Case $4$: IFRS $15-$ Revenue from Contracts with Customers

Scenario:

On February $1,2024,$ NetWorks Inc. signed a contract with

MegaCorp to install a fiber optic network and provide internet

services for three years. The contract's total value is $$2$ million,

broken down as follows:

Installation of fiber optic network: $$1$ million $($one$-$time$)$

Monthly internet services: $$27,000$ per month

Technical support: $$5,000$ per month

MegaCorp agreed to pay $60\%$ upfront for the installation, with

the remaining amount due upon completion of the network

setup. The internet services and technical support started on

March $1,2024,$ after installation.

In July $2024,$ MegaCorp requested an upgrade to a higher$-$speed

internet package, increasing the monthly service cost to $$35,000.$

NetWorks Inc. implemented the changes in August and issued

the first adjusted bill on August $31,2024.$

On December $31,2024,$ before signing off the financial

statements, MegaCorp disputed the quality of the service,

claiming that the upgraded package was not provided as

promised. Upon investigation, NetWorks Inc. found that the

enhanced internet service was not correctly activated due to a

technical error. MegaCorp was charged for services they did not

receive.

Required:

a$)$ Calculate the transaction price of each performance

obligation as of February $1,2024,$ and how the upfront

payment affects revenue recognition under IFRS $15.(3$

marks$)$

b$)$ Provide the journal entries for the month of March $2024,$

including revenue recognition for internet services and

technical support. $(4$ marks$)$

c$)$ Explain how NetWorks Inc. should handle the dispute with

MegaCorp. Should the service error be treated as an

adjusting event under IAS $10,$ and how would it affect

revenue recognition for the year $2024?(4$ marks$)$

d$)$ Discuss the ethical considerations NetWorks Inc. faces in

handling this dispute, in light of the IFAC Code of Ethics.

What actions should the company take to maintain

transparency and integrity in its financial reporting? $(4$

marks$)$