Question

BandHub Pte Ltd is a company incorporated in Singapore and adopts the Singapore Financial Reporting Standards (SFRSs). It provides voice and data services as well as sells handphones. On 1 January 20X1, BandHub enters into sales contracts with two different customers: Customer X and Customer Y. Both customers choose the same handphone and the same monthly service plan. The standalone selling price for the handphone is $480 (cost of the handphone is $350) and the standalone selling price of the service plan is $60 per month. Customer X purchases the handphone for $480 and enters into a cancellable contract to receive the voice and data services for $60 per month. Customer Y enters into a 24-month service contract for $60 per month and pays $200 for the handphone.

(a) Determine the allocation of the transaction prices for both customers and the revenue to be recognised for the month of January and February. Explain your answers using FRS 115 - Revenue from Contracts with Customers.

(b) To activate the voice and data services, Bandhub Pte Ltd charges the customers an upfront, non-refundable fee of $12. How should this activation fee be treated under FRS 115 - Revenue from Contracts with Customers.

Answer 1

IFRS 15 provides following-

The objective when allocating the transaction price is for an entity to allocate the transaction price to each performance obligation (or distinct good or service) in an amount that depicts the amount of consideration to which the entity expects to be entitled in exchange for transferring the promised goods or services to the customer.

To meet the allocation objective, an entity shall allocate the transaction price to each performance obligation identified in the contract on a relative stand-alone selling price basis.

To allocate the transaction price to each performance obligation on a relative stand-alone selling price basis, an entity shall determine the stand-alone selling price at contract inception of the distinct good or service underlying each performance obligation in the contract and allocate the transaction price in proportion to those stand-alone selling prices. Hence, following shall be transaction price of Customer X and Customer Y-

Customer X				Customer Y
Contract price	480$ for phone + $60 for services p.m	Contract price	$200 for phone and $60 for 24 months for services= $1,640
Goods/ Services	Standalone price	Allocated transaction price		Goods/ Services	Standalone price	Allocated transaction price
Handphone	480	480		Handphone	480	410
Voice and data services	60	60		Voice and data services	1,440	1,230
Total		540		Total		1,640
Note: Cost of phone and service is exactly same as
standalone selling price

2. upfront, non-refundable fees of $12.

IFRS 15 provides following-

In some contracts, an entity charges a customer a non-refundable upfront fee at or near contract inception. Examples include joining fees in health club membership contracts, activation fees in telecommunication contracts, setup fees in some services contracts and initial fees in some supply contracts.

To identify performance obligations in such contracts, an entity shall assess whether the fee relates to the transfer of a promised good or service. In many cases, even though a non-refundable upfront fee relates to an activity that the entity is required to undertake at or near contract inception to fulfil the contract, that activity does not result in the transfer of a promised good or service to the customer. Instead, the upfront fee is an advance payment for future goods or services and, therefore, would be recognised as revenue when those future goods or services are provided. The revenue recognition period would extend beyond the initial contractual period if the entity grants the customer the option to renew the contract and that option provides the customer with a material right.

In the given case, upfront fees is to activate the services and payments does not provide any right to buyer once the service has been started. Further, it does not matter whether the customer enjoys the services or not and there shall be no refund.

Hence, once the services are activated, the Company can recognise the revenue in accordance with IFRS 15.