025 Chapter 4: Page 42

Solutions to GAAP: Graded Questions Revenue from contracts with customers

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.

© Service & Kolitz, 2024-2025 Chapter 4: Page 43

Solutions to GAAP: Graded Questions Revenue from contracts with customers

Solution 4.13 continued ...

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.

© Service & Kolitz, 2024-2025 Chapter 4: Page 44

Solutions to GAAP: Graded Questions Revenue from contracts with customers

Solution 4.13 continued ...

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

© Service & Kolitz, 2024-2025 Chapter 4: Page 45

Solutions to GAAP: Graded Questions Revenue from contracts with customers

Solution 4.13 continued ...

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.

© Service & Kolitz, 2024-2025 Chapter 4: Page 46

Solutions to GAAP: Graded Questions Revenue from contracts with customers

Solution 4.13 continued ...

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

© Service & Kolitz, 2024-2025 Chapter 4: Page 47

Solutions to GAAP: Graded Questions Revenue from contracts with customers

Solution 4.13 continued ...

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
Contract liability (L) 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….

© Service & Kolitz, 2024-2025 Chapter 4: Page 48

Solutions to GAAP: Graded Questions Revenue from contracts with customers

Solution 4.13 continued ...

e) 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
Contract liability (L) 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.

© Service & Kolitz, 2024-2025 Chapter 4: Page 49

Solutions to GAAP: Graded Questions Revenue from contracts with customers

Solution 4.14

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

Revenue from customer contract 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

Receivable (A) 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.

© Service & Kolitz, 2024-2025 Chapter 4: Page 50

Solutions to GAAP: Graded Questions Revenue from contracts with customers

Solution 4.14 continued ...

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 expects to be
entitled to C60 000 (C100 000 – C40 000).

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.

Journal on 5 February 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).

Journal on 28 February 20X1:

Three 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 thus the rebate
allowance is derecognised (debit) and the adjustment recognised in revenue (credit).
• Since the performance obligations are completely satisfied, the amount received that was
initially recognised as a refund liability (because the receipt in January was too much
relative to the work that had completed to that date), 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).

© Service & Kolitz, 2024-2025 Chapter 4: Page 51

Solutions to GAAP: Graded Questions Revenue from contracts with customers

Solution 4.14 continued ...

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
Revenue from customer contract 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.

© Service & Kolitz, 2024-2025 Chapter 4: Page 52

Solutions to GAAP: Graded Questions Revenue from contracts with customers

Solution 4.14 continued ...

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%].

Journal on 28 February 20X1:

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

© Service & Kolitz, 2024-2025 Chapter 4: Page 53

Solutions to GAAP: Graded Questions Revenue from contracts with customers

Solution 4.15

a) Explanation with Journals – sale of goods with a right of return

The journals are as follows, with the related explanations thereafter.

01 March 20X6 Debit Credit

Receivable (A) Full invoice amount (given) 621 000

Note 1
Current tax payable: VAT VAT: 621 000 / 1.15 x 0.15 81 000
Note 2
Receivable: unearned interest (-A) TP excl VAT – PV of TP excl VAT 77 037
540 000 – 462 963
Note 3
Revenue (I) PV of TP excl VAT x 95% 439 815
462 963 x 95%
Note 4
Refund liability (L) PV of TP excl VAT x 5% 23 148
462 963 x 5%
Note 4
Recognising the sale of the goods on deferred payment terms and with a
right of return

Cost of sales (E) Balancing: 270 000 – 12 690 257 310

Note 5
Right of return asset (A) 270 000 x 5% x 94% 12 690
Note 5
Inventory (A) Given 270 000
De-recognition of inventory and recognition of right of return asset and cost
of sales expense

P.T.O. for the explanations of the above journals.

© Service & Kolitz, 2024-2025 Chapter 4: Page 54

Solutions to GAAP: Graded Questions Revenue from contracts with customers

Solution 4.15 continued …

a) continued …

Explanations underpinning the journals (with calculations)

1. Receivable (accounts receivable): C621 000

The receivable account is debited with the full amount that is receivable from the customer.

