ACC 351 CASE STUDY2 IFRS 15 establishes a model applied in recognizing revenue from a contract with customers. The model involves five steps in revenue recognition. This report utilizes the steps underlined under IFRS 15 to understand the revenue realized by Mirabella, Inc. from the contract with Jemison Brothers. Jemison Brothers contracted Mirabella, Inc. to provide and perform computer integration services for security equipment. The five steps of revenue recognition are; a)Contract identification: The contract between the two parties meets the criteria established under IFRS 15. First, the contract has been approved by Mirabella, Inc. and Jemison Brothers. Second, the rights of each party have been identified. Mirabella, Inc. has to provide Jemison Brothers with an integrated computer security system. In return, Jemison Brothers will have to pay for the goods or services supplied to it. Third, contract in commercial in nature. Fourth, ownership from Mirabella to Jemison will only occur after the integration is completed(AICPA, 2019). b)Identification of performance obligations: The obligation to perform is clearly defined in the contract. Mirabella is under obligation to fully integrate the security equipment with the computer system before transferring the ownership to Jemison Brothers. Based on the contract, the performance obligation would not have been fulfilled if Mirabella delivers the security equipment without integrating the computer system (Flood, 2017). In other words, the delivery of security equipment depends on the full integration of the computer system. c)Determination of the transaction price: The transaction price for the contract between Mirabella and Jemison is determined based on the underlined consideration. The outlined considerations are contract value, bonus, discount, and penalty. Firstly, Jemison acquired a $500,000 bonus for making a $9.5 million three days after the contract was signed(Flood, 2017). Secondly, Jemison has promised Mirabella
ACC 351 CASE STUDY3 specified bonuses is the contract is performed within eleven months. Moreover, Mirabella will have to pay penalties if the contract is accomplished beyond 12 months. Thirdly, Jemison will offer the old security equipment to Mirabella after operationalizing the old one. The contract between the two parties is variable based on the outlined considerations. Therefore, the transaction price cannot be determined with precision because it depends on the fulfillment of the outlined obligations (AICPA, 2019). d)Allocation of transaction price: The allocation of transaction price depends on the identified performance obligations. IFRS 15 also addresses the allocation of transaction price on a stand-alone performance obligation. The contract between Mirabella and Jemison is made up of one performance obligation (integration of the computer system). Therefore, the allocation of the transaction price is determined through the market assessment approach(Fiebig, 2015). Lastly, the allocation of transaction price does not apply in this case because only one performance obligation has been listed. e)Revenue recognition after satisfying performance obligation: According to IFRS 15, a company should only recognize revenue if the performance obligation has been satisfied. The performance obligation is satisfied when the control/ ownership has been passed from the seller to the buyer. The revenue recognition model states that control refers to the ability to use or benefit from a contract good / service. Mirabella is required to provide and perform a computer-integration service on the security equipment purchased by Jemison within a year after the contract is signed(Practising Law Institute, 2018). On the other hand, Jemison made full payment ($9.5 million) three days after signing the contract. Mirabella cannot recognize its revenue at the moment because the control/ ownership of the integrated security equipment has not
ACC 351 CASE STUDY4 been transferred to Jemison. Likewise, Mirabella cannot recognize the old security equipment currently held by Jemison as part of the revenue before performing the contract obligation(Flood, 2017). In summary, the contract between the two parties meets the five steps of revenue recognition as established under IFRS 15. Mirabella cannot recognize revenue because the contract is yet to be performed. Lastly, the transaction price depends on bonuses earned or penalties incurred.
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ACC 351 CASE STUDY5 References AICPA. (2019).Audit and Accounting Guide: Revenue Recognition 2019.New York: John Wiley & Sons. Fiebig, E. (2015).Recognition of Revenue From Construction Contracts According to IFRS: Theoretical and Practical Consequences of the Transition to IFRS 15.Berlin: GRIN Verlag. Flood, J. M. (2017).Wiley Revenue Recognition, + Website: Understanding and Implementing the New Standard.New York: John Wiley & Sons. Practising Law Institute. (2018).Implementing the FASB/IASB New Revenue Recognition Standard Workshop 2018.New York: Practising Law Institute.