- 4 Marks
FR – Nov 2021 – L2 – Q2b – Financial Reporting Standards and Their Applications
This question requires the recognition of revenue under IFRS 15 for a contract with advance payments and the calculation of a significant financing component.
Question
Marshall Ltd (Marshall) is a manufacturing company that prepares Financial Statements in compliance with IFRSs and has a reporting date of 31 December. During the year to 31 December 2020, Marshall entered into a contract with a customer to manufacture and sell some goods such that the goods will be delivered (control of the goods vests with the customer) in two years. The contract has two payment options:
i) The customer can pay GH¢500,000 when the contract is signed, or
ii) GH¢650,000 in two years when the customer gains control of the goods.
Marshall’s incremental borrowing rate is 10%. The customer paid GH¢500,000 on 1 January 2020, when the contract was signed. Marshall intends to recognise revenue on this contract in the financial statements.
Required:
In accordance with IFRS 15: Revenue from Contract with Customers, explain (with supporting calculations) how Marshall should account for the above transactions for the years 2020 and 2021.
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