EXCEL PROFESSIONAL INSTITUTE FINANCIAL REPORTING STANDARDS Elikem Vulley
EXCEL PROFESSIONAL INSTITUTE EXCEL PROFESSIONAL INSTITUTE TAX -IAS 12 PROVISION -IAS 37 REVENUE - IFRS 15 FINANCIAL INSTRUMENTS -IAS 32
EXCEL PROFESSIONAL INSTITUTE EXCEL PROFESSIONAL INSTITUTE Revenue is income arising in the course of an entity's ordinary activities. ‘Ordinary activities’ means normal trading or operating activities. ‘Revenue’ presented in the statement of profit or loss should not include items such as proceeds from the sale of non-current assets or sales tax. Revenue recognition IFRS 15 Revenue from Contracts with Customers says that an entity recognizes revenue by applying the following five steps:
EXCEL PROFESSIONAL INSTITUTE EXCEL PROFESSIONAL INSTITUTE (1) 'Identify the contract (2) Identify the separate performance obligations within a contract (3) Determine the transaction price (4) Allocate the transaction price to the performance obligations in the contract (5) Recognize revenue when (or as) a performance obligation is satisfied.'
EXCEL PROFESSIONAL INSTITUTE EXCEL PROFESSIONAL INSTITUTE On 1 December 20X1, Wade receives an order from a customer for a computer as well as 12 months' of technical support. Wade delivers the computer (and transfers its legal title) to the customer on the same day. The customer paid Ghc420 upfront. If sold individually, the selling price of the computer is Ghc300 and the selling price of the technical support is Ghc120. Required: Apply the 5 stages of revenue recognition, per IFRS 15, to determine how much revenue Wade should recognize in the year ended 31 December 20X1.
EXCEL PROFESSIONAL INSTITUTE EXCEL PROFESSIONAL INSTITUTE IFRS 15 says that a contract is an agreement between two parties that creates rights and obligations. A contract does not need to be written. An entity can only account for revenue from a contract if it meets the following criteria: the parties have approved the contract and each party’s rights can be identified payment terms can be identified the contract has commercial substance it is probable that the entity will be paid.
EXCEL PROFESSIONAL INSTITUTE EXCEL PROFESSIONAL INSTITUTE Aluna has a year end of 31 December 20X1. On 30 September 20X1, Aluna signed a contract with a customer to provide them with an asset on 31 December 20X1. Control over the asset passed to the customer on 31 December 20X1. The customer will pay ghc1m on 30 June 20X2. By 31 December 20X1, Aluna did not believe that it was probable that it would collect the consideration that it was entitled to. Therefore, the contract cannot be accounted for and no revenue should be recognized.
EXCEL PROFESSIONAL INSTITUTE EXCEL PROFESSIONAL INSTITUTE Performance obligations are promises to transfer distinct goods or services to a customer. Some contracts contain more than one performance obligation. For example: An entity may enter into a contract with a customer to sell a car, which includes one year’s free servicing and maintenance. The distinct performance obligations within a contract must be identified. An entity must decide if the nature of a performance obligation is: to provide the specified goods or services itself (i.e. it is the principal), or to arrange for another party to provide the goods or service (i.e. it is an agent) If an entity is an agent, then revenue is recognized based on the fee or commission to which it is entitled.
EXCEL PROFESSIONAL INSTITUTE EXCEL PROFESSIONAL INSTITUTE Rosemary's revenue includes Ghc2 million for goods it sold acting as an agent for Elaine. Rosemary earned a commission of 20% on these sales and remitted the difference of Ghc1.6 million (included in cost of sales) to Elaine. How should the agency sale be treated in Rosemary's statement of profit or loss?
EXCEL PROFESSIONAL INSTITUTE EXCEL PROFESSIONAL INSTITUTE The transaction price is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer. Amounts collected on behalf of third parties (such as sales tax) are excluded. The consideration promised in a contract with a customer may include fixed amounts, variable amounts, or both. When determining the transaction price, an entity shall consider the effects of all of the following: variable consideration the existence of a significant financing component in the contract non-cash consideration consideration payable to a customer.
