Week 4: Long Term and Onerous Contracts

Question 1

How is revenue recognized on a cost-plus 7% contract?

Answer 1

Revenue equal to the cost incurred plus 7% profit is recorded each year.

Question 2

Do IFRS apply the same guidance for recognizing contingent assets and contingent liabilities?

Answer 2

No. IFRS applies different recognition thresholds — contingent liabilities can be recognized if probable and measurable; contingent assets are only recognized if virtually certain.

Question 3

Path Pavers signed a contract with a customer to resurface the cycling trail. Path Pavers used the number of kilometers paved as compared to the total kilometres to be paved under the contract as the input method for revenue recognition over time.

True or False

Answer 3

False, using kilometers paved is an output method not an input method because it is measuring the physical output, not hte resources used

Question 4

When determining IFRS revenue recognition timing, do we test point-in-time criteria first?

Answer 4

No. We test over-time criteria first. If not met, we then use point-in-time recognition.

Question 5

What is the journal entry when billing a client under a long-term contract?

Answer 5

Debit Accounts Receivable, Credit Billings on Construction in Progress (CIP) or Work in Progress (WIP).

Question 6

Does Kennedy Construction’s warehouse contract have more than one performance obligation under IFRS?

Answer 6

No. Despite multiple goods/services, they are highly integrated and treated as one performance obligation.

Question 7

A contract in which the unavoidable cost of meeting the obligations under the contract exceeds the economic benefits to be received under it:

A) Is referenced under IFRS as an onerous contract
B) Requires the entity to consider whether the criteria for recognizing a provision are met in order to recognize future costs prior to the cash outflow of those future costs
C) Recognizes revenue for each period using the input or output method to determine transfer of control of assets to the customer during the period
D) All of the above

Answer 7

D (All of the above)

Onerous contract: Defined in IAS 37 as a contract where the costs of fulfilling the contract exceed the economic benefits.

In such cases, IFRS requires recognizing a provision if the contract is expected to lead to losses.

It also may impact how revenue is recognized, especially if costs change expected performance.