Solar Mini-Grid Contract: Revenue Timing and Variable Consideration
Yangon Engineering Co. (YEC) is a public interest entity reporting under MFRS. In January 2024 it signed a fixed-price contract with a township development committee to design, install and commission a 2 MW solar mini-grid for MMK 2,400 million. The contract also requires YEC to maintain the grid for two years after commissioning and to supply spare parts at cost plus 5%. YEC estimates stand-alone selling prices of the installation, maintenance and spare-parts supply at MMK 2,250 million, MMK 180 million and MMK 70 million. The committee may cancel for convenience on 60 days' notice; on cancellation YEC would be entitled only to costs incurred plus a 3% margin. YEC's estimated total installation cost is MMK 1,800 million. By 31 December 2024 it had incurred MMK 720 million of installation cost and had billed 30% of the contract price on signing. The grid is not yet commissioned. A performance bonus of MMK 200 million is payable if availability exceeds 98% in the first year; engineers regard 98% as achievable but not highly probable because of grid instability. YEC has recognised revenue equal to the 30% billing and deferred all costs. The finance director asks whether this is acceptable.
1. Identify the performance obligations and determine whether the installation is recognised over time or at a point in time. Justify under MFRS 15.
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MFRS 15 requires identifying promised goods/services. Performance obligations: (i) design, install and commission the mini-grid; (ii) two-year maintenance; (iii) spare-parts supply. The installation is a single combined obligation because design, equipment and commissioning are highly integrated and the committee cannot benefit from them separately. Maintenance is distinct because the committee can benefit from it with other providers. Spare parts are likely a separate promise (or an option) because they are not integral to the installed grid.
Timing: The installation is recognised over time if one criterion is met. The strongest is that YEC creates/enhances an asset controlled by the committee on its land, and the asset has no alternative use to YEC. The cancellation-for-convenience clause does not by itself prevent over-time recognition, but it affects the transaction price and the enforceable right to payment. The 3% margin is low, so YEC must verify that the right to payment compensates for performance completed; if it does not, over-time recognition under the no-alternative-use criterion is not supportable and revenue would be at a point in time. On the facts, the site-specific asset points to over time, subject to that verification.
2. Calculate the revenue and cost of sales for the installation for 2024, and explain the treatment of the bonus and the 30% billing.
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Transaction price = MMK 2,400m. The MMK 200m bonus is constrained to zero because it is not highly probable that no significant reversal will occur. Allocate on relative stand-alone selling prices: total SSP = 2,250 + 180 + 70 = 2,500. Installation = 2,400 × 2,250/2,500 = 2,160; maintenance = 172.8; spares = 67.2.
Progress = 720/1,800 = 40%. Installation revenue = 40% × 2,160 = 864. Cost of sales = 720. Gross profit = 144. Because 720 has been billed, present a contract asset of 144 (revenue recognised in excess of billing), not revenue equal to billing. The 30% billing is a receivable/contract liability, not a performance measure. The bonus is not recognised now; reassess at each reporting date and recognise only when highly probable. Maintenance and spares revenue are nil because those services have not started.
3. In March 2025 the committee cancels after YEC has incurred 50% of the installation cost. Advise what YEC should recognise on cancellation, referring to the enforceable right to payment.
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On cancellation, YEC should recognise revenue for the consideration to which it is entitled, including compensation for costs incurred and the 3% margin, and derecognise the contract asset. It should not recognise the remaining 50% of the allocated installation price unless the contract or law gives a right to it. If the enforceable right is only cost plus 3%, revenue is measured on that basis and any previously recognised revenue in excess is reversed. Costs incurred that are not recoverable are expensed. YEC should also assess whether the 3% margin means the over-time criterion was not met in earlier periods; if so, the prior revenue was premature. The cancellation right is a contract-term/transaction-price issue, not merely a disclosure.