GROUP PROJECT (15%) REVENUE RECOGNITON BUS 4143-IFRS (IAS 11 & 18) INTRODUCTION:
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GROUP PROJECT (15%) REVENUE RECOGNITON BUS 4143-IFRS (IAS 11 & 18) INTRODUCTION: Group in from 2-3 students take on a project to study the revenue recognition from business with reference to IAS 18 and IAS 11. LEARNING OUTCOME: CLO 4- Recommend an accounting treatment for selected issues on financial reporting METHOD OF ASSESSMENT: The assessment criteria require application of skills and knowledge acquired to recognize and account for revenue in given scenario. PROJECT DESCRIPTION: This project is introduced to enable students to recognize revenue under different circumstances or scenarios and from different businesses. The objective of the project is to apply theoretical knowledge gained in initial recognition, measurement, subsequert measurement and disclosure as per IAS 18. Students can use the notes and exercises that have been provided as well as add more information from textbooks or the Internet. OTHER: Submission Mode: Hard Copy and Safe Assign Drop Box Font: Size 12 - Type: Times New Roman Due date: to be submitted as hard copy on Wednesday 22nd of November 2017Explanation / Answer
Objective of IAS 18
The objective of IAS 18 is to prescribe the accounting treatment for revenue arising from certain types of transactions and events.
Key definition
Revenue: the gross inflow of economic benefits (cash, receivables, other assets) arising from the ordinary operating activities of an entity (such as sales of goods, sales of services, interest, royalties, and dividends). [IAS 18.7]
Measurement of revenue
Revenue should be measured at the fair value of the consideration received or receivable. [IAS 18.9] An exchange for goods or services of a similar nature and value is not regarded as a transaction that generates revenue. However, exchanges for dissimilar items are regarded as generating revenue. [IAS 18.12]
If the inflow of cash or cash equivalents is deferred, the fair value of the consideration receivable is less than the nominal amount of cash and cash equivalents to be received, and discounting is appropriate. This would occur, for instance, if the seller is providing interest-free credit to the buyer or is charging a below-market rate of interest. Interest must be imputed based on market rates. [IAS 18.11]
Recognition of revenue
Recognition, as defined in the IASB Framework, means incorporating an item that meets the definition of revenue (above) in the income statement when it meets the following criteria:
IAS 18 provides guidance for recognising the following specific categories of revenue:
Sale of goods
Revenue arising from the sale of goods should be recognised when all of the following criteria have been satisfied: [IAS 18.14]
Rendering of services
For revenue arising from the rendering of services, provided that all of the following criteria are met, revenue should be recognised by reference to the stage of completion of the transaction at the balance sheet date (the percentage-of-completion method): [IAS 18.20]
When the above criteria are not met, revenue arising from the rendering of services should be recognised only to the extent of the expenses recognised that are recoverable (a "cost-recovery approach". [IAS 18.26]
Interest, royalties, and dividends
For interest, royalties and dividends, provided that it is probable that the economic benefits will flow to the enterprise and the amount of revenue can be measured reliably, revenue should be recognised as follows: [IAS 18.29-30]
Disclosure [IAS 18.35]
Implementation guidance
Appendix A to IAS 18 provides illustrative examples of how the above principles apply to certain transactions.
Different industry applications
Recognition of revenue by real estate developers for sales of units, such as apartments or houses, 'off plan' – that is, before construction is complete.
Fundamental issue
The fundamental issue is whether the developer is selling a product (goods) – the completed apartment or house – or is selling a service – a construction service as a contractor engaged by the buyer. Revenue from selling products is normally recognised at delivery. Revenue from selling services is normally recognised on a percentage-of-completion basis as construction progresses.
Especially supermarkets grant loyalty award credits (such as 'points' or travel miles) to customers who buy other goods or services. Specifically, it explains how such entities should account for their obligations to provide free or discounted goods or services ('awards') to customers who redeem award credits.
Key provisions
CONSTRUCTION
A construction contract is a contract specifically negotiated for the construction of an asset or a group of interrelated assets.
