Essay About Customer B Us And Performance Obligation

Revenue Recognition – Multiple Element Arrangement
IFRS 1 – Assignments Week 6 – Revenue RecognitionQuestion 1 – Revenue Recognition – Multiple Element ArrangementCompany A provides a bundled service offering to Customer B. It charges Customer B US$ 35,000 for initial connection to its network and two ongoing services –access to the network for 1 year and ‘on-call trouble shooting’ advice for that year. Customer B pays US$ 35,000 upfront, on 1 July 2015. Company A determines that, if it were to charge a separate fee for each service if sold separately, the fee would be:Separate fees                        Fair value if sold separatelyConnection fee                5,000Access fee                        12,000Trouble shooting                23,000The end of Company A’s reporting period is 30 June.RequiredPrepare the journal entries to record this transaction in accordance with IFRS 15 for the year ended 30 June 2016, assuming Company A applies the relative fair value approach. Show all workings.IFRS 15 requires entities to apply a five-step model to recognise revenue:Step 1 – Identify the contract(s) with a customerStep 2 – Identify the performance obligation(s) in the contractStep 3 – Determine the transaction priceThe transaction price is a fixed payment in this case of US$ 35,000.Step 4 – Allocate the transaction price to the performance obligations in the contract Total of the fair values of the separate items if sold separately equals 5,000 + 12,000 + 23,000 = US$ 40,000. The aggregate of the stand-alone selling prices of US$ 40,000 exceeds the total transaction price of US$ 35,000, indicating there is a discount inherent in the contract. That discount must also be allocated to each of the individual performance obligations:Connection fee        5,000 x (35,000/40,000) = US$ 4,375Access fee                12,000 x (35,000/40,000) = US$ 10,500Trouble shooting        23,000 x (35,000/40,000) = US$ 20,125Step 5 – Recognise revenue when (or as) the entity satisfies a performance obligationThe ‘initial connection to the network’ is an performance obligation at a point in time that will be satisfied at once, and the ‘access to the network for 1 year’ and ‘on-call trouble shooting advice for 1 year’ are performance obligations that will be settled over time.Journal entries:1 July 2015Cash                                                DR                        US$ 35,000        Deferred Revenue (liability) –