Class Example 2 - Solution

This is a contract in which performance obligation is satisfied over time. The entity is carrying out the
work for the benefit of the customer rather creating an asset for its own use and in this case has an
enforceable right to receive consideration for work completed to date. We can see this from the fact
that certificate of work completed have been issued.

IFRS 15 states that the amount of payment that the entity is entitled correspond to the amount of
work completed to date (ie goods/ services transferred) which approximate to cost incurred in
satisfying performance obligation plus a reasonable profit margin.

In this case the contract is certified as 50% complete, measuring progress under the output method.
At 31 December 2022, the entity would have recognised a cumulative revenue of R7 500 000 and
cost of sales of R6 000 000, leaving profit of R1 500 000. The contract asset will be R7 500 000 on a
condition that the remaining work is completed, the other R7 500 000 will be classified as accounts
receivable as there no more conditions attached since work has been completed.