Kition Marine Systems: IFRS 15 over-time recognition, variable consideration and an unsigned change order
Kition Marine Systems Ltd, a Cyprus-based integrator, signed a €6.2 million contract in January 2024 to design, install and commission a vessel-monitoring system over 18 months, followed by two years of support. The contract includes a €300,000 early-completion bonus if commissioning is certified by 31 December 2024; management judges this unlikely because a third-party classification certificate is outstanding. Costs incurred to 31 December 2024 are €1.8 million; total estimated costs are €4.5 million. Payment is by milestones, and €2.0 million cash has been received. In November 2024 the customer verbally requested an additional distinct module, estimated to sell standalone for €680,000, but no signed change order or price exists at year end. Separately, Kition resells third-party hardware for €400,000; it never takes inventory risk, the customer contracts directly with the manufacturer for warranty, and Kition earns a fixed 8% arranging fee. Management recognises all cash received as revenue and measures progress by milestones.
1. Advise whether the main contract is a performance obligation satisfied over time and compute the revenue, contract asset or liability and profit to recognise for the year ended 31 December 2024. Show the IFRS 15 reasoning.
Read the worked answer
The contract is satisfied over time because the vessel-monitoring system has no alternative use to Kition and Kition has an enforceable right to payment for performance completed to date; the customer also receives and consumes the benefits as work progresses. Progress should be measured using costs incurred relative to total expected costs, because the milestones do not depict the transfer of control.
- Progress = €1.8m / €4.5m = 40%.
- Transaction price: the €300,000 bonus is constrained to zero because it is not highly probable that no significant revenue reversal will occur; the classification certificate is outstanding and outside Kition's control. Transaction price = €6.2m.
- Revenue = 40% × €6.2m = €2.48m.
- Cost = €1.8m; profit = €0.68m.
- Cash received €2.0m, so a contract asset of €0.48m is presented, not deferred revenue.
Recognising cash received as revenue would overstate revenue by €0.48m and ignore the cost-to-cost measure. The bonus must be reassessed each reporting date; if it becomes highly probable, a cumulative catch-up is recognised.
2. How should the unsigned module request and the third-party hardware be accounted for?
Read the worked answer
Module: the request is a contract modification. Because the module is distinct, it is accounted for as a separate contract only if the parties have approved the modification and the rights and obligations are enforceable. At 31 December 2024 there is no signed change order, so Kition should not recognise revenue for the module. If the modification later becomes enforceable and the €680,000 standalone estimate is supportable, it is a separate contract and revenue is recognised as the module is delivered. If the module is not distinct, the modification is combined with the original contract and revenue is adjusted by a cumulative catch-up. Disclosure of the unresolved request may be needed if material.
Hardware: Kition is an agent, not a principal. It does not control the hardware before transfer, bears no inventory risk, has no pricing discretion beyond a fixed 8% fee, and the manufacturer is responsible for warranty. Revenue is the net commission of 8% × €400,000 = €32,000. Recognising €400,000 gross revenue and €368,000 cost would inflate both revenue and expenses and misstate the business model.
3. If the customer signs a €700,000 change order in March 2025, before the financial statements are approved, how should the 2024 financial statements respond under IAS 10?
Read the worked answer
The key question is whether the March agreement provides evidence of conditions existing at 31 December 2024. Because the customer had only made a verbal request by year end and no enforceable price existed, the signed €700,000 order is normally a non-adjusting event: it does not change the rights and obligations that existed at the reporting date. Kition should disclose the modification if it is material to an understanding of the financial statements, but should not restate 2024 revenue for the module.
If, however, the facts show that the verbal request and price were already enforceable at 31 December 2024, or that the March price confirms an amount that was already agreed in substance, the event is adjusting and the 2024 accounts should reflect the modification. The auditor should inspect correspondence, board minutes and the signed order, and challenge management's assertion that no enforceable rights existed at year end.