Question

1. You go to Starbucks and purchase a latte coffee along with a donut. In the coffee you ask for extra milk and sugar. The coffee costs $4 and the donut costs $2. You receive the bill , which reflects the coffee price of $4 and the donut price for $2 for a total of $ 6 , which you pay and then go to a table and start enjoying your meal.

Q= Discuss each of the 5 steps of the revenue recognition process in this transaction?

Include in your answer the question as to when you received control of the assets.

2.ABC provides tax return preparation services for its client base. The cost of each tax return is $100. Upon payment, the customer is provided a coupon entitling her to a 20% discount on next year’s tax return preparation fee. ABC has estimated, based on past experience, that 75% of the customers will use this coupon.

Q1- How many performance obligations does ABC have in the above transaction?

Q2-What is the transactions price?

Q3-Allocate the transactions price between the performance obligation(s)?

Q4-How much revenue did ABC earn in Year 1 from one single paid tax return?

Answer 1

Recognition of Revenue as per IFRS 15

The core principle of IFRS 15 is that an entity will recognise revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This core principle is delivered in a five-step model framework:

1.Identify the contract(s) with a customer

2.Identify the performance obligations in the contract

3.Determine the transaction price

4.Allocate the transaction price to the performance obligations in the contract

5.Recognise revenue when (or as) the entity satisfies a performance obligation.

Application of this guidance will depend on the facts and circumstances present in a contract with a customer and will require the exercise of judgment.

Revenue is recognised in two ways under Step 5 i.e., Satisfied over time or Point in Time.

Performance obligation is satisfied over time if one of the criteria is met out of three:

1.The customer simultaneously receives and consumes the benefits provided by the entity’s performance as the entity performs

2.The entity’s performance creates or enhances an asset (for example work in progress) that the customer controls as the asset is created or enhanced or

3.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 performance completed to date.

Analysis:

1. Once I order the Latte Coffee, there is a contract entered between the starbucks and the you

2. The performance obligation in the contract is to supply a Latte coffee,a Donut ,some milk and Sugar packet

3. Transaction price for Latte coffe, sugar and milk is $4 and For donut it is $2

4. The transaction price is allocated in the following manner

Latte coffee, milk and sugar-$4 and Donut-$2

5. Revenue can be recognised once the Coffe and Donut is served to you and billed

ii)

An asset is transferred to you once all the risk and rewards are transferred to you.