Deck 4: Revenue From Contracts With Customers

Question 1

Biotech licenses intellectual property (IP) to an early-stage drug compound to Pharma. Biotech also provides research and development (R&D) services as part of the arrangement. Biotech is the only vendor able to provide the R&D services based on its specialised knowledge of the technology. How is this arrangement defined?

A) licence
B) distinct licence
C) non distinct licence
D) patent

Answer 1

C

Question 2

Seller enters into a contract with a customer to sell Products A, B and C for a total transaction price of £100,000. Seller regularly sells Product A for £25,000 and Product B for £45,000 on a stand-alone basis. Product C is a new product that has not been sold previously, has no established price, and is not sold by competitors in the market. Products A and B are not regularly sold together at a discounted price. Product C is delivered on 1 March, and Products A and B are delivered on 1 April. How should Seller determine the stand-alone selling price of Product C?
I. Seller can use the residual approach to estimate the stand-alone selling price of Product C, because Seller has not previously sold or established a price for Product C.
II. Prior to using the residual approach, Seller should assess whether any other observable data exists to estimate the stand-alone selling price. For example, although Product C is a new product, Seller might be able to estimate a stand-alone selling price through other methods, such as using expected cost plus a margin.
III. Seller has observable evidence that Products A and B sell for £25,000 and £45,000 respectively, for a total of £70,000. The residual approach results in an estimated stand-alone selling price of £30,000 for Product C (£100,000 total transaction price less £70,000).

A) I., II. and III.
B) I. and II.
C) II. and III.
D) None of the above

Answer 2

I., II. and III.

Question 3

Web Co operates a website selling used books. Web Co enters into a contract with Bookstore, a used bookshop, to sell books sold by Bookstore. The terms and conditions of the contract include:
$\bullet$ Web Co will transport the books sold to the end customer.
$\bullet$ Web Co does not take possession of the books sold to the customers; however, the customer returns the books to Web Co if they are dissatisfied.
$\bullet$ Web Co has the right to return books to Bookstore without penalty if they are returned by the customer.
$\bullet$ Web Co will invoice the customer for the sale.
$\bullet$ Web Co earns a fixed margin on the books sold, and has no flexibility in establishing the sales price of the book.
$\bullet$ Bookstore retains credit risk for sales to the customer.
Web Co should recognise revenue on the transfer of the books to the customer:

A) on a gross basis
B) on a net basis
C) on a gross basis as Bookstore retains all credit risk
D) on a net basis as Web Co does not set the sales price

Answer 3

on a net basis

Question 4

Equipment Dealer enters into a contract to deliver construction equipment to Landscaping Inc. Equipment Dealer operates in a country where it is common to retain title to construction equipment and other heavy machinery as protection against non-payment by a buyer.
Equipment Dealer's normal practice is to retain title to the equipment until the buyer pays for it in full. Retaining title enables Equipment Dealer to more easily recover the equipment if the buyer defaults on payment.
Equipment Dealer concludes that there is one performance obligation in the contract that is satisfied at a point in time when control transfers. Landscaping Inc has the ability to use the equipment and move it between various work locations once it is delivered. Normal payment and credit terms apply.
When should Equipment Dealer recognise revenue for the sale of the equipment?

A) when entering the contract
B) upon delivery
C) when full payment is made
D) none of the above

Question 5

Construction Co lays railroad track and enters into a contract with Railroad to replace a stretch of track for a fixed fee of €100,000. All work in process is the property of Railroad. Construction Co has replaced 75 units of track out of 100 total units of track to be replaced by year end. The effort required of Construction Co is consistent across each of the 100 units of track to be replaced.
Construction Co determines that the performance obligation is satisfied over time, as Railroad controls the work in process asset being created.
Construction Co should recognise revenue totalling:

A) €100,000.
B) €75,000
C) €25,000
D) €175,000

Question 6

According to IFRS 15, which method should be used to estimate the stand-alone selling prices?
I) Adjusted market assessment approach.
II) Expected cost plus a margin approach.
III) Residual approach, in limited circumstances.

