Question

As of June 30, 2017, in total, Cannon has purchased $75,000 of component parts. As of June 30, 2017, $25,000 of component parts remain in inventory and $50,000 have been integrated into the project. Further, Cannon has incurred $12,500 of direct costs to integrate the component parts into the Thornock Square Apartments construction project during the three months ended June 30, 2017.

B. During the three months ended September 30, 2017, Cannon purchased an additional $500,000 of component parts ($575,000 in total). Of the $575,000 of component parts, $325,000 remain in inventory and $200,000 have been integrated into the project during the three months ended September 30, 2017. During the three months ended September 30, 2017, Cannon incurred an additional $50,000 of direct costs to integrate the component parts into the Thornock Square Apartments construction project.

C. As of September 30, 2017, Cannon determined that the project was over budget and revised its cost estimate from $1 million to $1.25 million.

D. As of December 31 2017, the construction project was completed. During the three months ended December 31, 2017, Cannon purchased an additional $425,000 of generic component parts ($1 million in total). Of the $1 million component parts, $0 remain in inventory and $750,000 were integrated into the project during the three months ended December 31, 2017. Cannon has incurred $187,500 of direct costs to integrate the component parts into the Thornock Square Apartments construction project during the three months ended December 31, 2017.

If Thornock Square Apartments cancels the contract, Cannon will be entitled to reimbursement for costs incurred for work completed to date plus a margin of 20 percent, which is considered to be a reasonable margin. Cannon will not be reimbursed for any materials that have been purchased for use in the contract but have not yet been used and are still controlled by Cannon

How should the entity recognize revenue for the satisfaction of its performance obligation? What amount of revenue should be recognized for the following periods: a. The three months ended June 30, 2017? b. The three months ended September 30, 2017? c. The three months ended December 31, 2017?

Answer 1

IFRS 15 Revenue from contracts with customers standard has introduced a revenue model which states that any entity should recognize revenue to depict the transfer of promised goods or services to the customer in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods.

1. On the basis of IFRS 15 Yes ,the performance obligation met the criteria of recognizing revenue over time as it has fulfilled one of the criteria as given below:

“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 the performance completed to date.” Which here means ABC construction company is purchasing material and using it for the construction of village apartment building and village apartment building have to pay for only those materials which are used in their construction and not required to pay for the inventory in stock for the performance made up to date.

2.) For a performance obligation satisfied over time, an entity should select an appropriate measure of progress to determine how much revenue should be recognized as the performance obligation is satisfied.

2a.)Revenue for 3 months ended 30^th June2017.

Cost of Component parts used            $   50000

Direct cost $ 12500

Recovery cost if contract cancelled     $ 12500

Total Revenue                                         $ 75000

2b.)Revenue for 3 months ended 30^th Sept 2017.

Cost of Component parts used $ 200000

Direct Cost $ 50000

Recovery cost if contract cancelled $ 50000

Total Revenue $ 300000

2c.) Revenue for 3 months ended 31^st Dec 2017.

Cost of Component parts used $ 750000

Direct Cost                                                  $ 187500

Recovery cost if contract cancelled $ 187500     

Total Revenue $ 1125000