Chapter 4 Revenue Recognition

1. 1.1 1.2 1.3 1.4 1.5 1.6 Objectives Define the meaning of revenue. Determine the measurement of revenue. Discuss the revenue recognition criteria for sale of goods. Explain the various types of service transactions and their criteria for revenue recognition. Discuss the revenue recognition criteria for interest, royalties and dividends. Descri e the disclosure re!uirements under "#$% 1&.

D e fi n i ti o n

, easurem ent

)d e n ti fi c a ti o n of + r a n s a c ti o n

% a le o f ' oods

( e n d e rin g o f % e rv ic e s

)n te r e s t, ( o y a l ti e s * D iv id e n d s

D is c lo s u re

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2. 2.1

Introduction $ccruals accounting is ased on the matching of costs with the revenue they generate. )t is crucially important under this convention that -e can esta lish the point at -hich revenue may e recognised so that the correct treatment can e applied to the related costs. .or example, the costs of producing an item of finished goods should e carried as an asset in the statement of financial position until such time as it is sold/ they should then e -ritten off as a charge to the trading account. Income, Revenue and 0a1 ain

2.2

Income is increases in economic benefits during the accounting period in the form of inflo-s or enhancements of assets or decreases of lia ilities that result in increases in e!uity, other than those relating to contri utions from e!uity participants. Revenue is defined as the gross inf!ow of economic benefits during the period arising in the course of the ordinary activities of an enterprise -hen those inflo-s resu!t in increases in e"uity, other than increases relating to contri utions from e"uity participants. ains represent other items that meet the definition of income. 'ains represent increases in economic benefits and as such are no different in nature from revenue . "o-ever, they are often reported net of related expenses, e.g. net exchange gains, gain on disposa! of non#current assets. +hey also inc!ude unrea!i$ed gains, for example, arising from the revaluation of investment in securities.

0 1

0c1

2.3

+his %tandard covers the follo-ing areas2 0a1 sale of goods 0 1 rendering of services 0c1 interest, royalties and dividends

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%. 3.1

&easurement of Revenue &easurement of Revenue 0a1 0 1 (evenue should e measured at fair va!ue of the consideration received or receivab!e. 'air va!ue ( ) is the amount for -hich an asset -ould e exchanged, or a lia ility settled, et-een 3no-ledgea le, -illing parties in an arm4s length transaction. 01

3.2

3.3

5ased on the entity concept, revenue includes only the gross inf!ows of economic benefits received and receivab!e y the enterprise on its o-n account. $mounts collected on beha!f of third parties such as sales taxes are not counted. %imilarly, in an agency relationship, any amounts collected y an enterprise on ehalf of the principal are also not accounted for. (evenue is reduced y trade discounts and volume re ates ut not reduced y su se!uent ad de ts and sales returns. +eferred payment of revenue 6hen the inflo- of cash or cash e!uivalents is deferred, the fair value of the consideration -ill e less than the nominal amount of cash received or receiva le. +his happens -hen an enterprise provides interest free credit to the uyer or accepts a note receiva le -hich is elo- the mar3et interest rate. %uch an arrangement in fact constitutes a financing transaction. +he fair va!ue of the consideration has to e determined by discounting a!! future receipts at an imputed interest rate . +he difference between the fair va!ue and the nomina! amount of the consideration is recogni$ed as interest revenue. ,-,RCI., 1 $57 8td ought a machine from 9:; 8td at <4==,=== -hich -as a cash price. 9:; 8td allo-ed the payments to e made y four e!ual instalments. +he first instalments -as made at the date of purchase and the remaining three instalments -ere made annually at the same date. 9:; 8td did not charge
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(*) 3.4

3.5

$57 8td any interest for the deferred payment. +he orro-ing rate at that time -as 1=>. Re"uired/ 7ompute the present value of the consideration and the interest income.

.o!ution/

(0) 3.6

,1change of assets +he revised "#$% 16 specifies that exchange of items of property, plant and e!uipment, regard!ess of whether the assets are simi!ar, are measured at fair va!ue of the goods or services received , ad?usted y the amount of any cash or cash e!uivalents transferred. ,1amp!e 1 .ree 7onstruction 8td contracted -ith Arinting 8td -here it -ill supply a fixed !uantity of -all paper to Arinting 8td and in return, Arinting 8td -ill deliver a certain amount of in3 as consideration. .ree 7onstruction 8td should record revenue for the fair value of the in3 received.

