Multi-element machinery contract: IFRS 15 recomputation against performance materiality

Step 1 – the unit of account. There is one enforceable contract with commercial substance and probable collection. IFRS 15 is applied to the contract as a whole; the payment milestones do not create separate units of account.

Step 2 – performance obligations. (a) the three lines: each is capable of being distinct (the customer can benefit from a line alone) and distinct in context, because KovoPlast installs each line separately and the lines do not significantly modify one another; (b) installation: separately priced, performed by third parties in the market, therefore distinct; (c) 24-month support: distinct, satisfied over time.

Step 3 – transaction price. CZK 36,000,000 fixed, subject to the rebate (Task 2).

Step 4 – allocate on relative standalone selling price. SSP total 30 + 4 + 6 = 40.0m. Equipment 75% = 27.0m; installation 10% = 3.6m; support 15% = 5.4m. The 10% contract discount is spread pro rata; the IFRS 15.82 criteria for allocating it to specific obligations are not met.

Step 5 – recognise.

• Equipment at a point in time, on acceptance: 2/3 × 27.0 = 18.000m. The third line is finished but sits in KovoPlast's own warehouse, with no substantive customer request, no separately identified product and no acceptance; every control indicator in IFRS 15.38 points to KovoPlast. Bill-and-hold is not substantiated. Nil.
• Installation of the accepted lines: 2/3 × 3.6 = 2.400m.
• Support, straight line over 24 months: 3/24 × 5.4 = 0.675m.

Total 21.075m before the rebate, or 20.021m if the rebate is included in the transaction price.

Misstatement. Management recognised 25.2m. Difference = 25.2 − 21.075 = 4.125m (5.179m if the rebate is accrued). Both exceed performance materiality of 3.5m, and the error also distorts the contract balance and the gross margin. Sales milestones measure billing, not progress on a point-in-time obligation.

Conclusion. Propose the adjusting entry; if management refuses, carry it to the summary of uncorrected misstatements and evaluate the effect on the opinion under ISA 705.

Rebate as variable consideration. The rebate is variable consideration under IFRS 15.56–58. It is estimated (most likely amount is appropriate for a single threshold) and included in the transaction price only to the extent that it is highly probable that a significant reversal will not occur when the uncertainty is resolved in 20X5.

The threshold is 40 lines in 20X5 against three lines sold in 20X4. "Probable" is not the IFRS test; "highly probable" is. The auditor should therefore ask for the customer's own forecasts, purchase orders and any contractual minimum volumes. If those do not exist, the rebate should be excluded from the transaction price at 31 December 20X4 and recognised when the threshold is actually met – which is the position that produces 21.075m.

If evidence does support inclusion, the transaction price falls to 34.2m, all three allocated amounts fall by 5% and revenue becomes 20.021m. Either answer is defensible; what is not defensible is recognising a CZK 1.8m provision against a CZK 25.2m revenue figure computed on the full price, because that mixes the two approaches and leaves the allocated amounts computed on the wrong base.

Presentation (IFRS 15.105–109). Invoiced 25.2m versus revenue earned 21.075m leaves an excess of 4.125m. That excess is not a receivable; it is a contract liability (deferred income) until the related obligations are satisfied. A receivable may be recognised only when the right to consideration becomes unconditional – i.e. when only the passage of time is required. The rebate, if accrued, is a refund liability, not a netting against cost of sales.

Audit point. The 1.8m provision was booked on the full 36m and has no corresponding reduction of the allocated amounts, so the entry double-counts the effect. Ask for the calculation, test its arithmetical accuracy and challenge the input assumptions.

Two frameworks, two opinions. Czech statutory statements are prepared under Act No. 563/1991 Coll. and Decree No. 500/2002 Coll., with Czech Accounting Standards (notably ČÚS 601 for revenues from own products and services). IFRS 15's five-step model is not codified there, and the accrual principle in § 3 of the Act is expressed at a much higher level of generality.

The absence of codification is not permission. ČÚS 601 still requires revenue to be recognised when the performance has been rendered and the significant risks and rewards of the asset have passed. Applying that to this contract produces the same three conclusions:

• the third line is not delivered and not accepted, so no revenue and no receivable for it;
• the support is a separate service delivered over 24 months and must be spread;
• the rebate must be accrued if it is probable the customer will earn it.

A Czech GAAP result that is materially different from the IFRS result is a red flag for the auditor to examine, not a framework difference to accept.

Where genuine differences exist (for example the degree of granularity in splitting a contract into components), document them as framework differences, not misstatements, and reconcile the statutory figures to the group reporting package so that consolidation entries are evidenced rather than asserted.

Audit consequences.

1. The audit opinion on the statutory statements is separate from the opinion on the consolidated IFRS statements. If the statutory statements are materially misstated, the statutory opinion must be modified under ISA 705 even if the group figures are correct.
2. Conversely, a correct statutory figure does not rescue a misstated IFRS figure, because the group auditor opines on the consolidated statements.
3. The statutory audit also covers the consistency of the annual report (výroční zpráva) with the financial statements; a revenue figure that differs between the two documents is a reportable inconsistency.
4. Record the conclusion, the amounts and management's arguments in the audit file – this is a judgement area a reviewer or an inspection will test.