Page 406 - SBR Integrated Workbook STUDENT S18-J19

Chapter 25

Example 6

Construction

Amos has entered into a contract with a customer that contains a single
performance obligation: to construct a building.

The contract includes $4 million of fixed consideration and $1 million of
variable consideration. The entity must estimate the variable consideration to
which it is entitled. Using a most likely approach (since there are only two
outcomes), Amos expects to receive $1 million. However, ‘variable
consideration should only be included in the transaction price if it is
highly probable that a significant reversal in revenue recognised would
not occur when the uncertainty is resolved’ (IFRS 15, para 56). Due to the
bespoke nature of this building, and the doubts expressed by Amos, the
variable consideration should be excluded from the transaction price. The
transaction price is therefore $4 million, all of which relates to the construction
of the building.

Revenue from the construction should be recognised as or when the
performance obligation is satisfied. Amos must therefore consider whether it
satisfies the performance obligation over time or at a point in time. Amos is
creating an asset with no alternative use and has a right to payment for
performance completed to date. Therefore, per IFRS 15, this should be
accounted for as a performance obligation satisfied over time.

For performance obligations satisfied over time, revenue should be
recognised based on progress towards the completion of the performance
obligation. Based on costs incurred, the performance obligation is 20%
($0.5m/$2.5m) complete. Revenue of $0.8 million ($4m × 20%) should be
recognised.

Amos should show a corresponding receivable for $0.8 million because it has
an unconditional right to receive the money.

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