Accounting Case Study: Mirabella Inc. and IFRS 15 Revenue Recognition

This case study analyzes the revenue recognition process of Mirabella, Inc., in its contract with Jemison Brothers for computer integration services related to security equipment. The analysis applies the five-step model outlined in IFRS 15. The steps include contract identification, identifying performance obligations (which is the integration of the computer system), determining the transaction price (considering bonuses, discounts, and penalties), allocating the transaction price (which is straightforward due to only one performance obligation), and recognizing revenue after satisfying the performance obligation. The case highlights that Mirabella cannot recognize revenue until the integration is complete and control of the security equipment is transferred to Jemison. The transaction price is variable and depends on the fulfillment of contract obligations. The document references relevant accounting literature and provides a clear understanding of revenue recognition principles in this scenario. The document is a detailed analysis of the application of IFRS 15 to the Mirabella case study.

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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

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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

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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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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.

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