Question

PART I

(a) Discuss in detail, with reference to the principles of IFRS 15 Revenue from Contracts with Customers, whether Lockdown Health Ltd should recognise the following elements of the revenue contract with Sanitize Ltd as separate performance obligations:

• the testing equipment; • the installation of testing equipment; and • the 12-month warranty.

(b) Assume for this section of the question that there are three separate performance obligations, namely the testing software, testing equipment and training services in the revenue contract with Sanitize Ltd.

Criticise the journal entry that was processed with regards to the allocation of the transaction price for revenue recognition to the separate performance obligations listed above, for the year ended 31 August 2020. Support your answer with calculations and amounts.

Communication skills: logical flow and conclusion

(c) Prepare the journal entries to be processed by Lockdown Health Ltd to account for the transaction with StayHome Ltd for the year ended 31 August 2020.

PART II

Prepare the journal entries in the financial statements of Telecon Ltd to account for all the journal entries arising from the contract with the South African National Defence Force for the year ended 31 August 2020.

Please note:

• Round off all amounts to the nearest Rand. • Journal narrations are not required. • Deferred tax journal entries are not required. • Ignore any Value Added Tax (VAT) implications. • Your answer must comply with International Financial Reporting Standards (IFRS).

Answer 1

PART I
(a) Recognise the revenue as per IFRS 15 includes:
Identify the performance obligations in the contract. Performance obligations are promises in a contract
to transfer to a customer goods or services that are distinct.
As explained above in IFRS 15, performance obligation can be identified only when that obligation can be
distinct than other, as in this case selling of testing equipment, instalation of the same and 12 month warranty
service are distinct in nature, which under different contract may be varied without including warranty or limited
to selling only. So Lockdown Health Ltd should recognise the these three elements of the revenue contract with
Sanitize Ltd as separate performance obligations.
(b) allocation of the transaction price to each performance obligation under IFRS 15 is based on the basis of the relative stand-alone
selling prices of each distinct good or service promised in the contract.
So, in this case suppose total contract price is Rs. 10,00,000 and individually it is bifurcated that 33.33% for each obligation is devided,
then Rs. 3,33,333 shall be recognised for each performance oblligation respectively.
Journal entry will be
Journal Entries	$	$
Accounts Receivable	3,33,333
To Revenue from Testing of Software		3,33,333
Accounts Receivable	3,33,333
To Revenue from Testing of Equipment		3,33,333
Accounts Receivable	3,33,333
To Revenue from Training services		3,33,333
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