A contract covers two or more assets, the construction of each asset should be accounted for separately if (a) separate proposals were submitted for each asset, (b) portions of the contract relating to each asset were negotiated separately, and (c) costs and revenues of each asset can be measured. Otherwise, the contract should be accounted for in its entirety.
Two or more contracts should be accounted for as a single contract if they were negotiated together and the work is interrelated.
If a contract gives the customer an option to order one or more additional assets, construction of each additional asset should be accounted for as a separate contract if either (a) the additional asset differs significantly from the original asset(s) or (b) the price of the additional asset is separately negotiated. What is included in contract revenue and costs?
Contract revenue should include the amount agreed in the initial contract, plus revenue from alternations in the original contract work, plus claims and incentive payments that (a) are expected to be collected and (b) that can be measured reliably
Contract costs should include costs that relate directly to the specific contract, plus costs that are attributable to the contractor's general contracting activity to the extent that they can be reasonably allocated to the contract, plus such other costs that can be specifically charged to the customer under the terms of the contract.
Accounting
If the outcome of a construction contract can be estimated reliably, revenue and costs should be recognised in proportion to the stage of completion of contract activity. This is known as the percentage of completion method of accounting.
To be able to estimate the outcome of a contract reliably, the entity must be able to make a reliable estimate of total contract revenue, the stage of completion, and the costs to complete the contract
If the outcome cannot be estimated reliably, no profit should be recognised. Instead, contract revenue should be recognised only to the extent that contract costs incurred are expected to be recoverable and contract costs should be expensed as incurred.
The stage of completion of a contract can be determined in a variety of ways - including the proportion that contract costs incurred for work performed to date bear to the estimated total contract costs, surveys of work performed, or completion of a physical proportion of the contract work.
An expected loss on a construction contract should be recognised as an expense as soon as such loss is probable.
Disclosure
Presentation
The gross amount due from customers for contract work should be shown as an asset
The gross amount due to customers for contract work should be shown as a liability
AIRLINES
Airline Industry
The revenue recognition policies varies based on nature of services provided by airline companies. Overall, the treatment of passenger and freight revenue is similar. To attract customer, the airline companies issues airline passenger tickets or freight airway bill in advance of the service or transportation date.
Further, the amount paid as air fare on booking air tickets has two components – refundable fare and non-refundable fare, the proportion of two varies with passage of time. All amount received in advance from prospective customer is accounted as unearned revenue.
Passenger and freight revenue: On date of travel of the passenger or when freight is uplifted
Non-refundable tickets: On the same date the ticket booking for flight is closed
Limited refundable or exchangeable unredeemed tickets: significant time (determined based on historic trend) after the booked date of travel has lapsed or terms of the tickets
Commission and discounts: Commission is recognized as expenses and discount is recognized as reduction in revenue, when the sale is recognized.
SOFTWARE COMPANIES
At present, there is diversity in the technology sector in relation to the accounting for costs of acquiring a customer or contract. Some companies capitalise such costs and
some expense them as incurred. Those technology companies that currently expense all subscriber acquisition costs may meet the criteria to capitalise and amortise the
incremental costs of obtaining a contract with a duration of more than one year.
The revenue project has not been finalised and the proposals are subject to further re-deliberations by the Boards in the coming months. However, technology companies may start considering the potential impact of the proposals on their financial reporting, operations, internal systems and on communication with stakeholders.
Contracts analysis.
Technology companies would be required to analyse the terms and conditions of their
contracts, determine the number of performance obligations and consider whether these performance obligations meet the criteria for recognition of revenue over time or at a point in time. Compensation contracts with sales staff and external agents. Incremental commissions paid to internal sales staff and external agents would need to be revisited with the understanding that some costs would be required to be capitalised. Additionally, some commissions paid by technology companies may be based on revenue targets; such arrangements may need to be revisited with a view that timing of revenue recognition for some arrangements may change.
Staff training.
The final standard may result in changes to current accounting practices, and may affect operating practices as well. The training of finance staff will be essential as parallel record-keeping may be required in the period preceding the effective date to provide for comparative figures.
REFERNCES
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