2. VAT: C81 000

The invoice price of C621 000 includes VAT at 15%, 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 C81 000, calculated as: C621 000 / 1.15 x 0.15 = C81 000

3. Financing component: C77 037

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 C540 000 (C621 000 x 100% / 115%) is thus reduced to the
present value of C462 963 discounted at 8% for 2 years.

N = 2; FV = C540 000; i = 8%; Comp PV = C462 963

Of this present value of C462 963, 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 C540 000, and the PV, of C462 963, being
C77 037 (C540 000 – C462 963 = C77 037), will be recognised as ‘income from interest’ using
the effective interest rate method.

4. Right of return – effect on revenue and refund liability C439 815 & C23 148

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: 462 963 x Not expected to be returned: 95% = C439 815
• Refund liability: PV of ex VAT TP: 462 963 x Portion expected to be returned: 5% = C23 148

© Service & Kolitz, 2024-2025 Chapter 4: Page 55

Solutions to GAAP: Graded Questions Revenue from contracts with customers

Solution 4.15 continued …

a) continued …

Explanations continued …

5. Right of return – effect on cost of sales and right of return asset: C257 310 & C12 690

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 C270 000 = C13 500
(the cost of inventory has been provided excluding VAT).

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 C13 500 = C810

The net value of the inventory expected to be returned is thus calculated as: C13 500 – C810 =
C12 690

The net value of this right of return asset of C12 690 (calculated above) is the amount at which
the right of recovery asset (or right of return asset) must be measured, and the remaining cost of
the inventory ‘sold’, of C257 310 (total cost of inventory ‘sold’: 270 000 – right of return asset:
12 690 = C257 310), is then expensed to cost of sales

Another way of calculating the cost of sales of C257 310, is that it is the sum of:
• Cost of inventory that is sold and not expected to be returned: 95% x C270 000 = C256 500; plus
• Cost of fixing the inventory that is sold and expected to be returned: C810.

© Service & Kolitz, 2024-2025 Chapter 4: Page 56

Solutions to GAAP: Graded Questions Revenue from contracts with customers

Solution 4.15 continued …

b) Journals relating to the return of goods

i) No goods are returned within the 90-day period

31 May 20X6 Debit Credit

Refund liability (L) 23 148

Revenue (I) 23 148
Derecognising the entire refund liability and recognising it as revenue on
expiry of the right to return when goods had still not been returned

Cost of sales (E) 12 690

Right of return asset (A) 270 000 x 5% x 94% 12 690
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

31 May 20X6 Debit Credit

Refund liability (L) 23 148

Receivable (A) 23 148
Derecognising the entire refund liability and recognising it as a reduction
in the receivable when goods are returned

Inventory (A) 12 690

Right of return asset (A) 270 000 x 5% x 94% 12 690
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

31 May 20X6 Debit Credit

Refund liability (L) 23 148

Revenue (I) 23 148/ 0.05 x 0.02; or 9 259
Balancing: 23 148 – 13 889
Receivable (A) 23 148/ 0.05 x 0.03; or 13 889
PV 462 962 x 3%
Derecognising a portion of the refund liability (13 889) and reducing the
receivable by this amount when goods are returned and derecognising the
remaining refund liability (9 259) and recognising this as revenue when
right to return period expires without the return of goods

Cost of sales (E) 12 690 / 0.05 x 0.02 5 076

Inventory (A) 12 690 / 0.05 x 0.03 7 614
Right of return asset (A) 270 000 x 5% x 94% 12 690
Derecognising the right of return asset (12 690) and recognising part of
this as cost of sales (5 076) to the extent that goods were not returned and
part as a recapitalisation as inventory (7 614) to the extent that goods were
returned

