Danjuma Energy Solutions: Allocating the Price of a Solar EPC Contract

Step 1 - Performance obligations (IFRS 15.22-30). Equipment is capable of being distinct and distinct in context, so it is normally a separate obligation. Installation is judged separately: if the system is a standard configuration that any competent contractor could install and it does not significantly modify or customise the equipment, installation is a separate obligation; if bespoke integration is required, combine it with the equipment. Maintenance is a series of distinct, substantially identical daily services (IFRS 15.22(b)) and is treated as one obligation recognised over three years.

Step 2 - Transaction price. Fixed consideration NGN 1,840m plus variable consideration of 75% x NGN 60m = NGN 45m, giving NGN 1,885m before the constraint test. Under IFRS 15.56 the bonus is included only to the extent that a significant reversal is not highly probable. With a single binary outcome and a 25% failure probability, the safest position is to constrain the bonus to nil and recognise it when the uptime test is resolved, unless DES can demonstrate a portfolio of comparable contracts with a history of achieving the target and the uptime driver (the subcontracted inverters) is under DES's control. State the policy and apply it consistently.

Step 3 - Allocation on relative standalone selling price. Total SSP = 1,410 + 210 + 270 = NGN 1,890m. Using NGN 1,885m: equipment 1,406.3m; installation 209.4m; maintenance 269.3m (allocation ratio 99.735%).

Step 4 - Timing. Equipment revenue when control passes (delivery and acceptance on 1 December 2025, subject to the contract terms); installation at completion of commissioning; maintenance straight-line over 36 months from commissioning. If the bonus is constrained, it is added to the transaction price when the constraint is lifted and allocated to the obligations it relates to. Show the contract liability for the 20% advance and the receivable build-up separately.

Is there a financing component? Yes, on both sides. The university pays 20% on signing, roughly 18 months before the equipment transfers, which finances DES; and 50% of the price (about NGN 0.94bn) is settled in four instalments over 24 months after commissioning, which finances the customer. IFRS 15.60-65 requires DES to adjust for the time value of money where the timing agreed gives either party a significant financing benefit. The practical expedient in IFRS 15.63 (ignore if the period between transfer and payment is one year or less) is not available for the instalments, because the last payment falls about 24 months after commissioning. The advance, being under 12 months, would qualify for the expedient on its own.

Measurement. Net the two effects rather than double counting: accrete the advance from receipt to the transfer date, and discount the four post-commissioning instalments back to the transfer dates. The discount rate is the rate that would be used in a separate financing transaction at inception, reflecting the credit characteristics of the party receiving the financing - normally the customer's incremental borrowing rate if determinable, otherwise DES's. Nigerian general inflation or MPR changes do not set the rate; IFRS 15.64 is explicit that the rate is transaction-specific.

Presentation. The unwinding of the discount is interest income/expense, not revenue, and is presented separately (IFRS 15.65). Revenue allocated to each obligation is the discounted amount; the difference between the cash and the discounted amount is recognised as finance income over the period. Disclose the judgement and the rate applied. Note that if the instalments were renegotiated to 10-12 months, the expedient would apply and no adjustment would be made, so the contract terms should be confirmed in writing.

Test: does DES control the specified service before it is transferred to the university? IFRS 15.B34-B38 points to principal status where the entity is primarily responsible for fulfilling the promise, has inventory risk, and has discretion in setting the price.

Applied here: (i) DES is the university's single point of accountability - the university has no contract with the specialist and would pursue DES for any failure; (ii) DES sets the service price and carries the service-level risk, and the 3-year obligation is fixed with DES regardless of the specialist's performance; (iii) DES has committed to a fixed NGN 45m subcontract and bears the margin risk if specialist costs rise. The specialist is a supplier to DES, not a party to the customer contract.

Conclusion: DES is the principal for the maintenance obligation and recognises revenue gross - NGN 89.8m per year (NGN 269.3m / 3) allocated from the transaction price, with NGN 15m per year as cost of sales. Only if DES were merely arranging for the specialist to provide the service at a disclosed, fixed commission, with no pricing discretion and no responsibility for the service level, would net presentation be appropriate.

Judgement note: the gross/net conclusion does not change profit, but it changes revenue and the reported margin, so it matters to users; disclose the judgement if material. Also consider whether the subcontract gives DES a right to direct the specialist's activities - a strong indicator of control - and whether the maintenance obligation should be assessed as a separate series rather than merged with installation.