ExpertMedium2 marksMultiple Choice
ACCA · Question 26 · Revenue from Contracts with Customers
SECTION B - CASE 3: FinServe Solutions
FinServe Solutions Co is a fintech payment processor. The year-end is 31 March 20X7.
On 1 April 20X6, FinServe signed a 3-year contract with a major retailer to process their payments. FinServe charged a non-refundable upfront setup fee of $120,000 to integrate the retailer's systems with FinServe's platform. The integration does not transfer a distinct good or service to the retailer. FinServe also charges a 1% fee on all transactions processed.
How should the $120,000 setup fee be recognized in the statement of profit or loss for the year ended 31 March 20X7?
SECTION B - CASE 3: FinServe Solutions
FinServe Solutions Co is a fintech payment processor. The year-end is 31 March 20X7.
On 1 April 20X6, FinServe signed a 3-year contract with a major retailer to process their payments. FinServe charged a non-refundable upfront setup fee of $120,000 to integrate the retailer's systems with FinServe's platform. The integration does not transfer a distinct good or service to the retailer. FinServe also charges a 1% fee on all transactions processed.
How should the $120,000 setup fee be recognized in the statement of profit or loss for the year ended 31 March 20X7?
Answer options:
A.
$120,000
B.
$40,000
C.
$0
D.
$80,000
How to approach this question
Determine if the upfront fee relates to a distinct performance obligation. If it doesn't, it is treated as an advance payment for the future services and recognized over the contract term.
Full Answer
B.$40,000✓ Correct
Under IFRS 15, if an upfront fee does not relate to the transfer of a distinct promised good or service, it is treated as an advance payment for future performance obligations. Therefore, the $120,000 must be deferred and recognized as revenue over the 3-year contract period as the payment processing services are provided. For the year ended 31 March 20X7, $40,000 ($120k / 3) is recognized.
Common mistakes
Recognizing the entire non-refundable fee upfront.
Practice the full ACCA FR — Financial Reporting Practice Exam 1
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