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Hi Team,
I want to ask about the question as below : (I summarized)
On 1 Dec X7, Tang enters a contract to construct printing machine with consideration of 1.5m (fixed consideration) and bonus of 0.1m (if completed within 24 months). Expected cost is 0.8m
On 30 Nov X8, bonus is highly to be reversed, they complete 65% of the contract
On 4 Dec X8, contract is modified that results in the increase in fixed consideration by 0.11m and expected cost by 0.06m. The time for completion to get the bonus is extended so there’s high probability of achieving bonus (still 0.1m).
How to account for the event of 4 Dec X8? Tang has an accounting year end of 30 November.So in the answer section, they re- calculated the percentage of completion = 60.5% ($0.52m actual costs incurred/$0.86m total expected costs – new) and said “It recognises additional revenue of $59,550 [(60.5% × $1.71m) – $0.975m revenue recognised to date] at the date of the modification as a cumulative catch-up adjustment. As the contract amendment took place after the year end, it is a non-adjusting event and the additional revenue would not be recognised in the year ended 30 November 20X8”
So that means the additional revenue of $59,550 will be recorded in Year end November X9 instead? because the completion percentage now increase from 35% to 39.5% ?
No revenue at all can be recognised unless there is a change in control (or some other criterial in IFRS 15 are satisfied).
What justification do they give for recognising any revenue? Let me know.
Hi Stephen,
Below is there full answer
“owever, on 4 December 20X8, the contract is modified. As a result, the fixed consideration and expected costs increase by $110,000 and $60,000, respectively. The goods and services promised in the modification are not distinct from those promised in the original contract and there remains a single performance obligation. Therefore the modification is treated as part of the original contract. The allowable time for achieving the bonus is extended by six months with the result that Tang concludes that it is highly probable that including the bonus in the transaction price will not result in a significant reversal in the amount of cumulative revenue recognised in accordance with IFRS 15. Therefore the transaction price is $1,710,000 (1.5m + 0.11m + 0.1m).Therefore, Tang updates its estimates of costs and revenue as follows:Tang has satisfied 60.5% of its performance obligation ($0.52m actual costs incurred/$0.86m total expected costs). It recognises additional revenue of $59,550 [(60.5% × $1.71m) – $0.975m revenue recognised to date] at the date of the modification as a cumulative catch-up adjustment. As the contract amendment took place after the year end, it is a non-adjusting event and the additional revenue would not be recognised in the year ended 30 November 20X8.”
They only mention that the additional revenue will not be recorded in year ended 30 November X8. My question is that because there’s a change in the estimation of the remaining percentage of completion (from 35% to 39.5% (100 – 60.5)), will the additional revenue be included in 30 November X9?
I was thinking why would they calculate the additional revenue when it’s not to be adjusted anywhere. Let me know if I misunderstood where they said “cumulative catch-up adjustment”. Totally confused.thank you
Hi Stephen,
Below is there full answer
“owever, on 4 December 20X8, the contract is modified. As a result, the fixed consideration and expected costs increase by $110,000 and $60,000, respectively. The goods and services promised in the modification are not distinct from those promised in the original contract and there remains a single performance obligation. Therefore the modification is treated as part of the original contract. The allowable time for achieving the bonus is extended by six months with the result that Tang concludes that it is highly probable that including the bonus in the transaction price will not result in a significant reversal in the amount of cumulative revenue recognised in accordance with IFRS 15. Therefore the transaction price is $1,710,000 (1.5m + 0.11m + 0.1m).Therefore, Tang updates its estimates of costs and revenue as follows:Tang has satisfied 60.5% of its performance obligation ($0.52m actual costs incurred/$0.86m total expected costs). It recognises additional revenue of $59,550 [(60.5% × $1.71m) – $0.975m revenue recognised to date] at the date of the modification as a cumulative catch-up adjustment. As the contract amendment took place after the year end, it is a non-adjusting event and the additional revenue would not be recognised in the year ended 30 November 20X8.”
They only mention that the additional revenue will not be recorded in year ended 30 November X8. My question is that because there’s a change in the estimation of the remaining percentage of completion (from 35% to 39.5% (100 – 60.5)), will the additional revenue be included in 30 November X9?
I was thinking why would they calculate the additional revenue when it’s not to be adjusted anywhere. Let me know if I misunderstood where they said “cumulative catch-up adjustment”. Totally confused.thank you
1. Assuming they can take some revenue (as they have) in x8, and that’s only appropriate if there’s been a transfer of control. 🙂
2. Then, the change in contractual terms is a non-adjusting event. (I agree with that).
3. So the extra revenue will be takem in the x9 year, not the x8.
Hope trhis helps
🙂
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