EXCEL PROFESSIONAL INSTITUTE EXCEL PROFESSIONAL INSTITUTE In determining the transaction price, an entity must consider if the timing of payments provides the customer or the entity with a significant financing benefit. If there is a significant financing component, then the consideration receivable needs to be discounted to present value using the rate at which the customer would borrow. The following may indicate the existence of a significant financing component: the difference between the amount of promised consideration and the cash selling price of the promised goods or services the length of time between the transfer of the promised goods or services to the customer and the payment date.
EXCEL PROFESSIONAL INSTITUTE EXCEL PROFESSIONAL INSTITUTE Rudd enters into a contract with a customer to sell equipment on 31 December 20X1. Control of the equipment transfers to the customer on that date. The price stated in the contract is Ghc1m and is due on 31 December 20X3. Market rates of interest available to this particular customer are 10%. Required: Explain how this transaction should be accounted for in the financial statements of Rudd for the year ended 31 December 20X1.
EXCEL PROFESSIONAL INSTITUTE EXCEL PROFESSIONAL INSTITUTE If consideration is paid to a customer in exchange for a distinct good or service, then it is essentially a purchase transaction and should be accounted for in the same way as other purchases from suppliers. Assuming that the consideration paid to a customer is not in exchange for a distinct good or service, an entity should account for it as a reduction of the transaction price. Golden Gate enters into a contract with a major chain of retail stores. The customer commits to buy at least Ghc20m of products over the next 12 months. The terms of the contract require Golden Gate to make a payment of Ghc1m to compensate the customer for changes that it will need to make to its retail stores to accommodate the products. By the 31 December 20X1, Golden Gate has transferred products with a sales value of Ghc4m to the customer. How much revenue should be recognized by Golden Gate in the year ended 31 December 20X1?
EXCEL PROFESSIONAL INSTITUTE EXCEL PROFESSIONAL INSTITUTE The total transaction price should be allocated to each performance obligation in proportion to standalone selling prices. The best evidence of a standalone selling price is the observable price of a good or service when the entity sells that good or service separately in similar circumstances and to similar customers. If a standalone selling price is not directly observable, then the entity estimates the standalone selling price. Discounts In relation to a bundled sale, any discount should generally be allocated across each component in the transaction. A discount should only be allocated to a specific component of the transaction if that component is regularly sold separately at a discount.
EXCEL PROFESSIONAL INSTITUTE EXCEL PROFESSIONAL INSTITUTE Shred sells a machine and one year’s free technical support for Ghc100,000. It usually sells the machine for Ghc95,000 but does not sell technical support for this machine as a standalone product. Other support services offered by Shred attract a markup of 50%. It is expected that the technical support will cost Shred Ghc20,000. Required: How much of the transaction price should be allocated to the machine and to the technical support?
EXCEL PROFESSIONAL INSTITUTE EXCEL PROFESSIONAL INSTITUTE Revenue is recognized when (or as) the entity satisfies a performance obligation by transferring a promised good or service to a customer. For each performance obligation identified, an entity must determine at contract inception whether it satisfies the performance obligation over time, or satisfies the performance obligation at a point in time. Satisfying a performance obligation at a point in time If a performance obligation is satisfied at a point in time then the entity must determine the point in time at which a customer obtains control of a promised asset. Control of an asset refers to the ability to direct the use of, and obtain substantially all of the remaining benefits (inflows or savings in outflows) from, the asset. Control includes the ability to prevent other entities from obtaining benefits from an asset.
EXCEL PROFESSIONAL INSTITUTE EXCEL PROFESSIONAL INSTITUTE The following are indicators of the transfer of control: The entity has a present right to payment for the asset The customer has legal title to the asset The entity has transferred physical possession of the asset The customer has the significant risks and rewards of ownership of the asset The customer has accepted the asset. Consignment inventory This can raise the issue of consignment inventory, where one party legally owns the inventory but another party keeps the inventory on its premises. The key issue relates to which party has the majority of indicators of control.
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