© Service & Kolitz, 2024-2025 Chapter 4: Page 57

Solutions to GAAP: Graded Questions Revenue from contracts with customers

Solution 4.15 continued …

b) continued …

iv) 7% of the goods are returned within the 90-day period

31 May 20X6 Debit Credit

Refund liability (L) 23 148

Receivable (A) 23 148
Revenue (I) PV 462 963 x (7% - 5%) 9 259
Receivable (A) 9 259
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) 270 000 x 5% x 94% 12 690

Right of return asset (A) 12 690
Inventory (A) 270 000 x 7% x 94% - 12 690 5 076
Cost of sales (E) Or 270 000 x 94% x (7% - 5%) 5 076
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)

© Service & Kolitz, 2024-2025 Chapter 4: Page 58

Solutions to GAAP: Graded Questions Revenue from contracts with customers

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
• a series of distinct goods or services that are substantially the same and that have the same
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.

© Service & Kolitz, 2024-2025 Chapter 4: Page 59

Solutions to GAAP: Graded Questions Revenue from contracts with customers

Solution 4.16 continued …

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.

© Service & Kolitz, 2024-2025 Chapter 4: Page 60

Solutions to GAAP: Graded Questions Revenue from contracts with customers

Solution 4.16 continued …

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
• consideration payable to the customer.

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.

Step 4 is on the next page…

© Service & Kolitz, 2024-2025 Chapter 4: Page 61

Solutions to GAAP: Graded Questions Revenue from contracts with customers

Solution 4.16 continued …

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 TP
selling price
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.

© Service & Kolitz, 2024-2025 Chapter 4: Page 62

Solutions to GAAP: Graded Questions Revenue from contracts with customers

Solution 4.16 continued ...

c) Journals

Journals in 20X7
Debit Credit
28 December 20X7

Bank (A) Given 1 000 000

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

Contract liability (L) 258 065

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

Contract liability (L) 677 419

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: 1 000 000 64 516

– 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 (a)) / 354 838
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

© Service & Kolitz, 2024-2025 Chapter 4: Page 63

Solutions to GAAP: Graded Questions Revenue from contracts with customers

Solution 4.17

a) Explanation

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 C3 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 total transaction price (C450 000) must be allocated between two performance
obligations: the sale of goods and the sale of points.

The sale of goods to the value of C450 000 automatically results in the sale of 15 000 points since
every sale of C30 results in the sale of one point (C450 000 / C30 = 15 000 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.

The total stand-alone selling price of the goods sold is C450 000 (i.e. the price of the goods sold
does not change based on whether the customer is a member of the loyalty programme) and the
points that are effectively ‘sold’ are valued at C3 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 only 95% of the points will be
redeemed (15 000 x 95% = 14 250 points), thus the stand-alone selling price of the points is
estimated at C42 750 (14 250 points x C3 = C42 750).

The transaction price of C450 000 is thus allocated as follows:

Stand-alone Allocation of TP
selling price
Goods sold C450 000 C450 000/C492 750 x C450 000 C410 959
Points sold C42 750 C42 750/C492 750 x C450 000 C39 041
C492 750 C450 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, at which point the contract liability will be
derecognised and recognised as revenue instead. When points are redeemed, the portion of the
contract liability that is derecognised and recognised as revenue will be measured based on the
number of points redeemed as a percentage of the total number of points currently available to be
redeemed.

© Service & Kolitz, 2024-2025 Chapter 4: Page 64

Solutions to GAAP: Graded Questions Revenue from contracts with customers

Solution 4.17 continued …

b) Journals

On date of sale of goods Debit Credit

Bank/ Receivable (A) Given 450 000

Revenue from customer contract (I) Working above 410 959
Contract liability (L) Working above 39 041
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) Not given xxx
Revenue from customer contract (I) xxx
Recognising the revenue when the customer loyalty points are redeemed

© Service & Kolitz, 2024-2025 Chapter 4: Page 65

Solutions to GAAP: Graded Questions Revenue from contracts with customers

Solution 4.18

31 December 20X8 Debit Credit

Bank (A) Given 1 300 000

Revenue from customer contract (I) W1 1 203 704
Contract liability (L) W1 96 296
Recognising the receipt from the customer and the related contract 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

Revenue from customer contracts 48 148
Redemption of 52 000 points recognised as revenue

31 December 20X9

Contract liability (L) C96 296 x (93 000 / 117 000) – 28 395
Revenue from customer contracts Revenue recognised in prior years: 28 395
C48 148
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

© Service & Kolitz, 2024-2025 Chapter 4: Page 66

Solutions to GAAP: Graded Questions Revenue from contracts with customers

Solution 4.18 continued …

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.