A) I., II. and III.
B) I. and II.
C) II. and III.
D) None of the above

Question 7

Which of the following are excluded from the scope of IFRS 15?
I the initial recognition of agricultural produce
II insurance contracts within the scope of IFRS 4 Insurance Contracts
III the extraction of mineral ores
IV lease agreements

A) I, II only
B) II, III and IV only
C) I, III and IV only
D) I, II, III and IV

Question 8

Software Co provides a perpetual software licence to Engineer. Software Co will also install the software as part of the arrangement. Software Co offers the software licence to its customers with or without installation services, and Engineer could select a different vendor for installation. The installation does not result in significant customisation or modification of the software. How is this arrangement defined?

A) patent
B) distinct licence
C) non distinct licence
D) trademark

Question 9

On 1 January 2016, Producer enters into a contract to deliver a product to Customer on 31 March 2016. The contract is non-cancellable and requires Customer to make an advance payment of €5,000 on 1 February 2016. Customer does not pay the consideration until 1 March. How should Producer reflect the transaction in the statement of financial position?

A) 1 February 2016
Dr Trade Receivables $\quad\quad€ 5,000$
Cr Contract Liability $\quad\quad€ 5,000$

31 March 2016
Dr Contract Liability $\quad\quad€ 5,000$
Cr Revenue $\quad\quad€ 5,000$
B) 1 February 2016
Dr Trade Receivables $\quad\quad€ 5,000$
Cr Contract Liability $\quad\quad€ 5,000$

1 March 2016
Dr Cash $\quad\quad€ 5,000$
$\mathrm{Cr}$ Trade Receivables $\quad\quad€ 5,000$

31 March 2016
Dr Contract Liability $\quad\quad€ 5,000$
Cr Revenue $\quad\quad€ 5,000$
C) 1 January 2016
Dr Trade Receivables $\quad\quad€ 5,000$
Cr Contract Liability $\quad\quad€ 5,000$

1 February 2016
Dr Cash $\quad\quad€ 5,000$
$\mathrm{Cr}$ Trade Receivables $\quad\quad€ 5,000$

31 March 2016
Dr Contract Liability $\quad\quad€ 5,000$
Cr Revenue $\quad\quad€ 5,000$
D) None of the above

Question 10

According to IFRS 15, the methods for recognising revenue on arrangements involving the transfer of goods or services over time are:
I. Output methods
II) Residual method
III) Input methods
IV) Adjusted assessment method

A) I., II. and III.
B) I. and IV.
C) I. and III.
D) II., III. and IV.

Question 11

Blue Marine Limited sells boats and provides mooring facilities for its customers. Blue Marine sells the boats for €60,000 each and provides mooring facilities for €10,000 per year. Blue Marine sells these goods and services separately; therefore, they are distinct and accounted for as separate performance obligations. Blue Marine enters into a contract to sell a boat and one year of mooring services to a customer for €65,000. Blue Marine Limited will allocate the transaction price of €65,000 to the performance obligations as follows:
$\quad$ Boat $\quad$$\quad$ Mooring services

A) $\quad$ € 65,000 $\quad$ Nil
B) $\quad$ Nil $\quad$$\quad$$\quad$ € 65,000
C) $\quad$ € 55,000 $\quad$ € 10,000
D) $\quad$ € 55,714 $\quad$ € 9,286

Question 12

Which of the following contracts with customers to provide goods or services in the ordinary course of business are included within the scope of IFRS 15?
I lease contracts accounted for under IAS 17 Leases;
II insurance contracts accounted for under IFRS 4 Insurance Contracts;
III financial instruments and other contractual rights or obligations accounted for under IFRS 9 Financial Instruments or IAS 39 Financial Instruments: Recognition and Measurement, IFRS 10 Consolidated Financial Statements, IFRS 11 Joint Arrangements, IAS 27 Separate Financial Statements and IAS 28 Investments in Associates and Joint Ventures
IV non-monetary exchanges between entities in the same line of business to facilitate sales to customers or potential customers.

A) I., II. and III.
B) III. only
C) I., II. and IV.
D) None of the above

Question 13

Which of the following is a reason why the IASB and FASB jointly developed a revenue standard?
I. remove inconsistencies and weaknesses in the current revenue recognition literature;
II. provide a more robust framework for addressing revenue recognition issues;
III. improve comparability of revenue recognition practices across the various industries, entities, jurisdictions and capital markets;
IV. provide a single reference point in order to reduce the volume of the relevant standards and interpretations that entities will need to refer to;
V. provide more useful information to users through enhanced-disclosure requirements.

