Question 1

SECTION B

MediStream AI is a digital healthcare company providing telemedicine services and AI-driven diagnostic tools. The company is preparing its financial statements for the year ended 31 December 20X5.

**Exhibit 1: Subscription Bundles**
On 1 July 20X5, MediStream AI launched a new 'HealthPlus' package. Customers pay a single upfront fee of $1,200 for a 2-year subscription to the telemedicine platform and receive a proprietary biometric tracking device. If sold separately, the 2-year subscription costs $1,000 and the device costs $500. The device is fully functional on its own, but its data syncs seamlessly with the telemedicine platform. By 31 December 20X5, MediStream AI had sold 1,000 HealthPlus packages.

**Exhibit 2: AI Algorithm Development**
During 20X5, MediStream AI spent $2.5 million developing a new AI algorithm to detect early signs of skin cancer from smartphone photos. 
- $500,000 was spent on initial research and feasibility studies.
- $1.5 million was spent on coding and testing the algorithm after management demonstrated the technical feasibility, intention to complete, and ability to sell the software. 
- $500,000 was spent on training medical staff on how to use the new software.
Management wants to capitalize the entire $2.5 million as an intangible asset.

**Exhibit 3: Deferred Tax and Climate Regulation**
MediStream AI has accumulated tax losses of $4 million. The local tax authority allows these losses to be carried forward indefinitely to offset future taxable profits. The corporate tax rate is 25%. Historically, the company has been loss-making. However, management has prepared a 5-year forecast showing significant taxable profits starting in 20X7, driven by the new AI algorithm.

Recently, the government announced strict new data-center energy consumption regulations (a climate-related initiative) effective from 20X6. Compliance will significantly increase MediStream AI's server hosting costs. Management has not factored these increased costs into their 5-year profit forecast.

**Requirements:**

(a) In accordance with IFRS 15 Revenue from Contracts with Customers, determine the performance obligations in the HealthPlus package and calculate the revenue to be recognized for the year ended 31 December 20X5. (9 marks)

(b) Evaluate management's proposal to capitalize the entire $2.5 million spent on the AI algorithm in accordance with IAS 38 Intangible Assets. (8 marks)

(c) Discuss the criteria for recognizing a deferred tax asset in relation to the tax losses under IAS 12 Income Taxes. Evaluate how the new climate-related regulations should impact management's assessment of future taxable profits and the recognition of the deferred tax asset. (8 marks)

Accepted Answer

For part (a), follow the IFRS 15 five-step model. Explicitly state why the device and subscription are distinct. Calculate the allocation using the relative stand-alone selling price method. Recognize device revenue immediately and subscription revenue pro-rata (6/24 months). For part (b), apply IAS 38 rules: expense research, capitalize development (mention PIRATE criteria), and explicitly state why training costs are expensed (lack of control). For part (c), state the IAS 12 rule for DTAs on losses (probable future profits). Critically evaluate the forecast: it must be adjusted for the new climate regulations, which will likely reduce the allowable DTA.

Question 2

What mistakes do candidates make on this ACCA question?

Accepted Answer

Students often fail to pro-rate the subscription revenue in part (a). In part (b), students sometimes capitalize training costs, arguing it's 'directly attributable' to the software. In part (c), students often state the DTA rule but fail to apply the specific scenario (the climate regulations) to the forecast.

How to approach this question

Full Answer

Common mistakes

Practice the full ACCA SBR — Strategic Business Reporting Practice Exam 5

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