Tutorial 10

IFRS 15 Revenue from contracts with customers

Suggested Answer

Question 1

(a) Definition of Performance obligation

A promise in a contract with a customer to transfer to the customer either:

(a) a good or service (or a bundle of goods or services) that is distinct; or

(b) a series of distinct goods or services that are substantially the same and that have the
same pattern of transfer to the customer.

Identify a performance obligation

A performance obligation is a promise to transfer a good or service to a customer.

Performance obligations should be accounted for separately provided the good or service is
distinct.

Where a promised good or service is not distinct, it is combined with others until a distinct
bundle of goods or services is identified.

(b) Deemed to be satisfied over time:

1. The customer simultaneously receives and consumes the benefits provided by the
entity’s performance as the entity performs.

2. The entity’s performance creates or enhances an asset that the customer controls as
the asset is created or enhanced.

3. The entity’s performance does not create an asset with an alternative use to the entity
and the entity has an enforceable right to payment for performance completed to date.

4. Revenue is recognised in line with the pattern of transfer.

5. Whether an entity recognises revenue over the period during which it manufactures a
product or on delivery to the customer will depend on the specific terms of the
contract.

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(c) TulipBhd.

Workings:
(W1) Percentage of completion
= 22,200
30,000
= 74.0%

(W2) Contract asset / liability

RM'000
Cost incurred to date 14,450
Contract profit 6,660
21,110
Billing to date 20,000
Contract (liability) / asset 1,110

(W3) Account receivable

Invoiced to-date / progress

billing 20,000
Cash received to-date (19,500)
500

Tulip Bhd.
Statement of profit or loss (extract) FTYE 31/8/18

RM'000
Contract revenue (30,000 x 74%) 22,200
Contract cost [(14,450 + 6,550) x 74%] (15,540)
Contract profit 6,660

Tulip Bhd
Statement of financial position (extract) as at 31/8/18
RM'000
Current assets

Contract asset (14,450 + 6,600 - 20,000) (W2) 1,110

Contract receivable (20,000 - 19,500) (W3) 500

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(d) Flying-Unicorn Bhd.

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Workings:
(W1) Stage of completion = 41,870 x 100%
41,870 + 97,680

= 30.00%

(W2) Contract liability

RM'000
Cost incurred to-date 41,870
Recognised profit 1,860
43,730
Invoiced to-date / progress billing (44,570)
Contract liability (840)

(W3) Account payable

Invoiced to-date / progress billing 44,570

Cash received to-date (44,920)
(350)

RM'000
Contract revenue (145,750 x 30%) 43,725
Contract cost [(41,870 + 97,680) x 30%] (41,865)
Contract profit 1,860

Statement of financial position (extract) as at 31 August 2018

RM'000
Current liability

Contract liability (41,870 + 1,860 - 44,570) (W2) 840

Contract payable (44,570 - 44,920) (W3) 350

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Question 2

Jingle-deer Bhd.
Statement of profit or loss (extract) for the year ended 31 July
2018 2017
RM'000 RM'000
Contract revenue (32,830 x 42.4%) 15,167 13,920
[(32,830 x 88.6%) - 13,920]

Contract cost (27,640 x 42.4%) (12,770) (11,719)

[(27,640 x 88.6%) - 11,719]
Contract profit 2,397 2,201

Statement of financial position (extract) as at 31 July

2018 2017
RM'000 RM'000
Current assets
Contract receivable (14,200 - 13,130) 1,070

Contract asset / Amount due from customer (W2) 398

Current liabilities
Contract payable (28,700 - 29,140) 440

Contract liability / Amount due to customer (W2) - 269

Workings:
(W1) Percentage of completion
31/7/17 31/7/18
= 11,730 = 11,730 + 12,770
27,640 27,640
= 42.4% = 88.6%

(W2) Contract asset / liability

2018 2017
RM'000 RM'000
Cost incurred to date 24,500 11,730
Contract profit 4,598 2,201
29,098 13,931
Billing to date 28,700 14,200
Contract (liability) / asset 398 (269)

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Question 3

(a) Teaberry Bhd.

IFRS 15 requires application of the five-steps revenue recognition model:

(i) Identify the contract with a customer

A customer has entered into a binding contract to pay a twenty-four month fees to
Teaberry for the network services and free handset. So, a contract exists.

(ii) Identify the separate performance obligations in the contract

There are two distinct performance obligations:

- The obligation to deliver a handset

- The obligation to provide network services for twenty-four months

(iii) Determine the transaction price

The transaction price is RM250 x 24 months = RM6,000

(iv) Allocate the transaction price to the separate performance obligations in the
contract

The transaction price is allocated to each separate performance obligation in proportion

to the stand-alone selling price of each performance obligation at the inception of the
contract.

