Question
Mr X is the newly appointed accountant of A Ltd, a company that develops computer software. The end of the reporting period of A Ltd
Mr X is the newly appointed accountant of A Ltd, a company that develops computer software. The end of the reporting period of A Ltd is 30 September. A Ltd develops and sells software to its clients and also offers an on-site service contract. The software designed by A Ltd can only be installed by A Ltd. The software cannot be used by customers without A Ltd installing it. On-site service contracts are regularly provided to customers separately from the supply of software. It is also possible to obtain software from A Ltd without an on-site service. The company concluded a contract with C Bank on 1 February 2017 in terms of which a large system has to be designed for the bank. The system is purposely designed for the bank and cannot be used by other customers. The software was delivered to the bank in Botswana on 25 September 2017. The bank acknowledged receipt of the software on 30 September 2017 but still awaited the installation of the software which took place only on 10 October 2017. The contract is cancellable if the software is not installed to the satisfaction of the bank. Included in the purchase price is a service contract for two years. Payment is due on date of installation. C Bank settled the amount of $950 000 on 10 October 2017. The stand alone selling prices of similar software and on site services were as follows on 1 February 2017: Computer software: $850 000 On-site service: $100 000 The accountant has included the total revenue from the transaction of $950 000 in the statement of comprehensive income for the reporting period ended 30 September 2017.
Required: a) Discuss whether the accounting treatment for the above transaction results in fair presentation by referring to IFRS 15 Revenue from contracts with customers. b) Briefly discuss the recognition of the cost relating to the design that A Ltd incurred up to 25 September 2017.
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