3.@

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4. 4.1

.a!e of

oods oods

Recognition of .a!e of

(evenue from the sale of goods should e recogniBed -hen all the follo-ing conditions have een satisfied2 0i1 the enterprise has transferred to the uyer the significant ris2s and rewards of ownership of the goods/ 0ii1 the enterprise retains neither continuing manageria! invo!vement to the degree usually associated -ith o-nership nor effective contro! over the goods sold/ 0iii1 the amount of revenue can e measured re!iab!y/ 0iv1 it is probab!y that the economic benefits associated -ith the transaction -ill f!ow to the enterprise/ and 0v1 the costs incurred or to be incurred in respect of the transaction can e measured re!iab!y. 4.2 +o assist -ith the decision of revenue recognition, the %tandard provides an appendix -ith various examples2 3ransactions Critica! ,vent

1. C5ill and holdD sales E Delivery is (evenue is recogniBed -hen the uyer ta3es delayed, ut the uyer ta3es title title. (evenue is not recogniBed -hen there is and accepts illing. simply an intention to ac!uire or manufacture the goods in time for delivery. 2. 'oods shipped conditions E su ?ect to (evenue is normally recogniBed -hen the uyer accepts delivery, and installation and inspection are complete.

a. )nstallation and inspection.

. Fn approval -hen the uyer )f there is uncertainty a out the possi ility of has negotiated a limited right of return, revenue is recogniBed -hen the return. shipment has een formally accepted y the uyer or the goods have een delivered and the time period for re?ection has elapsed. c. 7onsignment sales under -hich (evenue is recogniBed y the shipper -hen the recipient 0 uyer1 underta3es the goods are sold y the recipient to a third to sell the goods on ehalf of party.
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the shipper 0seller1. d. 7ash on delivery sales. (evenue is recogniBed -hen delivery is made and cash is received y the seller or its agent

3. 8ay a-ay sales under -hich the (evenue is recogniBed -hen the goods are goods are delivered only -hen the delivered uyer ma3es the final payment in a series of instalments. 4. Frders -hen payment is received (evenue is recogniBed -hen the goods are in advance of delivery for goods delivered. not presently held in stoc3s. 5. %ales and repurchase agreements )n su stance, the seller has transferred the ris3s and re-ards of o-nership to the uyer and hence revenue is recogniBed.

6. %ales to intermediate parties, e.g. (evenue is recogniBed -hen the ris3s and distri utors, dealers, etc. for resale. re-ards of o-nership have passed. @. %u scriptions to pu lications and (evenue is recogniBed -hen the items similar items. involved are despacted. &. )nstallment sales, under -hich the (evenue attri uta le to the sales price, consideration is receiva le in exclusive of interest, is recogniBed at the date installments. of sale. G. Aroperty of sales. (evenue is normally recogniBed -hen legal title passes to the uyer. )f the seller is o liged to perform any significant acts after the transfer of the e!uita le andHor legal title, revenue is recogniBed as the acts are performed.

4. 5.1

Rendering of .ervices Recognition of Rendering of .ervices 6hen the outcome of a transaction involving the rendering of services can e measured relia ly, revenue associated -ith the transaction should e recogniBed y reference to the stage of completion of the transaction at the statement of financial position. +he outcome of a transaction can e estimated relia ly -hen all the follo-ing conditions are satisfied2 0i1 the amount of revenue can e measure re!iab!y/
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0ii1 0iii1 0iv1

it is probab!e that the economic benefits associated -ith the transaction -ill f!ow to the enterprise/ the stage of comp!etion of the transaction at the statement of financial position date can e measured re!iab!y/ and the costs incurred for the transaction and the costs to comp!ete the transaction can e measured re!iab!y.

