FRDeffered tax - September 2016

Not a deferred tax question but deferred income....... Step 1: Identify the contract - supply and support contract Step 2: Performance obligations - two performance obligations (1) supply and install (2) service. Note the supply and install is one obligation as they offer it as a package. In this case, it does not appear that you can buy the equipment without having them install as well. Step 3: Transaction price - this is $1,200 Step 4: Allocation of price to performance obligations - based on the relative stand alone price. The key term here is "relative standalone". Standalone for supply and install is $1,000 and 2 year service is $500. Typically where a discount is given, you need to consider whether this relates to all or some of the performance obligations. In this case, it the absence of any additional information, this appears to relate to all performance obligations, so apportion the discount over both. As a consequence, the supply and install is $1,000/$1,500 = $800 and the service is $500/$1,500 = $400. Step 5: Recognition of revenue - in year one, the company would recognise the supply and install (ie $1,000) and one year of the two year contract (ie $400/2 = $200). The remaining $200 for the second year of the service contract would be deferred.