© Service & Kolitz, 2024-2025 Chapter 4: Page 67

Solutions to GAAP: Graded Questions Revenue from contracts with customers

Solution 4.19

Debit Credit
Financial year-end: 31 December 20X5
1 March 20X5
Accounts receivable (A) C87 500 x 10 caravans 875 000
Revenue from customer contract – caravans 875 000
Cost of sales C102 375 / 1,3 x 10 787 500
Inventory 787 500
Recognising the revenue from the sale of the caravans and the related cost
of sales
Bank (A) Given 175 000
Accounts receivable 175 000
Recognising the first payment received
31 December 20X5
Accounts receivable (A) 105 000 (W1) x 10/12 87 500
Interest income (I) 87 500
Recognising the interest earned for the year (10 months to date)
Financial year-end: 31 December 20X6
28 February 20X6
Accounts receivable (A) 105 000 (W1) x 2/12 17 500
Interest income (I) 17 500
Recognising interest earned for the year until receipt of the second
instalment (2 months)
Bank (A) Given 350 000
Accounts receivable (A) 350 000
Recognising the receipt of the 2nd instalment of C350 000
31 December 20X6
Accounts receivable (A) 68 250 (W1) x 10/12 56 875
Interest income (I) 56 875
Recognising of the interest earned for the year (10 months between last
instalment and financial year-end)

WORKINGS:

W1: Effective interest rate table relating to the interest on the sale of the caravans

Opening Interest at
Year balance 15 % Instalment Closing balance
1 March 20X5 875 000 (175 000) 700 000
To 28 February 20X6 700 000 105 000 (350 000) 455 000
To 28 February 20X7 455 000 68 250 (523 250) 0

Comment:
The contract involved the supply of caravans 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:
C175 000/ 1 + C350 000 / PVF: 1.15 + C523 250/ PVF: (1.15/1.15) = C1 200 000.

© Service & Kolitz, 2024-2025 Chapter 4: Page 68

Solutions to GAAP: Graded Questions Revenue from contracts with customers

Solution 4.20

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 areis 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. After this, we will 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).

© Service & Kolitz, 2024-2025 Chapter 4: Page 69

Solutions to GAAP: Graded Questions Revenue from contracts with customers

Solution 4.20 continued …

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.

© Service & Kolitz, 2024-2025 Chapter 4: Page 70

Solutions to GAAP: Graded Questions Revenue from contracts with customers

Solution 4.20 continued …

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.

© Service & Kolitz, 2024-2025 Chapter 4: Page 71

Solutions to GAAP: Graded Questions Revenue from contracts with customers

Solution 4.20 continued …

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].

© Service & Kolitz, 2024-2025 Chapter 4: Page 72

Solutions to GAAP: Graded Questions Revenue from contracts with customers

Solution 4.20 continued …

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

Bank (A) Not given xxx

Receivable (A) xxx
Recording the progress payments received

Although not required, the final journals may be of interest:

30 June 20X7 Debit Credit

Receivable (A) 3 150 000

Revenue from customer contract (I) 21 000 000 x 100% - 21 000 000 x 85% 3 150 000
Recording the revenue from work completed to date

Bank (A) Not given xxx

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)

© Service & Kolitz, 2024-2025 Chapter 4: Page 73

Solutions to GAAP: Graded Questions Revenue from contracts with customers

Solution 4.20 continued …

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. Thus, no effects of
financing are recognised, as they are insignificant.

© Service & Kolitz, 2024-2025 Chapter 4: Page 74