(The answer is below: Please can someone explain why the 20,000 servicing revenue is multiplied by 6/12 (6 months)? The question doesn't mention the year-end being October 1st. Why and how is this assumption made? Question: On 1 April 2019 Zeal plc sold equipment to Flatford Ltd for 360,000. The contract included after-sales support to be provided by Zeal plc for two years from the date of sale. These are to be considered as separate performance obligations. The support will cost Zeal plc 16,000 pa to deliver and it would normally expect to make a 20% gross profit margin on the provision of such services. Flatford Ltd undertook to pay the amount due in three equal instalments on 1 April, 1 July and 1 October 2019. The first two instalments have been received and the cost of aftersales support has been included in the cost of sales. Zeal plc has credited 360,000 to revenue in respect of this sale. Required: Explain the required IFRS accounting treatment of Issues (i) to (iii) above in the financial statements of the respective companies at year-end. Prepare all relevant calculations and set out the required adjustments.

Answer:

Revenue The revenue for this sale must be split between the equipment and the after-sales servicing as they are separate performance obligations. Although there is no directly observable stand-alone selling price for the equipment, it can be estimated using the 'residual approach' (ie, the total transaction price less the standalone selling price attributable to the servicing). The revenue attributed to the servicing is a performance obligation satisfied over time and so can only be recognised as the service is delivered. After-sales support Annual revenue attributable to after-sales support: 10,000(20,0006/12) servicing revenue will be recognised in the current year and the balance of 30,000 ((20,0002)10,000) will be presented as a contract liability. Sale of equipment The after-sales support is for two years generating revenue of 40,000(20,0002). Total revenue is 360,000 which leaves a balance of 320,000(360,00040,000) as revenue for sale of the equipment. Revenue from the sale of equipment may be recognised immediately as the control of the equipment has transferred to the buyer. 17 BUSI3183-E1 Correction As 360,000 has been credited to revenue, revenue will need to be reduced by 30,000 to 330,000. In the statement of financial position, the contract liability will be presented as a current liability of 20,000 and a non-current liability of 10,000