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Revenue in depth
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Revenue
S4 to S6
1
OperatingActivities: Recognition and Measurement Issues
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Income
Framework
increases in economic benefits during the accounting
period in the form of inflows or enhancements ofassets or decreases in liabilities that result in increases
in equity, ..
2
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Income vsRevenue
What is Income?
FRS Framework para 4.29
Encompasses both Revenueand Gain
Revenuearises in the course of ordinary activities Eg, sales, fees, interest, dividends, royalties, rent
What is Revenue?
FRS 18 para 7
Grossinflow of economic benefits
Arising in course of ordinary activities
Increase in Equity3
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Revenue RecognitionCriteria (RRC)
Revenue recognition principle (Statement ofFinancial Accounting Concepts (SFAC) No 5):Realised / Realisable; andEarned
What is
4
Revenue? (FRS Framework para 4.29)
Recognition? (Framework paras 4.47 & 4.48) Realisation? (SFAC No. 6 para 143)
Earned? (SFAC No. 5 para 83)
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Revenue RecognitionCriteria (RRC)
Revenue recognition principle (Statement of FinancialAccounting Concepts (SFAC) No 5):
Realised / Realisableconvertingnon-cash resources and rights into $sale of assets for cash and claims to cash
Earned
the enterprise has substantially accomplishedwhat it must doto be entitled to the benefitsrepresented by the revenue
5
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FRS 18 Revenue
a) Sale of goods
b) Rendering of services
c) Use by others of entity assetsyielding interests,
royalties and dividends
Exclusions:
FRS 11 Construction Contracts
Para 6 6
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2 Main Issues in Revenue Recognition
and Measurement
Timing
Quantum
Revenue is recognised when it is probablethat futureeconomic benefits will flow to the entity and these
benefits can be measured reliably.
Para 9 Revenue shall be measured at the fair value of
the consideration received or receivable.
7
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Revenue from
Sale of Goods
FRS 18:14 Revenue from sale of goods should be recognisedwhen allthe following conditions have been satisfied:
1. Transfer of significant risks and rewards of ownership
2. No managerial involvement and effective control over thegoods sold
3. Inflow of economic benefits is probable
4. Amount of revenue can be measured reliably
5. Cost incurred or to be incurred can be measured reliably 8
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Sales Discounts/ Sales Returnsand
Allowances
Revenue should be measured at the fair value of the
consideration received or receivable (FRS 18:9)
9
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10
On January 6, Timberland sold $1,000 of
merchandise on credit with terms of 2/10, n/30.
Journal entry to record the sale:
Sales on Account (CreditSales)
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11
If the customer remits the appropriate amount on
January 14, what entry would Timberland make?
Journal entry to record the receipt:
Payment MadeWithin the Discount Period
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12
If the customer remits the appropriate amount onJanuary 19, what entry would Timberland make?
Journal entry to record the receipt:
Payment Made Outsidethe Discount Period
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13
On January 19, a Timberland factory stores credit card
sales were $3,000. The credit card company charges a
2% service fee.
Prepare the journal entry to record the sales:
Accounting for CreditCard Sales
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14
Sales Returns and Allowances
On July 8, Company Y returns $500 of hiking boots
originally purchased on account from Timberland.
Prepare the journal entry:
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Recording Sales RevenueGST
Without GST
Dr Cash / A/R $x
Cr Sales Revenue $x
With GST
Dr Cash / A/R $x
Cr Sales Revenue $xCr GST Payable $x
FRS 18 para 815
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FRS 18:8
Revenue includes only the gross inflows of
economic benefits received and receivable by
the entity on its ownaccount.
16
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Quiz
insurance agents
stockbrokers
17
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Q1
Scenario 1
Scenario 2
Scenario 3
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Quiz
risk and rewards vs legal title vs possession
refund
warranty
Revenue vs Expense
Revenue - recognition
Expensedoubtful debts
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Revenue from
Rendering of Services
20
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Revenue from
Rendering of Services
Recognition of revenue from rendering of services:
Generally, it must be realised/realisable and earned
FRS 18:20
a) Amount can be measured reliably
b) Inflow of economic benefits is probable
c) Stage of completion measured reliably
d) Costs incurred / costs to complete the transaction can
be measured reliably
21
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Determining Stageof Completion
FRS 18:24
(a) surveys of work performed;
(b) services performed to date as a percentage of
total services to be performed; or
(c) the proportion that costs incurred to-date bear to
the estimated total costs of the transaction.
