Semester 1 Week 9 PP (Revenue recognition)

Question 1

What does revenue arise from?

Answer 1

Revenue arises from:
Sales of goods
Sales of services
On cash or credit
Gains
Are increases in assets.
Dealt with in appropriate sections, we saw revaluation of property earlier.

Question 2

What steps do you take for IFRS 15 - revenue from contracts with customers?

Answer 2

Step 1: Identify the contract(s) with a customer.
Step 2: Identify the performance obligations in the contract.
Step 3: Determine the contract price.
Step 4: Allocate the transaction price to performance obligations.
Step 5: Recognise revenue.

Question 3

What must be in place before a contract can be said to be in place?

Answer 3

All parties must approve and commit to the contract obligations.
Each party had rights and obligations under the contract which can be identified.
The entity can identify payment terms.
Contract has commercial substance.
The entity will collect the revenue.
Fundamentally a contract should create rights and obligations for both parties.

Question 4

What is it called if you receive money from a customer before a contract exists?

Answer 4

Deferred income.

Question 5

Are these contracts?

Answer 5

Question 6

What is an example of performance obligations?

Answer 6

Delivering a computer to a client,
Building a building for a client,
Carrying out an audit for a client.

Question 7

Whygate Limited provide office services. They provide Wilson Plc. with security services and cleaning services for their office.
Are these distinct? (i.e. could Wilson have cleaning but not security or vice versa).

Answer 7

In some cases, companies that provide office services, such as Whygate Limited, may offer bundled packages that include both security and cleaning services. However, these services are indeed distinct, and it’s possible for a client like Wilson Plc. to contract with Whygate Limited for only one of these services if they wish. Therefore, Wilson Plc. could have cleaning services without security services or vice versa, depending on their specific requirements and preferences.

Question 8

What is variable consideration?

Answer 8

It is when there isn’t a single fixed price. This could include:
Bonuses – for finishing a job early or on time.
Penalties – for finishing a job late.
Volume discounts – where a large amount of goods are ordered.
Rebates – “cashback” when certain orders are met.

Question 9

What are two ways to actually calculate what total revenue is?

Answer 9

Option 1: Single most expected outcome.

Where there’s a single outcome we believe is most likely.

Option 2: Weighted average.

This occurs where we have several possible outcomes and know the chance of each.

Question 10

Answer 10

Question 11

Answer 11

Question 12

What is significant financing component/element?

Answer 12

Significant financing component/element is when there is a significant time frame between making the sale and being paid.

Question 13

How do we treat significant financing component/element?

Answer 13

Where we have a significant financing component we initially recognise the sale at present value (in other words the value of the sale in today’s money).
The interest rate will be given in the exam.
The remaining amount will be recognised as interest income over subsequent years.
We won’t be dealing with the subsequent recognition just at the moment.

Question 14

How do you discount an item?

Answer 14

Value/(1+ interest rate)^number of years discounted.

Question 15

Answer 15

Sale = 20,000/1.05^3 = £17,277

Dr Receivables (debtors) 17,277
Cr revenue 17,277
Being sale recognised.

Question 16

What ways can performance obligations be satisfied?

Answer 16

They can be satisfied:
Particular point in time - This refers to the situation where the performance obligations are either satisfied or not.
The most common example of this is goods delivered.

Over time - The other situation is where performance obligations are satisfied over time.
Imagine if a construction company was building a warehouse for a client. It’s not as simple as “done or not done” at any particular point in time they’re likely to be part way through the construction. As the performance obligation is therefore partially satisfied we can therefore recognise part of the revenue.
This will be done in proportion to the level of completion.

Question 17

Farrell Limited sells computer equipment, on 1 March 20X5 they receive an order for 4 new computers from the Foch Partnership.
The goods are passed to the couriers on 3 March 20X5, arrive at Foch on 5 March and are invoiced on 8 March.
When is the sale recognised?

Answer 17

The sale would be recognised on 5 March.

Note passing the goods to the courier is not satisfying the performance obligation.
If you ordered something online would you be ok if it never arrived but “was out for delivery”?!

Question 18

How do you workout completion?

Answer 18

Completion can be measured a number of ways:
Surveyor’s certificate.
Physical level of completion (e.g. walls, roof etc.).
Key milestones.
In the exam you will always be told.

Question 19

Newhaven Plc. is a construction company, they have been engaged to build a new office block.
The total price of the contract is £400,000, at the year end the surveyor estimates they are 25% complete.
Calculate the revenue to be recognised in year 1.

Answer 19

First, we’ll find 25% of the total contract price:

25% of £400,000 = £400,000 × 0.25 = £100,000

So, the revenue to be recognized in year 1 is £100,000.

Question 20

What do we need to disclose?

Answer 20

Need to disclose:
Revenue recognised in the period
Where any contract assets or liabilities have arisen through amounts prepaid or due from customers this should also be disclosed.

Question 21

What is a contract asset?

Answer 21

A contract asset is essentially where the amount of work done exceeds the amount received from the client.
A contract liability is where the amount received from the client exceeds the amount of work done.
Both can occur depending on the stage the contract is at.

Question 22

What is the Statement of Other Comprehensive Income (SOCI)?

Answer 22

Not all items go through the P/L.
While revenue goes through the P/L a lot of gains (for example revaluation gains) go directly to the revaluation reserve.
This appears underneath the P/L.

Question 23

Balgrave Limited have made a profit after tax of £2,300,000 for the year ended 31 December 20X3.
On the 31 December 20X3 the directors decided to revalue a building with a NBV of £600,000 (cost £700,000, accumulated depreciation £100,000) to its fair value of £800,000.
Prepare the necessary journal and the SOCI.

Answer 23

Gain = £800,000 - £600,000 = £200,000
Increase in cost = £800,000 - £700,000 = £100,000

Dr Building cost 100,000
Dr Building accumulated depreciation 100,000
Cr revaluation reserve 200,000
Being revaluation of building

Note: There is no journal going to the SOCI, we simply record what is going directly to reserves.

Question 24

How do we write P&L with the SOCI added?

Answer 24

The P/L and the SOCI are added together.
We call this the Statement of total comprehensive income (i.e. P/L and other comprehensive income added together.
Total profit + other comprehensive income = total comprehensive income.