Overview

Flash Security Solutions $($Pty$)$ Ltd $($hereafter $$Flash$)$ is a company operating in South Africa$$s large private security industry. Flash specializes in providing state of the art household security to private citizens. The company has a $28$ February financial year end.

Flash regularly offers the following products to its customers at the following stand$-$alone selling prices:

$$ Specialized home alarm system with installation at a price of R$3280($excluding VAT$).$ Only Flash can install this specialized alarm system. Flash does not sell the alarm system without installation and does not offer installation as a separate product.

$$ Construction $($raw materials and labour$)$ of electrified perimeter fencing $($fencing around the customer$$s yard$)$ at a price of R$890($excluding VAT$)$ per metre.

$24-$hour armed response service at a price of R$500($excluding VAT$)$ per month.

Contract with Mr$.$ Singh

On $1$ November $2022,$ Flash entered into a contract with a customer, Mr$.$ Singh. Mr$.$ Singh took advantage of a promotional offer whereby a customer could obtain a package deal of a $36$ months armed response service, a specialized home alarm system with installation, and the construction of $200$m of electrified perimeter fencing. As per the promotional offer, Mr$.$ Singh would obtain all of the above for the special price of R$172500($including VAT$).$ As per the contract, Mr$.$ Singh paid the R$172500$ to Flash in full on $1$ February $2023.$

The delivery and installation of the home security system and CCTV system took place on $1$ November $2022.$ The armed response service was also activated on the same day.

Flash started constructing the perimeter fence on $1$ November $2022$ but encountered issues with raw material shortages which brought the construction to a halt on $30$ November $2022.$ At this stage, the construction of the fence was $65\%$ complete. The supply issues were only resolved in March $2023$ and Flash resumed the construction of the fence on $15$ March $2023$ and completed it on $31$ March $2023.$

REQUIRED:

a$)$ Discuss the identification of the performance obligations in the contract between Flash Security Solutions $($Pty$)$ Ltd and Mr$.$ Singh.

IRRESPECTIVE OF YOUR ANSWER TO REQUIRED a$)$ ABOVE. FOR REQUIRED b$)$ AND REQUIRED c$)$ OF THIS QUESTION, PLEASE ASSUME THAT THE CONTRACT BETWEEN FLASH SECURITY SOLUTIONS $($PTY$)$ LTD AND MR$.$ SINGH GIVES RISE TO THE FOLLOWING THREE PERFORMANCE OBLIGATIONS:

$1.$ THE TRANSFER OF A SECURITY SYSTEM.

$2.$ THE CONSTRUCTION OF AN ELECTRICAL PERIMETER FENCE.

$3.$ THE PROVISION OF A $36-$MONTH ARMED RESPONSE SERVICE.

b$)$ Based on the performance obligations you have identified above, state with reasons, which of the performance obligations should be recognised over time.

c$)$ Calculate the total revenue that Flash Security Solutions $($Pty$)$ Ltd will recognise in respect of the contract with Mr$.$ Singh for the year ended $28$ February $2023.$

d$)$ Assume that Mr$.$ Singh entered into another contract with Flash Security Solutions $($Pty$)$ Ltd in respect of security sensor beams on $1$ April $2023.$ Mr$.$ Singh made the payment of the R$10000$ contract price on $1$ April $2023$ and only collected the security sensor beams on $1$ May $2023.$ The beams have a cost to Flash $($Pty$)$ Ltd of R$7000.$ The arrangement meets the requirements of a bill and hold arrangement in IFRS $15.$

The financial manager of Flash Security Solutions $($Pty$)$ Ltd has processed the following entries and notes in respect of this transaction:

$1$ April $2023$:

Note: No entry as inventory is still in our possession.

$1$ May $2023$:

Dr Bank $($SFP$)10000$

Cr Revenue $($P$/$L$)10000$

Dr Cost of sales $($P$/$L$)7000$

Cr Inventory $($SFP$)7000$

Briefly state with reasons whether you agree or disagree with the entries processed by the financial manager.