5.2

6hen the outcome of the transaction involving the rendering of services cannot be estimated re!iab!y, revenue should e recogni$ed on!y to the e1tent of the e1penses recogniBed that are recovera le. &ethods of &easuring the Revenue of Rendering of .ervices 0a1 5ercentage of comp!etion method E 6ith service industries, revenue is recogniBed y reference to the stage of completion of a transaction -hich is often referred to as the percentage of completion method. +he stage of completion of a transaction can e determined y various means depending on the nature of the transaction. +hese include2 0i1 surveys of -or3 performed/ 0ii1 services performed to date as a percentage of total services to e performed/ 0iii1 the proportion that costs incurred to date ear to the estimated total costs of the transaction. .traight !ine basis E 6hen services are performed y an indeterminate num er of acts over a specified period of time, revenue is recogniBed on a straight line asis over the specified period unless some other etter method is availa le. .or example, a fitness clu -hich provides unlimited use of its facilities to its mem ers offers a threeIyear mem ership su scription at a discount. .or such mem ership fees, revenue should e recogniBed over the three year period on a straightI line asis. Comp!eted performance method E 6hen a specific act is much more significant than any other acts, the recognition of revenue is postponed until the significant act is executed. .or example, a moving company may pac3, load, store and deliver goods to destinations designated y customers. +he act of delivery, the last of a series of acts, is so significant that revenue can only e recogniBed -hen delivery is
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5.3

0 1

0c1

completed. 5.2 Examples from %tandard 3ransactions 1. )nstallation fees Critica! ,vent (evenue is recogniBed y reference to the stage of completion of the installation.

2. %ervicing fees included in the price +he identifia le amount included in the of the product selling price, i.e. service fees, is deferred and recogniBed over the period during -hich the service is performed. 3. $dvertising commissions ,edia commissions are recogniBed -hen the related advertisement or commercial appears efore the pu lic. (evenue is recogniBed on the rene-al date of the policy provided that the agent -ill not e re!uired to perform further services. (ecognition of revenue for financial service fees depends on the purposes for -hich the fees are assessed and the asis of accounting for any associated financial instrument. (evenue from artistic performance, other special events is recogniBed -hen the event ta3es place. (evenue is recogniBed over the period of instruction. and )f fees permit only mem ership, the fee is mem ership fees. (ecognised as revenue -hen no significant uncertainty as to their collecti ility exists. )f fees include other services or facilities provided, revenue is recogniBed on a asis reflecting the timing, nature and value of the enefits provided. (evenue is recogniBed on a asis that reflects the purpose for -hich the fees are charged. y reference to the

4. )nsurance agency commissions

5. .inancial services fees

6. $dmission fees

@. +uition fees &. )nitiation, entrance mem ership fees

G. .ranchise fees

1=. .ees from the development of (evenue is recogniBed customiBed soft-are stage of completion.
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6.

Interest, roya!ties and dividends

6.1

+efinitions 0a1 0 1 0c1 Interest is the charge for the use of cash or cash e!uivalents or amounts due to the entity. Roya!ties are charges for the use of nonIcurrent assets of the entity, e.g. patents, computer soft-are and trademar3s. +ividends are distri utions of profit to holders of e!uity investments, in proportion -ith their holdings, of each relevant class of capital.

6.2

Recognition of Interest, Roya!ties and +ividends 0a1 0 1 0c1 Interest is recognised on a time proportion basis that ta3es into account the effective yie!d on the asset. Roya!ties are recognised on an accrua!s basis in accordance -ith the su stance of the relevant agreement. +ividends are recognised -hen the shareho!der7s right to receive payment is estab!ished.

8. @.1

+isc!osure Re"uirements $n enterprise should disclose2 a1 the accounting policies adopted for the recognition of revenue including the methods adopted to determine the stage of completion of transactions involving the rendering of services/ the amount of each significant category of revenue recogniBed during the period including revenue arising from2 0i1 0ii1 0iii1 0iv1 0v1 0c1 the sales of goods/ the rendering of services/ interest/ royalties/ dividends/ and

0 1

the amount of revenue arising from exchanges of goods or services in each significant category of revenue.
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,1amination .ty!e 9uestions

9uestion 1 0a1 )n accordance -ith "#$% 1& C(evenueD, 0i1 define CrevenueD, and 02 mar3s1 0ii1 explain ho- revenue should e measured -hen goods are sold in exchange for dissimilar goods. 03 mar3s1 0 1 )n accordance -ith "#$% 1& C(evenueD, discuss -hen and ho- revenue should e recogniBed in the follo-ing transactions. 0i1 5est $dvice 8td is a consulting firm that has received a t-oIyear engagement from a client. +he company -ill assign differing num ers of personnel to the pro?ect depending on the pro?ect4s needs and the availa ility of personnel. +he company ma3es periodic illings ased on the hours -or3ed y the personnel, plus 2=> profit. 04 mar3s1 0ii1 +he .ar 8ost "ealth 7lu has t-o types of mem erships2 oneIyear and t-oIyear. Each type of mem ership re!uires an initial fee as -ell as monthly fees for unlimited use of the clu 4s facilities. 04 mar3s1 0iii1 .rancisco 8td o-ns &=> and 2=> of the e!uity shareholdings in .ed 8td and +ed 8td respectively. $ll three companies are unlisted and their accounting year ends 31 Decem er. Fn 1 $pril 2==1 and 15 $pril 2==1, final dividends in respect of the year ended 31 Decem er 2=== -ere declared and approved at the general meetings of .ed 8td and +ed 8td respectively. 04 mar3s1 0$dapted "#$$+ Aaper @ .inancial $ccounting )) Decem er 2==1 J61

