In: Accounting
Question 5 During the year ending 30th April 2020, Borg plc entered into a contract to build a factory for a price of £1,000,000, plus a performance bonus of £100,000 if the factory was complete by 31st March 2021. The contract met the criteria for revenue to be recognised over time. Due to delays caused by poor weather the directors of Borg did not expect to complete the factory by 31st March 2021. Where relevant, Borg plc measures completion based on an independent valuer. The following information relates to the contract as at 30th April 2020: £ Costs incurred to date 600,000 Estimate of the costs to complete the contract 200,000 Value of work certified by independent expert 750,000 Amounts invoiced to date 665,000 Requirements IFRS 15 contains three criteria regarding when revenue should be recognised over time as opposed to at a point in time.
State any TWO of the three criteria.
Explain how the directors should treat the performance bonus with respect to revenue recognition.
Prepare the relevant Statement of profit or loss and Statement of financial position extracts in respect of the above contract for the year ended 30th April 2020.
1.) The two of the three criteria when revnenue should be recognized over a period of time as per IFRS 15 are given hereunder:-
Criteria 1:- The customer simultaneously receives and consumes the benefits provided by the entity's performance as the entity's performs.
Criteria 2:- The entities performance creates or enhances an asset (for example work in progress) that the customer controls as the asset is created or enhanced.
2.) There are 2 methods for estimating the amount of variable consideration under IFRS 115:-
a.) Expected value method-This method can be applied when the entity has large number of contracts with similar characteristics.
b.) Most likely outcome method-This method is used if the contract has only two possible outcomes, for example the entity can either achieve a performance bonus or not.
Hence most likely outcome method will be used to recognize revenue in respect of performance bonus. In the given case since the director's of Borg did not expect to complete the factory by 31st March 2021 due to delays caused by poor weather. Hence, amount of performance bonus should not be considered in revenue recognition in respect of this contract.
3.
Borg Plc | |
Statement of profit or loss (extracts) for the year ended April 30,2020 | |
Particulars | Amount |
Revenue from contract | 750000 |
Cost incurred for contract | 600000 |
Profit from contract | 150000 |
Borg Plc | |
Balance sheet (extracts) as at April 30,2020 | |
Particulars | Amount |
Current Assets | |
Accounts receivable | 665000 |
Unbilled revenue (750000-665000) | 85000 |
Total current assets | 750000 |
Workings:-
Cost incurred till date (A) | 600000 |
Estimate of cost to complete (B) | 200000 |
Total cost of the contract (A+B=C) | 800000 |
Degree of completion (A/C*100=D) | 75.00% |
Contract value (E ) | 1000000 |
Revenue to be recognized (E*D=F) | 750000 |
Invoiced to customer (G) | 665000 |
Unbilled revenue (F-G) | 85000 |