FINANCIAL ACCOUNTING

TUT 1
QUESTION 6.1 (30 marks – 45 minutes)

Mr Smart has recently been appointed as the new financial manager of Berry Ltd. Even though he held
a financial position long ago, he has been working in the film industry for the past 15 years. His
knowledge of financial accounting is thus somewhat outdated and he approached you for advice on the
correct accounting treatment for the products and services offered by Berry Ltd. The company's year
end is 31 December 2019.

Technology support services

Berry Ltd provides online technology support services to customers remotely via the internet. Berry Ltd
will scan a customer’s personal computer for viruses and optimise their computer’s performance for a
fixed fee of R800. When a customer calls to obtain the support services the following process is
followed:

- Berry Ltd describes to the customer the services it can provide and the price for those
services. All telephonic conversations with customers are recorded.
- When the customer agrees to the terms stated by the Berry Ltd representative, a payment is
made over the telephone via the customer’s credit card.
- After a successful payment has been made by the customer, Berry Ltd gives the customer an
access code for Berry Ltd’s website in order to obtain and use the scan services.

Software licences and software customisation

Berry Ltd licences accounting software to its customers. In addition Berry Ltd also provides a service to
significantly customise the accounting software to the customer’s business environment and
information technology platform. The licence, including the customisation of the software, is sold to
customers at R35 000.

Laptops

Berry Ltd sells laptops to the public via its website. Berry Ltd only sells the Bell X1 and Bell X2 model
laptops. The Bell X1 and Bell X2 are sold for R8 500 and R10 500 respectively.

Once the customer have paid for the laptop on Berry Ltd’s online shop using his/her credit card, the
laptop is dispatched to the customer. Berry Ltd uses a third-party carrier to deliver the laptops to its
customers. Berry Ltd’s delivery terms on its website stipulate that legal title of the product passes to the
customer when the laptop is handed over to the carrier.

REQUIRED
Marks
Advise Mr Smart on the following:

(a) If the technology support services provided by Berry Ltd is a contract with a 6
customer.
(b) If the software licences and software customisation are separate performance 8
obligations in a single contract.

(c) When should revenue from the laptops sold through the online shop be recognised 5
by Berry Ltd.
Please note:

• Ignore any normal income tax implications.

• Ignore any Value Added Taxation (VAT) implications.
• Your answer should be limited to IFRS 15 Revenue from Contracts with Customers.

QUESTION 6.1 - Suggested solution

(a) A contract with a customer is in the scope of IFRS 15 if it meets the following five
criteria (IFRS 15.9):
• The parties to the contract have approved the contract and are committed to
perform their respective obligations;
• The rights of each party regarding the goods or services can be identified;
• The payment terms are identified;
• The contract has commercial substance; and
• It is probable that the entity will collect the consideration to which it is entitled to.

The scanning services is a contract with a customer since:

(1)
• Orange Ltd and the customer enter into an oral agreement which is legally
enforceable (IFRS 15.10).
(1)
• In terms of the agreement Orange Ltd will deliver scanning services in return for a
specified amount of R800, immediately payable by the customer with a credit card.
Thus the rights of each party can be identified. (1)
• The payment terms are therefore clear as the customer pays immediately with a
(1)
credit card.
• Orange Ltd will receive the cash for the service to be provided and after payment,
(1)
the customer receives an access code which gives him/her the right to access the
scanning services on the website at any time. In light of the above, the contract with
the customer has commercial substance.
• The collection of the consideration for the services is probable since payment by the
customer is immediate.
As such, this agreement would be a contract within the scope of IFRS 15 at the time of
the receipt of payment during the telephone conversation. (1)
Total (6)

(b) In terms of the contract Orange Ltd promises to deliver a software licence and the
customisation of software. In order to identify whether these promises are separate
performance obligations, Orange Ltd has to determine if they are distinct
(IFRS 15.22(a)). (1)

A good or service is distinct if both of the following criteria are met (IFRS 15.27):
• The customer can benefit from the good or service on its own or together with other
resources readily available to the customer; and
• The good or service to be transferred by the entity is separately identifiable from
other promises in the contract.

A good or service is not separately identifiable (IFRS 15.29) if:

 • The entity provides a significant service of intergrating the goods or service
promised into a bundle of goods or services that represent a combined output; or
• One or more of the goods or services significantly modifies/customises one or more
of the other goods or services in the contract; or
• The goods or services are highly interdependent or highly interrelated.

It is possible that a customer may benefit from the licence and the customisation of the
(1)
software on its own or together with its own resources (for instance a customer may
have the expertise to customise its own software). Therefore the good and service is
distinct.

The licence and software customisation is not separately identifiable for the following
reasons: (1)
• Orange Ltd is providing a significant service of integrating the goods and services
(the licence and the software customisation services) into a single combined output
for which the customer has contracted. (1)
• In addition, the software is significantly customised by Orange Ltd in accordance
with the specifications negotiated with the customer. (1)
• The licence and software is highly interdependent or highly interrelated with other
goods or services in the contract. The license and software cannot be used without
the other. (1)

The licence and consulting services offered in a single contract to Orange Ltd’s
customers are not distinct and are therefore not separate performance obligations.
Hence, the entity would account for the licence and software customisation services
together as one performance obligation. (2)

The contract to provide the licence and customisation is a single contract since it was
negotiated as a package with a single commercial objective (IFRS 15.17(a)). (1)
Total (9)
Maximum (8)

(c)
(c) An entity shall recognise revenue from a transaction when the entity satisfies a
performance obligation by transferring a good or service (an asset) to a customer
(IFRS 15.31).

An asset is transferred when the customer obtains control of that asset

(IFRS 15.31).

A performance obligation is performed over time or at a point in time

(IFRS 15:32).

To determine the point in time a customer obtains control of an asset and the entity
satisfies a performance obligation the requirements of control (IFRS 15.31-.35) and
the indicators of control (IFRS 15.38) are to be considered.

The performance obligation is satisfied at a point in time since the customer obtains
control of the product at the point of shipment for the following reasons: (1)
• Although the customer does not have physical possession of the product at that
point, it has legal title and therefore can sell the product to (or exchange it with)
another party (IFRS 15.38(b)). Physical possession and control of the asset need
not coincide (IFS 15.38(c)). (2)
• Orange Ltd is also precluded from selling the customer’s laptop to another
customer at this point (IFRS 15.33). (1)

Hence revenue from the laptops should be recognised by Orange Ltd at the point of
shipment (i.e. when the product is handed over to the carrier). (1)
Total (5)