DipIFR Syllabus B. Elements of financial statements - Exam Standard Illustrations - Notes ^{4 / 8}

An entity negotiates with major airlines to purchase tickets at reduced rates

It agrees to buy a specific number of tickets and must pay even if unable to resell them.

The entity then sets the price for these ticket for its own customers and receives cash immediately on purchase

The entity also assists the customers in resolving complaints with the service provided by airlines. However, each airline is responsible for fulfilling obligations associated with the ticket, including remedies to a customer for dissatisfaction with the service.

How would this be dealt with under IFRS 15?

1. Step 1: Identify the contract(s) with a customer

   This is clear here when the ticket is purchased

2. Step 2: Identify the performance obligations in the contract

   This is tricky - is it to arrange for another party provide a flight ticket - or is it - to provide the flight ticket themselves?

   Well - look at the risks involved. If the flight is cancelled the airline pays to reimburse, 

   If the ticket doesn't get sold - the entity loses out

   Look at the rewards - the entity can set its own price and thus rewards

   On balance therefore the entity takes most of the risks and rewards here and thus controls the ticket - thus they have the obligation to provide the right to fly ticket

3. Step 3: Determine the transaction price

   This is set by the entity

4. Step 4: Allocate the transaction price to the performance obligations in the contract

   The price here is the GROSS amount of the ticket price (they sell it for)

5. Step 5: Recognise revenue when (or as) the entity satisfies a performance obligation

   Recognise the revenue once the flight has occurred

An entity has a customer loyalty programme that rewards a customer with one customer loyalty point for every $10 of purchases.

Each point is redeemable for a $1 discount on any future purchases

Customers purchase products for $100,000 and earn 10,000 points

The entity expects 9,500 points to be redeemed, so they have a stand-alone selling price $9,500

How would this be dealt with under IFRS 15?

1. Step 1: Identify the contract(s) with a customer

   This is when goods are purchased

2. Step 2: Identify the performance obligations in the contract

   The promise to provide points to the customer is a performance obligation along with, of course, the obligation to provide the goods initially purchased

3. Step 3: Determine the transaction price

   $100,000

4. Step 4: Allocate the transaction price to the performance obligations in the contract

   The entity allocates the $100,000 to the product and the points on a relative stand-alone selling price basis as follows:

   So the standalone selling price total is 100,000 + 9,500 = 109,500

   Now we split this according to their own standalone prices pro-rata

   Product $91,324 [100,000 x (100,000 / 109,500] 
   Points $8,676 [100,000 x 9,500 /109,500]

5. Step 5: Recognise revenue when (or as) the entity satisfies a performance obligation

   Of course the products get recognised immediately on purchase but now lets look at the points..

   Let’s say at the end of the first reporting period, 4,500 points (out of the 9,500) have been redeemed 

   The entity recognises revenue of $4,110 [(4,500 points ÷ 9,500 points) × $8,676] and recognises a contract liability of $4,566 (8,676 – 4,110) for the unredeemed points