IFRS 15 provides guidance for the accounting for consideration received without the contract criteria being met. Which one of the following statements is correct?
Burn Bright Inc. receives MU18,000 from a customer six months before the contract criteria in IFRS 15 are met. As the contract criteria will ultimately be met, it would process the following journal upon receipt of the cash:
Dr Cash MU18,000 Cr Revenue MU18,000
Scents Ltd. receives MU10,000 cash from a customer at contract inception but the contract criteria in IFRS 15 are not met therefore it would process the following journal upon receipt of the cash:
Dr Cash MU10,000 Cr Other Income MU10,000
Candle Company Ltd. receives MU38,000 from a customer before the contract criteria in IFRS 15 are met. As a result, it continues to assess the criteria and therefore upon receipt of the cash it processes the following journal:
Dr Cash MU38,000 Cr Contract liability MU38,000
EverGlow Inc. receives MU50,000 from a customer at contract inception however since the contract criteria in IFRS 15 are not met, it would process the following journal entry upon receipt of the cash:
Dr Cash MU50,000 Cr Liability MU50,000
The correct statement is:
Candle Company Ltd. receives MU38,000 from a customer before the contract criteria in IFRS 15 are met. As a result, it continues to assess the criteria and therefore upon receipt of the cash it processes the following journal:
Dr Cash MU38,000 Cr Contract liability MU38,000
According to IFRS 15, when a company receives consideration from a customer before the contract criteria are met, it should initially recognize the amount received as a contract liability. The liability is then recognized as revenue only when the performance obligations under the contract are transferred to the customer and the criteria for recognizing revenue are met. In the cases where the contract criteria are not yet fulfilled, recognizing the receipt as revenue would be inappropriate. Therefore, Burn Bright Inc. and Scents Ltd. processing the cash received as revenue or other income upon receipt would not be in accordance with IFRS 15 guidelines. EverGlow Inc.'s classification of the receipt as a generic liability is also not specific to the contract and may not be in line with the standard's requirements.
