Activity 1:

Query 1: Can you briefly explain the five steps in the revenue recognition process?
Answer:

 Identify the Contract with the Customer

A contract is an agreement between two or more parties that creates enforceable rights
and obligations. Ensure the contract meets the criteria for recognition, such as approval,
clear payment terms, and commercial substance.
 Identify the Performance Obligations
Determine the distinct goods or services promised in the contract. A performance
obligation is a promise to transfer a good or service that is distinct or a series of distinct
goods or services that are substantially the same.
 Determine the Transaction Price
Ascertain the amount of consideration the company expects to receive in exchange for
transferring the promised goods or services. This includes variable considerations,
discounts, and any significant financing components.
 Allocate the Transaction Price to Performance Obligations
Distribute the transaction price to each performance obligation based on their standalone
selling prices. If standalone prices are not directly observable, estimates can be made
using appropriate methods.
 Recognize Revenue When (or As) Performance Obligations Are Satisfied
Revenue is recognized as the entity satisfies a performance obligation by transferring
control of the promised goods or services to the customer, either over time or at a point in
time.
Query 2: Brightech Solutions is also planning to expand and open a new vertical in
Construction. They analysed a contract for building a multi-unit residential complex. The
entity enters into a contract with a customer for a specific unit that is under construction.
The goods and services to be provided in the contract include procurement, construction,
piping, wiring, installation of equipment, and finishing. They want your opinion about how
to recognise the performance obligation.

Answer:

For Brightech Solutions, it is likely that the entire construction contract represents a single
performance obligation because the activities are highly interdependent and integrated. Revenue
should be recognized over time using a method that reliably measures progress toward satisfying
the performance obligation, such as the input method. Regular monitoring of the project's
progress and reassessment of estimates are also crucial for accurate revenue recognition.

To determine how to recognize the performance obligations in Brightech Solutions' construction

contract for a multi-unit residential complex, the following steps can be applied based on the
IFRS 15 and ASC 606 revenue recognition frameworks:

1. Identify the Performance Obligations

 Analyze the goods and services in the contract (e.g., procurement, construction, piping,
wiring, installation, and finishing) to determine if they are distinct.
 A good or service is distinct if:
o It can be used independently or with other resources readily available to the
customer.
o It is separately identifiable from other promises in the contract.

For construction contracts, it is often the case that all activities are highly interrelated, and the
customer benefits from the overall completed construction rather than individual components. In
this case, the entire construction process is treated as a single performance obligation.

2. Determine Control Transfer

 Revenue recognition depends on when control of the promised asset is transferred to the
customer. This can happen over time or at a point in time.
 For construction contracts, the control is typically transferred over time if:
o The customer simultaneously receives and consumes the benefits as the entity
performs.
o The entity’s performance creates or enhances an asset that the customer controls
as it is created.
o The asset created has no alternative use, and the entity has an enforceable right to
payment for performance completed to date.

If these conditions are met, revenue is recognized over time.

Query 3: What are the requirements to be met for the revenue to be recognised over time?
Answer:

For revenue to be recognized over time under IFRS 15 and ASC 606, one of the following
criteria must be met:

1. Customer Simultaneously Receives and Consumes the Benefits

 The customer receives and consumes the benefits of the entity's performance as the work
is performed.
 Example: Ongoing services such as cleaning, consulting, or subscription-based software
services.

2. The Entity’s Performance Creates or Enhances an Asset That the Customer Controls

 The entity’s work creates or improves an asset (e.g., a building, software) that the
customer controls as it is being created or enhanced.
 Example: Construction of a building on land owned by the customer.

3. The Asset Being Created Has No Alternative Use to the Entity

 The entity’s performance creates an asset that cannot be repurposed for another customer
or use without significant cost or effort (e.g., custom-built equipment).
 Additionally, the entity has an enforceable right to payment for performance completed
to date, even if the customer cancels the contract.
 Example: Custom manufacturing projects or tailored construction projects.

Additional Points:

 Measurement of Progress: When one of the above criteria is met, the entity must have a
reliable method for measuring progress (e.g., input methods like cost-to-cost or output
methods like milestones).
 Enforceable Payment Rights: For criterion 3, it’s essential that the entity has a legal
right to payment for completed work, which typically includes covering costs incurred
and a reasonable profit margin.

If none of these criteria are met, revenue should be recognized at a point in time, typically when
control of the asset transfers to the customer (e.g., upon delivery or handover).
Activity 2:
Query 1: BrightTech Solutions sells a software licence for $1,000 with the option for
customers to pay in four equal instalments over the next year, how should the company
recognize revenue for this sale?

