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Hello tutor, I have a question about recognition of revenue (part a).
To be hard to assess if the bespoke product and generic product are satisfied overtime/point in time. Although it takes 6 weeks to be completed as it does not mean that the performance obligation satisfies overtime.
Please explain if the bespoke product and generic product satisfy overtime/point in time ?
Thanks tutor.
Can you please tell me where you are seeing this question – in a BPP kit? or Kaplan? (The original Q was set pre-IFRS 15 and I will have to see how the Q has been adapted to answer your query.)
I have a Kaplan version of the Q & A and I don’t understand what it is you are querying.
A performance obligation is satisfied at a point in time UNLESS it is satisfied overtime. To be over time, just ONE of the following criteria have to be met …. [and applying to Dali]:
(a) the customer simultaneously receives and consumes the benefits provided by the entity’s performance as the entity performs [NO – the customer does not have any benefit until the completed machine is delivered]
(b) the entity’s [Dali’s] performance creates (or enhances) an asset (e.g. WIP) that the customer controls as the asset is created (or enhanced) [NO – the customer has no control until the completed machine is delivered]
(c) the entity’s [Dali’s] performance does not create an asset with an alternative use
to the entity [Dali] and the entity [Dali has an enforceable right to payment for performance completed to date [YES – as “made to order” and “specific to their [the customer’s] needs”].But this is an audit exam – not SBR – so we don’t have to discuss each criteria but conclude that there is a risk of misstatement in revenue recognition because revenue should be recognised over time (as each machine is customised and therefore has no alternative use – and because Dali will have an enforceable right to payment – it would be a poorly drafted contract with customers if this were otherwise).
What’s important to recognised is the “cutoff” issue that is raised by the various stages of “WIP” at the reporting date. For example, any 30% advance deposits would be a contract liability if the design work hasn’t started, but if the design work has been completed there should be some revenue recognition (not necessarily 30% because it depends on what proportion the design work is in relation to the each build).
Sales of generic products do not meet any of the over time criteria – and revenue would be recognised at a point in time (at the point of sale).
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