Newing plc (Newing) is a construction company constructing homes and apartments. In its financial statements for the fiscal year ended on 31 December 2021, Newing recognized revenue for the following construction contract:

At the beginning of 2021, Newing entered into a contract with a local government authority. The contract specified that Newing would construct an apartment building for people with disabilities on land owned by the government authority. To accommodate the preferences of the government authority, Newing arranged several meetings before the contract was signed. At these meetings, the parties discussed, for example, the size of the apartments and rooms, the possibility of creating communal areas, and the installation of exclusively designed equipment that some of the future tenants require. The government authority agreed to a price of £1,850,000 and will pay the entire amount upon completion.

At the end of 2021, Newing has incurred costs in relation to the contract of £978,000 of which £718,000 relate to work performed in the fiscal year 2021. Newing expects total costs to amount to £1,350,000 and will complete the construction of the apartment building by the end of the fiscal year 2022. REQUIRED:

a) Newing recognized revenue for the above construction contract in the fiscal year 2021 and thus recognizes revenue over time. Explain why this treatment appears correct. Include in your explanation a short discussion of performance obligations that result in revenue recognition over time under IFRS 15.

b) Newing wants to measure progress based on costs incurred for work performed to date. Identify and explain the methods to measure the progress that is allowed under IFRS 15 and provide an example of each that applies to the above construction of the apartment building.  

c) Calculate the amount of revenue, using costs incurred for work performed to date relative to total expected costs as a measure of progress, and prepare the corresponding journal entries in Newing’s financial statements for fiscal years 2021 and 2022.  

d) Assume that you are supposed to rewrite the above description of the construction contract so that it results in a performance obligation that is satisfied at a point in time. Propose at least two changes that you would make to the description. Include in your answer a short discussion of performance obligations that result in revenue recognition at a point in time.  

e) Explain how your proposed changes in d) affect financial performance in the fiscal year 2021 compared to the scenario above in which revenue is recognized over time. You should refer to measures of financial performance that are consistent with the IASB’s definition of financial performance.

Answer rating: 100% (QA)

a Newing recognizes revenue for the above construction contract in the fiscal year 2021 and thus recognizes revenue over time The treatment appears correct because the revenue is recognized over time ... View the full answer