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Contract Liability Case Study

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The last scenario is to resolve revenue from a non-refundable prepayment for the right to receive goods or services in the future, such as a gift card in this case (IFRS 15 BC396). According to IFRS 15.B44, UCL should recognize a contract liability in the amount of the prepayment for its performance obligation to transfer in the future. UCL shall derecognize that contract liability (and recognize revenue) when it transfers those goods or services and, therefore, satisfies its performance obligation. As the gift cards have no expire date, UCL will only recognize revenue when those gift cards are redeemed (IFRS 15.B40), because the related performance obligations has been satisfied. Customers may not always exercise their contractual rights to redeem the gift cards in full. …show more content…
UCL expects to be entitled to a breakage amount in a contract liability, so UCL shall recognize the expected breakage amount as revenue in proportion to the pattern of rights exercised by the customer. As a result of that, UCL should recognize a contract liability for $85,000 gift card over the year when the gift cards are sold. UCL will also have to account for the 8% breakage. However, since this amount cannot be recognized upfront, it will initially remain as part of the $85,000 liability. As the customer exercises its rights by redeeming the card, a proportionate amount of breakage can be recognized (IFRS15.B46). By December 31 of 2016, only $20,000 worth of purchases have been made by gift card. Therefore, when these purchases are made, rather than recognizing $20,000 of revenue, $21,739.13 of revenue will be recognized to incorporate expected

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