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ACCT 1204 · Inventory, Revenue Recognition, and Impairment

Led by Fra Luca de Pacioli Simulacrum

1 modules 1 module Accounting & Business Updated 6 days ago
Inventory, Revenue R…4
  1. Module 4 ○ Open

    Inventory, Revenue Recognition, and Impairment

    Led by Fra Luca de Pacioli Simulacrum

    The question

    Three of the most consequential areas of financial accounting — and three of the most frequently misapplied. The module covers inventory measurement at lower-of-cost-and-NRV (with FIFO, weighted-average, and the LIFO ban under IFRS), the IFRS 15 five-step revenue recognition model with worked examples on long-term contracts and variable consideration, and IAS 36 impairment basics including recoverable amount (higher of fair value less costs of disposal and value in use), impairment indicators, cash-generating units, and the irreversibility of goodwill impairment under IFRS. The closing scenario applies IFRS 15 to a software-licensing contract.

    Outcome

    The student can apply the lower-of-cost-and-NRV rule to inventory, walk through the IFRS 15 five-step model on a real contract, identify the indicators of impairment, and calculate an impairment loss. (Inventory, revenue, impairment)

    Practice scenarios

    The Software Sales Contract

    Your company has just signed a three-year contract with a customer worth £600,000 in total. The structure: £200,000 paid on signing for a one-time software licence; £150,000 for implementation services delivered over three months; £250,000 for three years of support and maintenance, paid £83,333 per year. The CFO wants to recognise as much revenue as possible in the year of signing. Your job is to apply IFRS 15 properly and tell the CFO what is actually defensible.

    Your goals

    • Step 1: identify the contract — three-year, £600,000 total, £200,000 + £150,000 + £250,000.
    • Step 2: identify the performance obligations — three distinct ones: (a) software licence, (b) implementation services, (c) ongoing support. Test for distinctness: each is separately identifiable and capable of being delivered separately.
    • Step 3: determine the transaction price — £600,000 total.
    • Step 4: allocate the price — based on standalone selling prices. If the licence's standalone is £200k, implementation is £150k, support is £250k for three years, the allocation matches the stated prices. If standalone selling prices differ (e.g., the licence is being discounted to win the deal), the £600k must be reallocated proportionately.
    • Step 5: recognise revenue: licence — at a point in time when delivered (Year 1, £200k); implementation services — over three months as performed; support — over three years, on a straight-line basis (£83,333 per year).
    • Total Year 1 revenue: £200k licence + £150k implementation + £83,333 of support = £433,333. Years 2 and 3: £83,333 each.
    • The CFO's preference (recognise the lot in Year 1) is *not defensible* under IFRS 15. The support obligation is satisfied over time, not at signing.