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In this section there is income received from sale of a licence which is deferred over the period of the licence. However,the answer applied was under IAS 18.
This is how I phrased my answer in accordance with IFRS 15,kindly review it if its correct.
‘According to IFRS 15,revenue is recognised when performance obligation is satisfied. In this situation,performance obligation may be satisfied over time. The risk is that mgt may not understand the application of these principles.
Have a good day,Sir.
IFRS 15 was issued in May 2014 and applies to an annual reporting period beginning on or after 1 January 2018
You’re quoting a question from a June 2015 examination … before IFRS 15 came into force / effect
So we have to apply IAS 18 Revenue
However, even with the application of IFRS 15, there is nothing in the question to suggest that Ted has any continuing obligations under the licensing agreements
In that case, revenue is earned as at the point of granting the license
If there ARE continuing obligations, sure, apply the matching principles to defer the appropriate element of the license fee over the five year license period
You say “The risk is that mgt may not understand the application of these principles.”
Surely the risk is of a huge (potentially $18 million) understatement of revenue and profits!
In the suggested solution there are 12 areas of audit risk identifies and this part of the question is worth 17 marks
1.5 marks for detailed evaluation of the audit risk associated with the license revenue treatment?
If your answer was entirely off-the-wall it’s only 1.5 marks not gained
OK?
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