A) I, II only
B) II, III and IV only
C) I, III and IV only
D) I, II, III, IV and V

Question 14

Which of the following disclosure are required by IFRS 15?
I)Total income, allocated between revenue and other gains
II) qualitative and quantitative information about contracts with customers
III) qualitative and quantitative information about any assets recognised from the costs to obtain or fulfil a contract with a customer
IV) the opening and closing balances of receivables, contract assets and contract liabilities from contracts with customers, if not otherwise separately presented or disclosed

A) I and II only
B) II, III and IV only
C) I, II and III only
D) I, II, III and IV

Question 15

Travel Co negotiates with major airlines to obtain access to airline tickets at reduced rates, and it sells the tickets to its customers through its website. Travel Co contracts with the airlines to buy a specific number of tickets at agreed rates and must pay for those tickets regardless of whether it is able to resell them. Customers visiting Travel Co's website search Travel Co's inventory of tickets, and Travel Co has latitude to set the prices for the tickets that it sells to its customers. Customers pay for airline tickets using credit cards, and Travel Co is the merchant of record. Credit card charges are pre-authorised; however, Travel Co incurs occasional losses as a result of disputed charges.
Travel Co is responsible for delivering the ticket to the customer. Travel Co will also assist the customer in resolving complaints with the service provided by the airlines. The airline is responsible for fulfilling all other obligations associated with the ticket, including the air travel and related services (that is, the flight), and remedies for service dissatisfaction.
Travel Co should recognise revenue:

A) for the ticket price agreed with the airlines
B) for the fee charged to customers on a gross basis
C) for the fee charged to customers net of the amounts paid to the airlines
D) for the fee charged to customers net of credit card charges

Question 16

In 2016 Contractor enters into a contract with Government to build an aircraft carrier for a fixed price of €4 billion. The contract contains a single performance obligation that is satisfied over time. Additional contract characteristics are:
$\bullet$ Total estimated contract costs are €3.6 billion, excluding costs related to wasted labour and materials.
$\bullet$ Costs incurred in year one are €740m, including €20m of wasted labour and materials.
Contractor concludes that the performance obligation is satisfied over time, because Government controls the aircraft carrier as it is created. Contractor also concludes that an input method using costs incurred relative to total cost expected to be incurred is an appropriate measure of progress towards satisfying the performance obligation.
How much revenue and cost should Contractor recognise as of the end of 2016?
$\quad$ Revenue $\quad$ Cost

A) $\quad$ € 800m $\quad$ € 740m
B) $\quad$ € 800m $\quad$ € 760m
C) $\quad$ € 800m $\quad$ € 720 m
D) $\quad$ € 760m $\quad$ € 740m

Question 17

In which circumstances arrangements with customers are contracts within the scope of IFRS 15?
I. the contract might be approved by all parties in writing, or in accordance with other customary business practices,
II. the parties are committed to carrying out their respective obligations;
III. the entity cannot identify the rights of each party with regard to the goods or services that are to be transferred under the contract;
IV. the entity cannot identify the payment terms for the goods or services to be transferred;
V. the entity has completed performing all of its obligations under the contract and has received all, or substantially all, of the consideration promised by the customer.

A) I., II. and III.
B) II. and V.
C) I., II. and IV.
D) None of the above

Question 18

Data Co enters into a two-year contract with a customer to build a data centre in exchange for consideration of €1m. Data Co incurs incremental costs to obtain the contract and costs to fulfil the contract that are recognised as assets and amortised over the expected period of benefit.
The economy subsequently deteriorates, and the parties agree to renegotiate the pricing in the contract, resulting in a modification of the contract terms.
The remaining amount of consideration to which Data Co expects to be entitled is €650,000. The carrying value of the asset recognised for contract costs is €600,000. An expected cost of €150,000 would be required to complete the data centre.
How should Data Co account for the asset after the contract modification?

A) Data Co should recognise an impairment loss of C100,000.
B) Data Co should record the contract asset for €1m.
C) The carrying value of the asset recognised for contract cost should be €500,000 (€650,000 less €150,000).
D) Data Co should recognise an impairment loss of €150,000.