Beta NV: progress, bonus and an unsigned change order
Beta NV, a Belgian engineering group reporting under IFRS, holds a €12m three-year contract to build a specialised test facility for a single customer. The contract is one performance obligation satisfied over time, measured using costs incurred relative to total expected costs. At 31 December of year 1, costs incurred are €3.2m and total estimated costs to complete are €9.6m; no overrun is expected. The contract contains a €1.0m bonus for early completion, which management assesses as 60% likely, and a €0.5m liquidated-damages penalty for late delivery, assessed as 80% likely. In November the customer verbally agreed to add a €0.9m fire-suppression system, but the written change order is unsigned and management has not adjusted the transaction price. Beta has invoiced the customer €1.85m. Financial control has booked revenue of €3.25m for the year and a contract asset of €1.40m, and describes the result as 'in line with the contract'.
1. Compute the revenue that IFRS 15 would support at 31 December and explain how you treat the bonus, the penalty and the unsigned change order.
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Progress. Total expected costs are €3.2m + €9.6m = €12.8m, so costs incurred represent 3.2 / 12.8 = 25% completion. On the base contract, revenue is 25% × €12m = €3.0m.
Variable consideration. The expected-value method gives (60% × €1.0m) − (80% × €0.5m) = €0.6m − €0.4m = €0.2m. That figure is not automatically included: the constraint requires it to be highly probable that no significant reversal will occur. A 60% chance of the bonus means a 40% chance of losing it, which is a significant reversal risk, and the penalty at 80% is only more likely than not. On the facts, the constrained amount is arguably nil, or at most the €0.2m net if the delivery schedule and penalty mechanism support it. Even on the more generous view, revenue is €3.0m + 25% × €0.2m = €3.05m.
Change order. The variation is not approved in writing and its price is not enforceable or reliably measurable at the reporting date, so it is excluded from the transaction price. Costs already incurred on it are assessed for recoverability as a contract asset only if recovery is probable; otherwise they are expensed.
Conclusion. Supported revenue is €3.0m to €3.05m against €3.25m booked, an overstatement of €200k to €250k, driven by including the full bonus and ignoring the penalty.
2. Evaluate the €1.40m contract asset and state what the correct presentation and disclosure should be.
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Revenue of €3.25m less €1.85m invoiced gives exactly the €1.40m booked, so the balance is arithmetically consistent with the revenue figure but inherits its error. Correcting revenue to €3.0m produces a contract asset of €3.0m − €1.85m = €1.15m, a reduction of €250k.
A contract asset is appropriate only for the right to consideration that is conditional on something other than the passage of time - here, delivery milestones. Test three things. (i) Composition: does the balance include costs of the unsigned change order or the unconstrained bonus? Strip them out. (ii) Recoverability: check the customer's payment history, the absence of disputes, and whether the amount exceeds what will be billed under the contract. (iii) Classification: amounts already invoiced and unconditionally due become receivables, not contract assets; if the customer had paid in advance, the balance would be a contract liability.
Disclosure under IFRS 15 should explain the methods used to measure progress and to constrain variable consideration, and quantify the amounts subject to constraint. The narrative 'in line with the contract' is not disclosure; the judgement about the bonus is exactly what users need to see.
3. The project director argues the penalty should be ignored because Beta has never paid liquidated damages on any contract. How do you respond, and what evidence would change your view?
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A historical pattern of never paying penalties is relevant but not decisive. IFRS 15 requires the expected value or most likely amount to be estimated from the contract's terms and the current facts, not from an assumption that history will repeat. An 80% assessed likelihood of late delivery is management's own view and points in the opposite direction to the 'we never pay' argument; the two statements cannot both stand without explanation. Ask who made the 80% assessment, on what schedule basis, and document the contradiction.
Evidence that would change the view: a written waiver or a contract amendment deleting the penalty; a revised, approved programme showing completion ahead of the penalty trigger; a legal opinion on enforceability under the governing law; or evidence that the penalty is in substance a price concession rather than a genuine damages clause. Conversely, a revised schedule, a customer letter reserving its rights, or a pattern of penalties conceded in prior contracts would reinforce inclusion.
The penalty is a decrease in the transaction price, so it is recognised prospectively once identified, with a catch-up adjustment. If the constraint is genuinely borderline, disclose the judgement and the sensitivity rather than reporting a single firm number.