% of Revenu
Performance obligation Stand-alone SP
total e Workings
RM % RM
Handset 2,150 34.5% 2,071 (RM6,000 x 34.5%)

Network services 4,080 65.5% 3,929 (RM6,000 x 65.5%)

(RM170 x 24 mths)
6,230 100.0% 6,000 (RM250 x 24 mths)

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(v) Recognize revenue when (or as) the entity satisfies a performance obligation

As each performance obligation to the customer is satisfied, Teaberry will recognize

revenue.

- When Teaberry gives a handset to the customer, the control of the handset is
considered as pass to the customer. Teaberry is allowed to recognize the full amount
of revenue of RM2,071 from the sales of handset.

- When Teaberry provides network services to the customer, Teaberry needs to

recognize the monthly revenue from which total network fee of RM3,929 is spread
over 24 months. So, RM164 (RM3,929, x 1/24) is recognized every month for the
next twenty-four month.

(b) Journal entries:

(i) 1 July 2021

DR CR
RM RM
Trade Receivable (unbilled revenue) 2,071

Revenue 2,071

(Recognition of revenue from the sale of the handset)

(ii) 31 July 2021

The monthly payment from the customer is split between the amounts owing for network
services and amounts owing for the handset.

DR CR
RM RM
Bank 250

Revenue (3,929 x 1/24 mths) 164

Trade Receivable (2,071 x 1/24 mths) 86

(Recognition of revenue from monthly provision of network services

and the ‘repayment’ of handset) ___

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(c)
Statement of profit or loss (extract) for the year ended 30 November 2021
RM
Revenue [2,071 + (164 x 5 mths)] 2,891

Statement of financial position (extract) as at 30 November 2021

RM
Current asset
Trade receivable [2,071 – (86 x 5 mths)] 1,641

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Question 4

(A)

(a)

The sale of the leasehold property in fact is a repurchase agreement under IFRS 15 / MFRS
15 Revenue from Contracts with Customers as Haku has an option to repurchase the property
from Yoshie at the end of year four (ie: 30/6/24) and therefore the control has not transferred
to Yoshie. Without obtaining the full control of the property, Yoshie ability to enjoy the
benefit from the use of the property is limited.

Haku should not record the said transaction as a disposal of PPE in SOPL but to treat it as a
financing arrangement. Haku should record both the asset (leasehold property) and liability
(loan from Yoshie) in its financial statements.

Haku should not have dereocgnised the property from the SOFP because the risks & rewards
of ownership have not been transferred. The substance of the transaction is Haku is obtaining
a loan of RM313.4 million with 7.4% “premium” p.a. repayable after 4 years from Yoshie,
for which the 7.4% premium p.a. on repurchase of the land is effectively an interest payment.

By recording the sale and repurchase transaction as a sale instead of a financing transaction is
an attempt to manipulate the financial statements for the year ended 30 June 2020. This in
fact will allow Haku to show an improved profit for the year ended 30 June 2020 and a more
favourable cash position. The gearing ratio position of the Haku will be understated as well.

Correction entries as at 30 June 2020:

Haku should reinstate the carrying amount of the property before the transaction at RM286
million in the SOFP and continued to depreciate the asset based on the remaining useful life
of 54 years.

The gain on disposal of the property need to be reversed from the SOPL.

The repurchase of property / repayment of loan will be taken place after 4 years, therefore the
loan from Yoshie is to be classified as non-current liability in Haku’s SOFP.

Haku need to accrue for the interest expense incurred at 7.4% p.a. for four years period up to
the date of repayment.

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 (b) The following is the correction entry:

DR CR
RM’000 RM’000
(i) Leasehold property 286,000
Gain on disposal of land (313,400 – 286,000) 27,400
Loan from Yoshie 313,400

(Reinstate the CA of the leasehold property, reversal of gain on disposal of

property and recognised loan received from Yoshie)

(ii) Finance cost 7,731

Loan from Yoshie (313,400 x 7.4% x 4/12 months) 7,731

(Recognised of interest cost for loan from Yoshie for

the year ended 30/6/20)

(iii) Depreciation - leasehold property 5,413

Accumulated depreciation - leasehold property 5,413
(292,300 x 1/54 years)

(Depreciation charges for leasehold property for the year ended 30/6/20)

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(B)
Souffle Bhd.
Statement of profit or loss (extract) for the year ended 31 August 2020

RM'000
Contract revenue 234,442
[(450,850 x 92.4%) - (450,850 x
40.4%)]

Contract cost (221,375)

{[(170,300 + 221,400 + 32,000) x 92.4%] - [(170,300 + 250,800) x 40.4%]}

Contract profit 13,067

Souffle Bhd.
Statement of financial position (extract) as at 31 August 2020
RM'00
0
Current assets
8,78
Contract asset / amount due from customer (W2) 6

Current liabilities
Contract payables (183,400 + 224,600 - 177,600 - 233,500) 3,100

Workings:
(W1) Percentage of completion

YE 31/8/19
Percentage of completion
= 170,300 x 100%
170,300 + 250,800
= 40.4%

YE 31/8/20
Percentage of completion
= 170,300 + 221,400 x 100%
170,300 + 221,400 + 32,000
= 92.4%

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