Question

a) A telecommunications company enters into a contract with a customer. Under the contract, the company promises to provide to the customer 4 GB data, 300 minutes of talk time, and 500 texts for $36.

Required:

Briefly explain how the telecommunications company should account for the contract under NZ IFRS 15. You need to refer to the relevant requirements but not to any specific paragraph of NZ IFRS 15.

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.

Based on above the Revenue Recognition for a performance obligation is done over time if one of the criteria is met out of three else Revenue Recognition for a performance obligation is done at a point in time.

Analysis:

Five steps of recognition:

1. Once the Recharge is done, a contract is being entered between the company and the customer.

2. There are 3 performance obligations-i) 4GB data,ii) 300 minutes of talk time and iii) 500 text messages for $ 36

3. Transaction price is $ 36

4. Allocation of Transaction price the Performance obligation in the ratio of Standalone selling price or Fair value

5. Customer receives the Data, Talktime and SMS balance simultaneously when the company performs the same. Since the one of the condition under Step 5 is satisfied. Hence the Transaction is recognised OVER TIME

Conclusion: If there is no expiry time for the balance then, telecommunication company shall recognize the revenue as an when the customer uses the services. If there is Expiry date for the Balance then the unused balance revenue shall be recognised on the last day of the the expiry date.

For Example:
if the Standalone selling price of the services are following
Particulars	Amount	Allocation of Transactions	Remarks
4 GB data	10	9	As per the Step 4- allocation of TP to the performace obligations based on the Standalone selling price
300 Minutes talktime	20	18
500 SMS	10	9
Total	40	36

In the given example if the customer uses uses 4GB and 200 minutes of Talk time and Does not use the SMS then the revenue is recognised in the following way if there is no expiry date
Particulars	Amount
4 GB data	9
200 Minutes talktime	12
0 SMS	0
Total	21