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Could you please give me its explanation by its clear debit and credit entries?
Performance obligation Transaction Price Allocated Transaction Price Revenue
Single Product 18000 14400(18000/20000)3600(14400/4years)
Service 2000(500*4 years)
total 20000 1600 400(1600/4 years)According to IFRS 15, I can not recognise revenue over product but in this example, why deferred revenue 400 and non current-liability 800 is recognised?
Why do I have to recognize revenue only 400 and not 3600?I do not understand there is no any logic behind it.
Revenue includes an amount of $16 million for a sale made on 1 April 2015. The sale relates to a single product and includes ongoing servicing from Downing Co for four years. The normal selling price of the product and the servicing would be $18 million and $500,000 per annum ($2 million in total) respectively.
start date:1 April 2015-31March 2016
Product and servicing sale Under IFRS 15 Revenue from Contracts with Customers, sales made which include revenue for on-going servicing work must have part of the revenue deferred and any discount offered to stand-alone selling prices must (normally) be allocated to each component pro rata to the stand-alone selling prices. The stand-alone selling price of the product and the servicing work would be $20 million ($18 million and $2 million (500 x 4 years) respectively). The actual combined selling price of $16 million represents a 20% discount on the stand-alone selling prices ((20,000 – 16,000)/(18,000 + 2,000)). Thus the sales revenue of $16 million would be allocated $14·4 million (18,000 x 80%) to the product and $1·6 million (2,000 x 80%) to the servicing. At 31 March 2016 there are three more years of servicing work, thus $1·2 million ((1,600 x 3 years/4 years) must be treated as deferred revenue, split $400,000 as a current liability and $800,000 as a non-current liability.
“The actual combined selling price of $16 million represents a 20% discount on the stand-alone selling prices”- from my perspective, this is only a 10% discount! The aggregate price of the contract is $16 million + $500,000 x 4 years giving a total of $18,000,000 and that’s a discount of 10% when compared with the ‘normal’ prices of $18 million + $2,000,000 service charges
So, of the $16,000,000 sale price, we’re going to recognise 90% of that figure = $14,400,000
There is a TOTAL contract value of $18,000,000 of which we’re recognising $14,400,000 immediately as revenue and that leaves us with $3,600,000 to mess around with
Of that $3,600,000 $500,000 is taken as revenue in each of 4 years so that leaves us with just $1,600,000 to allocate and, since it’s a four year contract, we’ll take $400,000 in each of the four years
That’s $400,000 this year and $400,000 next year (so that’s current) and the remainder of $800,000 taken in years 3 and 4 so they are deferred beyond 12 months
You ask “Why do I have to recognize revenue only 400 and not 3600?”
$2,000,000 of that $3,600,000 relates to ongoing service obligations and is spread over the 4 year period. That $2,000,000 will be the subject of 4 separate invoices of $500,000 each in each of the 4 years so none of that amount is recognised as deferred and is recognised instead as revenue in each of those years of service
The remainder of $1,600,000 I believe I have explained above
OK?
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