In: Accounting
Imagine yourself as the accountant of Chonng Berhad. Your managing director has approached you regarding some issues about contract. His doubt included:- (i) A modification to existing contract should be treated as a separate contact. (ii) If the agreed date of payment by a customer is later than the date on which services are transferred to that customer, part of the consideration should be treated as interest and not revenue. (iii) If a contract with customer provided warranty after service, the warranty represents a separate performance obligation, thus part of transaction price should be allocated for warranty.
Required: - In accordance with Malaysian Financial Reporting Standards (MFRS) 15 Revenue from Contracts with Customers, discuss the above issues.
i)An entity shall account for a contract modification as a separate contract if both of the following conditions are present:
(a) the scope of the contract increases because of the addition of promised goods or services that are distinct
(b) the price of the contract increases by an amount of consideration that reflects the entity’s stand-alone selling prices of the additional promised goods or services and any appropriate adjustments to that price to reflect the circumstances of the particular contract.
For example, an entity may adjust the stand-alone selling price of an additional good or service for a discount that the customer receives, because it is not necessary for the entity to incur the selling-related costs that it would incur when selling a similar good or service to a new customer
ii) An entity need not adjust the promised amount of consideration for the effects of a significant financing component if the entity expects, at contract inception, that the period between when the entity transfers a promised good or service to a customer and when the customer pays for that good or service will be one year or less.
iii) If a warranty, or a part of a warranty, provides a customer with a service in addition to the assurance that the product complies with agreed-upon specifications, the promised service is a performance obligation. Therefore, an entity shall allocate the transaction price to the product and the service. If an entity promises both an assurance-type warranty and a service-type warranty but cannot reasonably account for them separately, the entity shall account for both of the warranties together as a single performance obligation