Answer:

To determine how Brightech Solutions should recognize revenue for selling a software license
with instalment payments, the company must follow the IFRS 15 or ASC 606 revenue
recognition framework:

Key Points:

1. Identify the Performance Obligation

 The software license likely represents a single performance obligation if it is
delivered upfront, granting the customer immediate access to the software.
2. Determine the Timing of Revenue Recognition
 Revenue is recognized when control of the software license transfers to the
customer.
 If the license is a right to use (e.g., perpetual license with no significant ongoing
obligations from the seller), revenue is recognized at the point in time when
control is transferred (e.g., delivery of the license).
 If the license provides a right to access (e.g., subscription license with ongoing
updates or support), revenue is recognized over time as the service is provided.
3. Assess the Payment Terms and Financing Component
 The customer is paying in instalments over the next year. If the payment terms
provide a significant financing component (e.g., payments extend beyond one
year, or interest is implied), the company must adjust the transaction price to
reflect the time value of money.
 Since the payments are within one year, the financing component is likely not
significant, and no adjustment for time value is needed.
4. Recognize Revenue
 If it is a right to use license:
 Recognize the full $1,000 at the point in time when the license is
delivered.
 Payment instalments will be recorded as receivables and reduced as
payments are collected.
 If it is a right to access license:
 Recognize revenue over the license period (e.g., monthly or quarterly)
based on the duration of access provided to the customer.

Accounting Journal Entries:

 At the time of sale (license delivery):

Accounts Receivable Dr. $1,000
To Revenue $1,000

 As payments are received (instalments):

Cash Dr. $250
To Accounts Receivable $250

Overall, If the license is a right to use and control is transferred at delivery, Brightech Solutions
should recognize the entire $1,000 revenue upfront. The instalments will be recorded as
receivables. If it's a right to access, revenue is recognized over time based on the access period.
Query 2: On January 15, BrightTech signed a contract providing a piece of scientific
equipment for $215,000 to Sin Inc., with delivery expected to occur on April 30. Per the
terms of the contract, Sin will pay for the full amount on March 31. BrightTechs cost to
produce the equipment is $175,000. Can you help with the journal entries to be recorded on
January 15, March 31 and April 30.

1. January 15: Signing the Contract

 No journal entry is required on this date because no revenue is recognized and no

payment has been received. The contract itself does not meet the criteria for recognition
of revenue or financial transactions. However, the contract should be disclosed in internal
records.

2. March 31: Receipt of Payment ($215,000)

 When Sin Inc. makes the payment in advance of delivery, Brightech should record it as a
liability (Unearned Revenue) since the performance obligation (delivery of the
equipment) has not yet been satisfied.

Cash Dr. $215,000

To Accounts Receivable $215,000

3. April 30: Delivery of Equipment

 On this date, the performance obligation is satisfied because the equipment is delivered.
Brightech should recognize the revenue and remove the liability. It should also recognize
the cost of producing the equipment as Cost of Goods Sold (COGS).

Unearned Revenue Dr. $215,000

To Revenue $215,000

Journal Entry to Record Cost of Goods Sold:

Cost of Goods Sold Dr. $175,000
To Inventory $175,000

Query 3: BrightTech Solutions enters into a contract to develop a custom software solution
for a client. The contract specifies a total price of $50,000 and the project is expected to
take six months to complete. How would the company recognize revenue for this project if
the work completed is evenly spread out over the entire six-months period?
To recognize revenue for a custom software development contract, Brightech Solutions must
follow the IFRS 15 and ASC 606 framework. Since the project is evenly spread over six months,
the company can recognize revenue over time based on the progress toward completion.

Step-by-Step Revenue Recognition:

1. Identify the Performance Obligation

 The contract involves a custom software solution, which is likely treated as a
single performance obligation because the activities (design, development, and
testing) are highly interdependent and cannot be separated.
2. Determine If Revenue Can Be Recognized Over Time
 Revenue is recognized over time if:
 The customer simultaneously receives and consumes benefits, or
 The software has no alternative use and Brightech has an enforceable right
to payment for performance completed to date.

In this case, custom software generally meets the criteria for revenue recognition over
time.

3. Measure Progress Toward Completion

 Use an appropriate method to measure progress:
 Input Method: Based on resources consumed or costs incurred.
 Output Method: Based on results achieved, such as milestones.

Since the work is evenly spread over six months, Brightech can use a time-based
measure of progress (output method).

4. Allocate Revenue Over Time

 The total price of $50,000 will be evenly allocated over the six months, resulting
in monthly revenue recognition of $8,333.33.

Journal Entries for Monthly Revenue Recognition:

1. At the Start of the Contract (if no payment is received upfront):

o No entry is made as no performance obligation has been satisfied or payment
received.
2. Monthly (e.g., at the end of each month):
o Recognize revenue and record a receivable if the payment is not yet received.

Journal Entry:

Accounts Receivable / Cash Dr. $8,333.33

To Revenue $8,333.33

When Payments Are Received (e.g., periodically or after milestones):

  Record cash received and reduce the receivable.

Journal Entry:

Cash Dr. $8,333.33

To Accounts Receivable $8,333.33