FINANCIAL REPORTING EXERCISE OF JUDGEMENT & ESTIMATION REVENUE ARISING FROM CONTRACTS WITH CUSTOMERS

Question 1

What is “IFRS15 - Revenue arising from contracts with customers”?

Answer 1

“To depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services”

Question 2

What kinds of revenue are included in “IFRS15 - Revenue arising from contracts with customers”?

Answer 2

Includes:

• Sale of goods
• Supply of services
• Intellectual property license

Excludes:

• Borrowings
• Contributions by shareholders
• Gains
• Rental income
• Interest and Dividends

Question 3

What is the 5-Step Model for Revenue arising from contracts with customers?

Answer 3

1. Identify contract with customer
2. Identify performance obligations
3. Determine transaction price
4. Allocate transaction price to performance obligations
5. Recognise revenue when/as performance obligation is satisfied

Question 4

Describe Step 1 of the 5-Step Model for Revenue arising from contracts with customers (“Identify contract with customer”).

Answer 4

Contract: Agreement between 2 or more parties that creates enforceable rights obligations. May be simple (e.g. sale of goods) or complex (e.g. construction of building)

Contract conditions: ALL of the following must be met

1. Parties committed to contract – have approved the contract
2. Identify contractual rights of each party in relation to goods or services to be transferred
3. Identify payment terms
4. Has commercial substance
5. Probable collection of consideration due for goods or services transferred

Cannot account for ‘underperformed’ contract or where there is a unilateral right to terminate

Question 5

What is “Step 2 Identify performance obligations” of the 5-Step IFRS 15 Revenue arising from contracts with customers?

Answer 5

Performance obligation is a promise to transfer either …

• Distinct good or service or bundle of goods or services.
• Series of distinct goods or services that are substantially the same and have same pattern of transfer

Question 6

What is “Step 3 - Determine transaction price” of the 5-Step IFRS 15 Revenue arising from contracts with customers?

Answer 6

Transaction price is the amount of consideration reasonably expected in exchange for transfer of goods/services (past customary business practice is considered)

Fixed value pricing

OR

Variable value pricing (discounts, penalties …) – estimate using expected value or most likely amount.

*Excludes amounts collected on behalf of 3rd parties (e.g. VAT)

Question 7

What is “Step 4 - Allocate transaction price to performance obligations” of the 5-Step IFRS 15 Revenue arising from contracts with customers?

Answer 7

Use standalone selling price of each obligation in contract

• Single performance obligation contract
  
  • Direct stand-alone selling price
  • Variable pricing applied to direct stand-alone selling price

Multiple performance obligations contract

• Relative stand-alone selling price or estimate
• Variable pricing allocated between multiple performance obligations relative to stand-alone selling price

Question 8

What is “Step 5 - Recognise revenue when/as performance obligation is satisfied” of the 5-Step IFRS 15 Revenue arising from contracts with customers?

Answer 8

Performance obligation satisfied by transferring goods or services to customer ‘Transferred’? Customer obtains control of that good or service. Key: timing

• Single time period to satisfy performance obligations
  
  • Revenue recognized when performance obligation is satisfied
• Multiple time periods to satisfy performance obligations
  
  • Revenue recognised according to progress towards complete satisfaction of performance obligation: - Output method - Input method

Question 9

Describe the uncertainty created by credit sale transactions.

Answer 9

Credit sales give rise to trade receivables

• Trade receivables are an asset - expected to be collected as cash in the future

BUT

• Credit sales generate potential uncollectable trade receivables

Question 10

What are the costs and benefits of granting credit?

Answer 10

– Benefit: boost in sales and profit

– Cost: uncollectable debts

Question 11

What are the 2 kinds of uncollectable debts?

Answer 11

• Potential impairment – uncertain that full amount outstanding from customers will be collected, potential that some impairment may occur if unspecified customers default in full or part
• Specific impairment – known customer unable or unwilling to pay outstanding amounts in full or part

Question 12

How do you make an allowance for credit losses (2 steps)?

Answer 12

1. Estimate amount of potentially uncollectable debts
2. ‘Contra’ account containing estimated uncollectable debts, netted against Trade Receivables balance for inclusion in Statement of Financial Position (Net trade receivables reported)

Question 13

How do you recover uncollectable debts?

Answer 13

• Reinstate the debt to the trade receivables account
  
  • Note: only reinstate debt when absolutely certain of receipt
• Record the receipt of cash

Question 14

What are the IFRS15 - Revenue from Contracts with Customers disclosure requirements?

Answer 14

• Revenue for the period, analysed into appropriate categories
• Impairment losses recognised in the period in relation to contract assets or receivables arising from contracts with customers
• Opening and closing balances of contract assets and contract liabilities, together with an explanation of significant changes during the period
• Amount of revenue allocated to performance obligations that are unsatisfied at the end of the period
• Significant judgements made by the entity in applying the requirements of IFRS15