IFRS 15 Revenue from Contracts with Customers provides detailed and consistent guidance regarding revenue recognition. IFRS 15 sets out a five-step model, which applies to revenue earned from a contract with a customer with limited exceptions, regardless of the type of revenue transaction or the industry. Step one in the five-step model requires the identification of the contract with the customer and is critical for the purpose of applying the Standard. The remaining four steps in the Standard's revenue recognition model are irrelevant if the contract does not fall within the scope of IFRS 15.
Scenario 1
Tang enters into a contract with a customer to sell an existing printing machine such that control of the printing machine vests with the customer in two years' time. The contract has two payment options. The customer can pay N$240,000 when the contract is signed or N$300,000 in two years' time when the customer gains control of the printing machine. The interest rate implicit in the contract is 11.8% in order to adjust for the risk involved in the delay in payment. However, Tang's incremental borrowing rate is 5%. The customer paid N$240,000 on 1 December 2017 when the contract was signed.
Scenario 2
Tang enters into a contract on 1 December 2017 to construct a printing machine on a customer's premises for a promised consideration of N$1,500,000 with a bonus of N$100,000 if the machine is completed within 24 months. At the inception of the contract, Tang correctly accounts for the promised bundle of goods and services as a single performance obligation in accordance with IFRS 15. At the inception of the contract, Tang expects the costs to be N$800,000 and concludes that it is highly probable that a significant reversal in the amount of cumulative revenue recognized will occur. Completion of the printing machine is highly susceptible to factors outside of Tang's influence, mainly issues with the supply of components. On 30 November 2018, Tang has satisfied 65% of its performance obligation on the basis of costs incurred to date and concludes that the variable consideration is still constrained in accordance with IFRS 15. However, on 4 December 2018, the contract is modified with the result that the fixed consideration and expected costs increased by N$110,000 and N$60,000 respectively. The time allowable for achieving the bonus is extended by six months with the result that Tang concludes that it is highly probable that the bonus will be achieved and that the contract remains a single performance obligation. Tang has an accounting year-end of 30 November.
Required:
Discuss how the above two contracts should be accounted for under IFRS 15. (In the case of Scenario 1, the discussion should include the accounting treatment up to 30 November 2019, and in the case of Scenario 2, the accounting treatment up to 4 December 2019.