Entity 4 has the following contracts.

(i) Contract 1: Entity 4 has entered into a contract with a customer to supply a license for a standard ‘off-the-shelf software package, install the software, and provide unspecified software updates and tech support for a period of two years for a total contract price of £250,000. Entity 4 sells the license and tech support separately, and the installation service is routinely provided by a number of other unrelated companies similar to Entity 4. The software will remain functional without the software updates and tech support.

(ii) Contract 2: Entity 4 entered a contract with a customer on 1 January 2020 with the following details:

Contract
£’000
Contract price	14,000
Cost up to 31 December 2020	4,000
The anticipated cost of completion	10,000
Percentage of completion	30%

Under the contract, Entity 4 would be delivering a custom-made defense system for the customer, and it has an enforceable right for payments to the cost incurred up to date for the customer.

During 2021, Entity 4 incurred a further £3,000,000 for the contract. Total invoice billed to the customer amount to £6m by 31 December 2021 of which £5,400,000 have been collected from the customer. The percentage of completion is 70% by 31 December 2021.

Required

(a) Explain how you would account for contract 1 in accordance with IFRS 15.

Answer rating: 100% (QA)

Recording Contract 1 in accordance with IFRS 15 The contract ... View the full answer