22
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Quiz
progress payments and advances vs stage of
completion
uncertain outcome
loss outcome
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Q2
Dragon Place
24
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Q10
iCustom
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Use of AssetFRS 18
Use of asset Generalrecognition: only if
Inflow of economic benefit isprobable; and
Amount can be measuredreliably
Interest On effective interest methodFRS 39
Royalty On an accrual basis inaccordance with thesubstance of the agreement
Dividend When the shareholders right to
receive payment is established26
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Recording Service Revenue
Without GST
Dr Cash / A/R $x
Cr Service Revenue $x
With GST
Dr Cash / A/R $x
Cr Service Revenue $xCr GST Payable $x
FRS 18 para 827
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Quiz
Unpaid interest before acquisition of interest-bearing
investment
pre-acquisition and post-acquisition
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Q7
Vienna Restaurant
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Disclosure
Accounting policy
Amount of each significant category of revenue:
i. Sale of goods
ii. Rendering of services
iii. Interest
iv. Royalties
v. Dividends
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New Standard for
Revenue Recognition & Measurement
Title: Revenue from Contracts with Customers
Jointly issued by IASB (IFRS 15) and FASB
ASC is expected to issue the new standard soon
Effective 1 January 2017
31
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Core Principle
Recognise revenue 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
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5Steps to apply the Core Principle
Step 1: Identify the contract(s) with the customer
Step 2: Identify the separate performance obligation(s)
Step 3: Determine the transaction price
Step 4: Allocate the transaction price
Step 5: Recognise revenue when a performance obligation is
satisfied
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OtherGains/Losses
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Other Gains/Losses
35
Unrealised?
No inflow of resources (because no external
transaction)
= paper gains
Realised?
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OtherGains/Losses
Fair value on Property, Plant and Equipment (FRS 16)
Land
Building
Fair value on Investment Property (FRS 40)
Mark-to-market gains/losses on Investments (FRS 39)
Investment in Trading SecuritiesInvestment in Available-For-Sale securities
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Classificationof Financial Assets:
(a) financial assets at fair value through profit or loss(FVTPL);
(b) held-to-maturity investments;
(c) loans and receivables; and
(d) available-for-sale financial assets (AFS).
FRS 39:45
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TradingSecurities
Upon initial recognition: at Fair Value (exclude
transaction costs)
At B/S date: marked to market
Unrealisedholding gains/losses: to P/L
Upon disposalRealisedgains/losses: to P/L
38
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TradingSecurities
39
Year 2DR Cash $15m
CR Gain on disposal of TS (P/L) $5m
CR TS $10m
Year 1 - Trading Securities - $8m (cost)As at end of Year 1 - Marked-to-market - $10m
Year 2 - Trading Securities sold for $15m
End of year 1DR TS $2m
CR FV gain on TS (P/L) $2m
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Upon initial recognition: at Fair Value (includingtransaction costs)
At B/S date: marked to market
Unrealisedgains/losses: directly to Fair Value
Reserve (Equity/OCI)
Upon disposal RealisedGain/loss on disposal to P/L
Fair value reserve transferred/recycledto P/L
40
Available-for-Sale Securities
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Available-for-Sale Securities
Year 1 - AFS securities - $8m (cost)
As at end of year 1marked-to-market is $10mYear 2 - AFS securities sold for $15m
41
Year 2
DR Cash $15mDR Fair value reserve on AFS (Equity) $2m
CR AFS $10m
CR Gain on disposal of AFS (P/L) $7m
End of year 1
DR AFS $2m
CR Fair value reserve on AFS (Equity/OCI) $2m
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Presentationin F/S
Trading securities
Available-for-sale securities
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Q3
Myers
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Q8 and Q9
CT
44
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Q11
45
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Revenue
S4 to S6 END
OperatingActivities: Recognition and Measurement Issues
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