Question

Case 2: Manufacturing & Contract Modifications

Dell Computer, computer manufacturer, enters into contract with UPM to deliver 300 computers for total price of RM600,000 (RM2,000 per computer).

Due to necessary preparation works, UPM agrees to deliver computers in 3 separate deliveries during the forthcoming 3 months (100 computers in each delivery). UPM takes control over the computers at delivery.

After the first delivery is made, UPM and Dell Computer amend the contract. Dell Computer  will supply 200 additional computers (500 in total).

How should Dell Computer  account for the revenue from this contract for the year ended 31 December 20X1 if:

• Scenario 1: The price for additional 200 computers was agreed at RM388,000, being RM1,940 per computer. Dell Computer  provided a volume discount of 3% for additional delivery which reflects the normal volume discounts provided in similar contracts with other customers.
• Scenario 2: The price for additional 200 computers was agreed at RM280,000, being RM1,400 per computer. Dell Computer  provided a discount of 30% for additional delivery because it hopes for the future cooperation with UPM (nothing even discussed yet).

As of 31 December 20X1, Dell Computer  delivered 400 computers (300 as agreed initially and 100 under the contract amendment).

Answer 1

Scenario 1: The price for additional 200 computers was agreed at RM388,000, being RM1,940 per computer. Dell Computer  provided a volume discount of 3% for additional delivery which reflects the normal volume discounts provided in similar contracts with other customers.
MFRS 118	MFRS 15
Revenue - at the time of delivery, in the fair value of consideration received for the computers. The revenue for the year ended 31 December 20X1: = RM600,000 (the first 300 computers) + RM194,000 (additional 100 computers delivered) = RM794,000 (for all 400 computers already delivered)	Contract modification is a separate contract Contract modification is accounted for as for a separate contract (meaning that the original contract is left as it is), when 2 criteria are fulfilled: Additional goods and services in the modification must be distinct from the goods or services in the original contract. In both scenarios, this is met, as additional computers are quite distinct from the original computers. Amount of consideration expected for the additional goods/services must reflect the stand-alone selling price of these goods/services. The price for additional computers indeed reflects their stand-alone selling prices, because Dell Computer normally provides 3% volume discount. Therefore, this contract modification is accounted for as a separate contract and revenue for the year 20X1 (400 computers delivered) is: RM600,000 from the original contract for 300 computers; RM194,000 from the contract modification for additional 100 computers delivered. Total revenue in the year 20X1 is therefore RM794,000.
Scenario 2: The price for additional 200 computers was agreed at RM280,000, being RM1,400 per computer. Dell Computer  provided a discount of 30% for additional delivery because it hopes for the future cooperation with UPM (nothing even discussed yet).
MFRS 118	MFRS 15
Revenue - at the time of delivery, in the fair value of consideration received for the computers.   The revenue for the year ended 31 December 20X1: = RM600,000 (the first 300 computers) + RM140,000 (additional 100 computers delivered) = RM740,000 (for all 400 computers already delivered)	Contract modification is not a separate contract If the above criteria are not fulfilled (or one of them is not met), then the contract modification is not a separate contract and the accounting depends on further analysis. It’s clear that the price for additional computers does not reflect their stand-alone selling prices, because 30% discount is exceptional and tied to the overall contract with UPM. It means that the second criterion is not met. As a result, the contract modification is NOT a separate contract, but it is bundled with the original contract. In this case, as additional goods are distinct, you need to account as you would terminate the original contract and start the new one. Recognize total revenue amounting to: That part of consideration in the original contract that hasn’t been recognized as revenue yet (in other words, price for goods yet to be delivered); PLUS The consideration agreed in the contract modification. Contract modification was made after the first delivery, so Dell Computer needs to recognize revenue for the first 100 computers in line with the original contract: 100 computers x RM2,000 per computer = RM200,000 Total transaction price to allocate after the contract modification is: RM400,000, being the part of original consideration related to undelivered 200 computers (300 per contract - 100 delivered; x  RM2,000 per unit); RM280,000, being total consideration for additional 200 computers; Total: RM680,000   Then, allocate RM680,000 to 400 computers in total (200 undelivered before contract modification + 200 additional computers), which means that Dell Computer allocates RM1,700 to one computer (RM680,000/400). Total revenue recognized in 20X1 during which 400 computers were delivered: = RM200,000 (RM2,000 x 100) Revenue for 100 computers delivered before contract modification. = RM510,000 (RM1,700 x 300) Revenue for 300 computers delivered after contract modification. Total: RM710,000.

MFRS 118 - Revenue; at the time of delivery, in the fair value of consideration received for the computers.

MFRS 15 - Contract modification is accounted for as for a separate contract (meaning that the original contract is left as it is), when 2 criteria are fulfilled:

• Additional goods and services in the modification must be distinct from the goods or services in the original contract.
• Amount of consideration expected for the additional goods/services must reflect the stand-alone selling price of these goods/services.

If the above criteria are not fulfilled (or one of them is not met), then the contract modification is not a separate contract and the accounting depends on further analysis.