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IFRS 15Case studies (Step 3 of 5)

Case study

Step 3 of 5
Practical caseIFRS 15L3 · Advanced

Construction contract: cost-based progress, modification and contract asset

6 documents10 tasks≈ 80 min
0 / 14 items completed
Standards
IFRS 15 — Revenue from Contracts with Customers
Assistance levelNo help · reduced assistance
  • Method: withdrawn
  • Checklist: withdrawn
  • Hints: withdrawn
  • Step-by-step work: shown

Case brief

Situation

Bâtiments Lorvane SA (a fictitious entity) is building a warehouse for Logistique Cérans SAS (a fictitious entity) on land owned by the customer. The contract was signed on 1 March 20X1 and the works are due to be completed at the end of 20X3. Lorvane's reporting date is 31 December and it does not publish interim financial statements. You are preparing the contract schedule for the years 20X1 and 20X2.

Your assignment

Analyse the pattern of revenue recognition and the 20X2 modification, calculate the cumulative revenue, the revenue of each year and the contract balance at the end of 20X1 and of 20X2, record the entries of each year and measure the impact of the year 20X2 on the financial statements. One document is not useful and one piece of information is missing.

Work on this file as you would in practice: read the situation, open the documents, sort the useful information, then carry out the work requested. The solution is revealed once you submit.

Advanced level: no help, the work is grouped by kind.

Documents

File documents

6 documents: open each one to read it.

Document 1Contract

Construction contract

Construction contract signed on 1 March 20X1: fixed price excluding taxes 10,000,000. The warehouse is built on land owned by Logistique Cérans; the works become the customer's property as they are incorporated into the land and the customer may request changes during construction. Invoicing upon reaching technical milestones certified by the customer's architect, invoices payable within 45 days; outside these milestones, Lorvane has no right to invoice the work performed. Memo of the contract analysis team (case data): the design, construction and integration of the various work packages form a single performance obligation.

Data

Key data from the documents

The figures of the documents, gathered for your work.

ItemValueFound in
Initial contract price€10,000,000.00
Initial budget of contract costs€8,000,000.00
Costs incurred since inception at 31 December 20X1€2,000,000.00
Price of amendment No. 1€1,200,000.00
Budgeted costs of the added work€700,000.00
Costs incurred since inception at 31 December 20X2€5,500,000.00
Revision of the budget of the initial work€100,000.00
Foundations milestone invoice (20X1)€2,000,000.00
Structure milestone invoice (20X2)€4,000,000.00
Amount of the performance bond€1,500,000.00

Sorting the information

Not every document matters: identify those that affect the accounting treatment.

Part 1 · Classification · Analysis

Sort each document: does it affect the accounting treatment?

Drag each item into its category, or tap the category under the item.

To sort6

  • Construction contract

  • Cost report at 31 December 20X1

  • Amendment No. 1

  • Cost report at 31 December 20X2

  • Statement of invoices issued

  • Performance bond

Relevant to the treatment0

    No effect0

      Questions

      Work programme

      10 tasks in the order of the file. Calculations, entries and effects on the financial statements are marked; written answers are self-assessed against the solution.

      1. Task 1Analysis

        Is the performance obligation satisfied over time and how should progress be measured?

      2. Task 2Analysis

        How should amendment No. 1 be accounted for?

      3. Task 3Calculation

        Calculate the cumulative revenue at the end of 20X1 and of 20X2.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Calculate the cumulative revenue at the end of 20X1 and of 20X2.

        1. €
        2. €
        3. €
        4. €

        Checks

        • 0 / 4 steps entered
        • Amounts readable

        Result: Cumulative revenue at 31 December 20X2

      4. Task 4Calculation

        Calculate the revenue of each year.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Calculate the revenue of each year.

        1. €
        2. €

        Checks

        • 0 / 2 steps entered
        • Amounts readable

        Result: Revenue of the year 20X2

      5. Task 5Calculation

        Calculate the contract balance at the end of 20X1 and of 20X2.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Calculation

        Calculate the contract balance at the end of 20X1 and of 20X2.

        1. €
        2. €
        3. €

        Checks

        • 0 / 3 steps entered
        • Amounts readable

        Result: Contract asset at 31 December 20X2

      6. Task 6Journal entries

        Record the entries of the year 20X1.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Journal entry · Journal entries

        Entry 1 of 2

        One line = one account and one side. Add a line if the entry needs more; the balance check updates live.

        1. Line 1

        2. Line 2

        TotalsDebit0Credit0

        Calculator

        Click in an answer field to be able to insert the result.

        Part 2 · Journal entry · Journal entries

        Entry 2 of 2

        One line = one account and one side. Add a line if the entry needs more; the balance check updates live.

        1. Line 1

        2. Line 2

        TotalsDebit0Credit0

      7. Task 7Journal entries

        Record the entries of the year 20X2.

        Calculator

        Click in an answer field to be able to insert the result.

        Part 1 · Journal entry · Journal entries

        Entry 1 of 2

        One line = one account and one side. Add a line if the entry needs more; the balance check updates live.

        1. Line 1

        2. Line 2

        TotalsDebit0Credit0

        Calculator

        Click in an answer field to be able to insert the result.

        Part 2 · Journal entry · Journal entries

        Entry 2 of 2

        One line = one account and one side. Add a line if the entry needs more; the balance check updates live.

        1. Line 1

        2. Line 2

        TotalsDebit0Credit0

      8. Task 8Effects on the financial statements

        What is the impact of the 20X2 entries on the financial statements?

        Part 1 · Classification · Analysis

        State the direction of the effect on each financial statement aggregate.

        1. Financial position (balance sheet)

        2. Profit or loss

        3. Other comprehensive income

        4. Equity

        Calculator

        Click in an answer field to be able to insert the result.

        Part 2 · Calculation · Analysis

        Quantify the effect on the aggregates concerned.

        1. €
        2. €
        3. €

        Checks

        • 0 / 3 steps entered
        • Amounts readable

        Result: Amount of the effect — Equity

      9. Task 9Missing information

        Which information is missing at 31 December 20X2?

      10. Task 10Conclusion

        Write the conclusion.

      Workspace

      Your working draft for this file: points noted, leads, intermediate calculations.

      Saved on this device only; never graded.

      Conclusion

      Submission and solution

      Complete every item of the file to submit it (0 / 14).

      Document this file

      These working papers use the data and results of this case.

      Normative references

      • IFRS 15 §31
      • IFRS 15 §32
      • IFRS 15 §35
      • IFRS 15 §B5
      • IFRS 15 §39
      • IFRS 15
      • IFRS 15
      • IFRS 15 §B18
      • IFRS 15 §43
      • IFRS 15 §44
      • IFRS 15 §18
      • IFRS 15 §19
      • IFRS 15 §20
      • IFRS 15 §21
      • IFRS 15 §105
      • IFRS 15 §106
      • IFRS 15 §107
      • IFRS 15 §108