Question

Imagine yourself as the accountant of Chong 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. [8 marks]

Answer 1

Revenue Recognition as per MFRS 15 requires 5 steps:

1) Identify the Contract2) Separate Performance Obligaton3) Determine Transacion Price4) Allocation of Transaction Price5) Recognise Revenue

(i) A modification to existing contract should be treated as a separate contact: It depends on the type of modification whether it is in addition to original contract or it is in existing contract.

This contract includes feature that it is modification in the original/existing contract further check whether additional goods/services are not disincts or consideration for additional goods/ services does not reflect their stand alone selling price. So it is not a separate contract.

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:

An entity recognizes revenue when or as it satisfies a performance obligation by transferring a promised good or service to a customer which is when the customer obtains control of that good or service and the amount of revenue can be measured reliably,it is probable that the economic benefits associated with the transaction will flow to the entity,and the costs incurred or to be incurred in respect of the transaction can be measured reliably.

Therefore consideration should be recognized as revenue and not interest because services are fully transferred and collection of consideration is certain.

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:

a)Assurance-type warranties – those are warranties that promise to customer that the delivered product is as specified in the contract and will work as specified in the contract.These warranties do not give rise to a separate performance obligation, and you account just a provision for warranty repairs.

b)Service-type warranties – those are warranties that provide something additional to the mere assurance, for example – they provide some extra services.These warranties give rise to a separate performance obligation, because they provide additional service to the customer.

Further check whether your customer has the option to purchase the warranty separately:

If yes, then it’s for sure service-type warranty and you must account for it as for a separate performance obligation.

If not, then you need to see whether the warranty provides something more, some additional service beyond fixing the defects existing at the time of sale.

The above transaction falls in assurance type warranties,it is not a separate performance obligation, therefore just make provision for warranty repairs and no need to allocate part of transaction price to warranty.