IFRS Guidebook by Steven M. Bragg

IFRS Guidebook by Steven M. Bragg

Author:Steven M. Bragg
Language: eng
Format: epub
Publisher: AccountingTools, Inc.,
Published: 2018-02-25T16:00:00+00:00


• Immediate enhancement. The seller creates or enhances an asset controlled by the customer as performance occurs. This asset can be tangible or intangible.

• No alternative use. The seller’s performance does not create an asset for which there is an alternative use to the seller (such as selling it to a different customer). In addition, the contract gives the seller an enforceable right to payment for the performance that has been completed to date. A lack of alternative use happens when a contract restricts the seller from directing the asset to another use, or when there are practical limitations on doing so, such as the incurrence of significant economic losses to direct the asset elsewhere. The determination of whether an asset has an alternative use is made at the inception of the contract, and cannot be subsequently altered unless both parties to the contract approve a modification that results in a substantive change in the performance obligation.

Construction contracts are likely to be designated as being performance obligations that are transferred over time. Under this approach, they can use the percentage-of-completion method to recognize revenue, rather than the completed contract method. This means that they can recognize revenue as a construction project progresses, rather than waiting until the end of the project to recognize any revenue.

EXAMPLE

Oberlin Acoustics is contractually obligated to deliver a highly-customized version of its Rhino brand electric guitar to a diva-grade European rock star. The contract clearly states that this customized version can only be delivered to the designated customer, and it is likely that this individual would pursue legal action if Oberlin were to attempt to sell it elsewhere (such as to the lead guitarist of a rival band). Also, Oberlin might have to incur significant costs to reconfigure the guitar for sale to a different customer. In this situation, there is no alternative use.

However, if Oberlin had instead contracted to deliver one of its standard Rhino brand guitars, the company could easily transfer the asset to a different customer, since the products are essentially interchangeable. In this case, there would be a clear alternative use.

EXAMPLE

Tesla Power Company is hired by a local government to construct one of its new, compact fusion power plants in the remote hinterlands of Malawi. There is clearly no alternative use for the power plant, since Tesla would have to incur major costs to dismantle the facility and truck it out of the remote area before it could be sold to a different customer. However, the contract states that 50% of the price will be paid at the end of the contract period, and there is no enforceable right to any payment; this means that Tesla must consider its performance obligation to be satisfied as of a point in time, rather than over time.

EXAMPLE

Hassle Corporation is in talks with a potential acquirer. The acquirer insists that Hassle have soil tests conducted in the area around its main production facility, to see if there has been any leakage of pollutants. Hassle engages Wilson Environmental to conduct these tests, which is a three-month process.



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