Revenue Recognition – Multiple Element Arrangement

IFRS 1 - Assignments Week 6 - Revenue Recognition

Question 1 – Revenue Recognition – Multiple Element Arrangement

Company A provides a bundled service offering to Customer B. It charges Customer B US$ 35,000 for initial connection to its network and two ongoing services –access to the network for 1 year and ‘on-call trouble shooting’ advice for that year. Customer B pays US$ 35,000 upfront, on 1 July 2015. Company A determines that, if it were to charge a separate fee for each service if sold separately, the fee would be:

Separate fees                        Fair value if sold separately

Connection fee                5,000

Access fee                        12,000

Trouble shooting                23,000

The end of Company A’s reporting period is 30 June.

Required

Prepare the journal entries to record this transaction in accordance with IFRS 15 for the year ended 30 June 2016, assuming Company A applies the relative fair value approach. Show all workings.

IFRS 15 requires entities to apply a five-step model to recognise revenue:

Step 1 - Identify the contract(s) with a customer

Step 2 - Identify the performance obligation(s) in the contract

Step 3 - Determine the transaction price

The transaction price is a fixed payment in this case of US$ 35,000.

Step 4 - Allocate the transaction price to the performance obligations in the contract

Total of the fair values of the separate items if sold separately equals 5,000 + 12,000 + 23,000 = US$ 40,000. The aggregate of the stand-alone selling prices of US$ 40,000 exceeds the total transaction price of US$ 35,000, indicating there is a discount inherent in the contract. That discount must also be allocated to each of the individual performance obligations:

• Connection fee        5,000 x (35,000/40,000) = US$ 4,375
• Access fee                12,000 x (35,000/40,000) = US$ 10,500
• Trouble shooting        23,000 x (35,000/40,000) = US$ 20,125

Step 5 - Recognise revenue when (or as) the entity satisfies a performance obligation

The ‘initial connection to the network’ is an performance obligation at a point in time that will be satisfied at once, and the ‘access to the network for 1 year’ and ‘on-call trouble shooting advice for 1 year’ are performance obligations that will be settled over time.

Journal entries:

1 July 2015

Cash                                                DR                        US$ 35,000        

Deferred Revenue (liability) -