Data Co enters into a two-year contract with a customer to build a data centre in exchange for consideration of €1m. Data Co incurs incremental costs to obtain the contract and costs to fulfil the contract that are recognised as assets and amortised over the expected period of benefit.
The economy subsequently deteriorates, and the parties agree to renegotiate the pricing in the contract, resulting in a modification of the contract terms.
The remaining amount of consideration to which Data Co expects to be entitled is €650,000. The carrying value of the asset recognised for contract costs is €600,000. An expected cost of €150,000 would be required to complete the data centre.
How should Data Co account for the asset after the contract modification?
A) Data Co should recognise an impairment loss of C100,000.
B) Data Co should record the contract asset for €1m.
C) The carrying value of the asset recognised for contract cost should be €500,000 (€650,000 less €150,000).
D) Data Co should recognise an impairment loss of €150,000.

Question

Quizplus · Accepted Answer

The correct accounting treatment after the contract modification is to recognise an impairment loss. The impairment loss is calculated as the difference between the carrying value of the asset (€600,000) and the recoverable amount, which is the remaining consideration (€650,000) minus the expected cost to complete the project (€150,000), resulting in a recoverable amount of €500,000. Therefore, the impairment loss is €100,000 (€600,000 - €500,000).

Data Co Enters into a Two-Year Contract with a Customer