Questions:
What are the key differences between IFRS 15 and FRS 102?

On June 30 2022, Poly entered a contract to manufacture bespoke machinery for a local customer. The customer instructed Poly on the machinery specification, as Poly's standard machines were unsuitable. The customer paid an upfront deposit, which is refundable if Poly fails to complete the construction of the machinery. The remaining balance on the contract is due when the machinery is delivered to the customer's site and Poly is responsible for arranging delivery. If the customer defaults on the contract before the completion of the machines, Poly only has the right to retain the deposit.

Which reporting standard should the company follow, FRS 102 or IFRS 15?

Reference answers:
IFRS 15 and FRS 102 are both accounting standards that deal with revenue recognition, but they have key differences in complexity and approach:
- FRS 102: Based on IAS 18 Revenue, it offers a principle-based approach, requiring judgment to identify when revenue can be recognized.
- IFRS 15: Introduces a more comprehensive and prescriptive five-step model for revenue recognition. This step-by-step approach aims to be more consistent and easier to apply.

FRS 102 will still likely be a simpler standard with less detailed disclosure requirements. 

As per IFRS 15 Revenue providing the bespoke machinery is a single performance obligation. Poly needs to assess whether the performance obligation is satisfied over a period or at a point, to determine when and how the revenue should be recognized. As the machinery being produced is bespoke, an asset is created that has no alternative use to Poly.

However, Poly only has an enforceable right to the deposit received and therefore does not have the right to payment for work completed to date. This means Poly should account for the sale as a performance obligation satisfied at a point in time, rather than over time. Revenue will most likely be recognized when the machinery is delivered to the customer, assuming control of the asset has been transferred to the customer. The deposit should be recognized as a contract liability.

As per FRS 102, revenue from goods should be recognized when the risks and rewards of ownership transfer from the buyer to the seller. Poly has responsibility for the delivery of the machinery and therefore is exposed to the potential risks of ownership of the asset until delivery has been completed. Poly therefore cannot recognize any revenue until this point. The deposit received in advance should be recorded in deferred income.