(a)    IFRS 15 Revenue from Contracts with Customers sets out the core principle that an entity will recognise revenue to depict the transfer of promised goods or services to customers in an amount which reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This principle is delivered through a five-step model. Once the contract with the customer has been identified, step 2 of the model identifies those elements of the contract which should be accounted for separately. The performance obligations should be identified at the beginning of the contract by identifying distinct goods or services in the contract. To do so, the entity should identify all the goods and services which have been promised. The distinct performance obligations are the units of account which determine when and how revenue is recognised. A good or service is distinct only if the customer can benefit from the good or service either on its own or together with other resources available to the customer and the good or service is separately identifiable from other promises in the contract.

A customer can benefit from a good or service on its own if it can be used, consumed, or sold to generate economic benefits. Determining whether a good or service is distinct within the context of the contract requires assessment of the contract terms and the intent of the parties.

Thus in the case of Darlatt, the entity is required to assess whether the deliverables it has promised to the customer give rise to separate performance obligations. The purchase of the wind turbine and the maintenance contract are obviously separate performance obligations. However, the two warranties require further consideration. The nature of the warranty will determine the accounting impact. IFRS 15 states that an entity accounts for a warranty as a separate performance obligation if the customer has the option to purchase the warranty separately. An entity accounts for a warranty as a cost accrual if it is not sold separately, unless the warranty is to provide the customer with a service in addition to assurance that the product complies with agreed specifications. The free warranty simply provides the customer with the assurance that the wind turbine meets the agreed specification and thus is not a separate performance obligation. Where the warranty provides an additional service as is the case with the ten-year warranty, then the income will be treated as deferred revenue.

Once the separate performance obligations have been identified, then the transaction price is allocated to them based on the relative stand-alone selling prices of the goods or services promised. This allocation is made at contract inception and not adjusted to reflect subsequent changes in the stand-alone selling prices of those goods or services. The best evidence of stand-alone selling price is the observable price of a good or service when the entity sells that good or service separately.

Therefore, the wind turbine will be allocated with ($3·2m/$4·1m x $3·6m), i.e. $2·8 million and the maintenance contract with ($0·9m/$4·1m x $3·6m), i.e. $0·8 million of the total revenue. Thus the maintenance contract and additional warranty will be recognised over time and the sale of the wind turbine and free warranty will be recognised at a point in time. Where revenue is recognised over time, a method should be used which best reflects the pattern of transfer of goods or services to the customer. In this case, it would appear that both of the above elements would be recognised over 10 years.

(b)    The contract is not accounted for under IFRS 9 Financial Instruments. The contract is simply a right and an obligation to exchange economic resources (or to pay or receive the difference in values between two economic resources if the contract will be settled net).The entity should therefore apply the general measurement concepts in the Conceptual Framework and the relevant IFRS.

The result in this case would be that the contract would be measured at zero and hence is not recognised unless the contract is onerous.

If an entity enters into a forward contract to purchase a resource at a future date, the entity’s asset is normally its right to buy the underlying resource, not the underlying resource itself. However, there may be circumstances in which the terms of a forward contract to purchase a resource give the purchaser control of that resource. In such circumstances, the purchaser should identify both an asset (the underlying resource which it already controls) and a liability (its obligation to pay for the resource). In practice, obligations under contracts which are not performed would not be accrued in the financial statements.

For example, the liability for the steel ordered but not yet received would not generally be recognised as a liability in the financial statements. If historical cost measurement is applied to the contract, the contract would be measured at zero which has the same practical effect as not recognising the contract unless it is onerous. However, in order to achieve consistency with the existing requirements in IAS 2 Inventories, a contract would be regarded as onerous if the contractual price payable for the inventory exceeded its net realisable value. At 31 August 2017, the price which Dalatt would have to pay for the steel would be (2,000 tonnes x €400/1·75), i.e. $457,142. At the time of the contract, the contract price would have been (2,000 tonnes x €400/2), i.e. $400,000. Therefore it can be argued that a provision of $57,142 should be made as the fall in the dollar/euro exchange is unlikely to be reversed.

The deposit paid of €100,000 is a non-monetary item as it is non-refundable. IAS 21 The Effects of Changes in Foreign Exchange Rates states that the essential feature of a non-monetary item is the absence of a right to receive or an obligation to deliver a fixed or determinable number of units of currency. The standard further gives an example of non-monetary items as amounts prepaid for goods and services. Non-monetary items which are measured in terms of historical cost or fair value are translated using the exchange rate at the date of the transaction or at the date when the fair value was measured. Thus the deposit will be stated at $50,000 in the financial statements under current assets.

(c)    Development is defined in IAS 38 Intangible Assets as the application of research findings or other knowledge to a plan or design for the production of new or substantially improved materials, devices, products, processes, systems or services before the start of commercial production or use. Commercial production is not defined in IAS 38 but it would suggest that it includes an approved technology or any output from its use being available for sale to customers. The wind farm is essentially a test site to create knowledge about the design of future wind turbines to create a more efficient and cost effective product. There has not been commercial production of the wind turbine because of doubts over its durability and therefore the designation of the farm as a development project should remain until the technology has been proven. Once commercial production commences, then the development phase is complete.

During the development phase, these costs should be treated as intangible assets if they meet the capitalisation requirements in IAS 38. These requirements include its technical feasibility for use or sale, the entity’s intention to complete the intangible asset and use or sell it, the generation of probable future economic benefits, the availability of adequate resources to complete the development and the entity’s ability to measure reliably the expenditure on the development. However, judgement should be used to determine whether these assets should be recorded as property, plant and equipment as they are actually producing energy.

A further question is whether the income generated from the wind farm should be offset against the development cost or recognised in profit or loss. The income from the sale of energy is essentially a by-product of the development and is not necessary to develop the assets for their intended use. Therefore the income should be shown as operating income. There are differing views on whether offsetting provides decision useful information and is appropriate under the Conceptual Framework. It is felt that offsetting is not in line with the Conceptual Framework and in this case is not appropriate due to the different nature of the income from the expense items.