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9uestion 2 "#$% 1& C(evenueD re!uires revenue to e recognised -hen it is pro a le that future economic enefits -ill flo- to the enterprise and these enefits can e measured relia ly. :ou are the accountant of $+ 8imited. :our ?unior as3s you to explain the accounting treatments, according to the re!uirements of "#$% 1&, of the follo-ing t-o transactions2 0i1 Fn 1 Kanuary 2==4, $+ 8imited sold a machine for <6==,=== on installment sales. Aroceeds are received in 3 e!ual installments, paya le in advance. +he mar3et interest rate at time of the sale -as 12> per annum. $+ 8imited o-ns the right to a retail shop franchise. Fn 1 Kanuary 2==4 it sold the right to open a ne- outlet to ,r 8ee/ the franchise is for three years. $+ 8imited received an initial fee of <21=,=== on 1 Kanuary 2==4. $n instalment payment of <25,=== per annum is receiva le in advance for a period of three years starting from 1 Kanuary 2==4. $+ 8imited has to provide continuing services E including mar3eting, product sourcing and mar3et research E to ,r 8ee in accordance -ith the franchise agreement.

0ii1

Re"uired/ 0a1 )n accordance -ith "#$% 1& C(evenueD, explain -hen and ho- to recogniBe revenue from the follo-ing categories2 0i1 rendering of services/ and 06 mar3s1 0ii1 sale of goods. 06 mar3s1 Arepare ?ournal entries to record the installment sales transactions from 2==4 to 2==6. 0%ho- your -or3ings1. Aresent value interest factor of <1 at 12> for n periods Aeriod 0n1 1 2 3 0c1 Discount factor at 12> =.&G3 =.@G@ =.@12

0 1

0@ mar3s1 Arepare ?ournal entries to record the revenue earned from the franchise in 2==4 and 2==5. 06 mar3s1 0+otal 25 mar3s1 0$dapted "#$$+ Aaper @ $dvanced $ccounting Kune 2==4 711
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9uestion % 5est-or3 8imited, -hich is an entertainment programme producer and distri utor, has the follo-ing transactions occurred during the year ended 3= %eptem er 2==52 011 5est-or3 8imited entered into a franchise agreement -ith 8ine 8imited and sold the right of a franchise to 8ine 8imited for a period of 4 years on 1 Fcto er 2==4. 5est-or3 8imited received an initial fee of <16=,=== on 1 Fcto er 2==4 and <5=,=== per year thereafter for a period of 4 years. 5est-or3 8imited provides continuing supporting services, including an advertising and sales campaign, product sourcing and mar3et research to 8ine 8imited in accordance -ith the terms of agreement. 021 5est-or3 8imited entered into a nonIcancella le agreement -ith a file distri utor on 1 Kune 2==5. +he agreement involved the granting of rights to exhi it a motion picture film in mar3ets/ ho-ever, 5est-or3 8imited had no control over the distri utor and expected to receive no further revenue from the ox office receipts. )n return, 5est-or3 8imited -ould receive a lump sum of <5==,=== under his agreement. 031 Fn 1 .e ruary 2==5, 5est-or3 8imited received total su scriptions in advance of <252,===. +he su scriptions -ere for 36 monthly pu lications of an entertainment magaBine issued y 5est-or3 8imited starting from 1 $pril 2==5. Re"uired/ 0a1 )n accordance -ith "#$% 1& C(evenueD, provide a definition of revenue and explain ho- revenue shall e measured under the follo-ing circumstances2 0i1 -here there is an agreement et-een the entity and the uyer of the asset/ and 0ii1 -hen goods or services are exchanged or s-apped for goods and services -hich are of dissimilar nature and value. 06 mar3s1 )n accordance -ith "#$% 1& C(evenueD, explain -hen revenue shall e recogniBed in the case of2 0i1 revenue from sale of goods/ and 05 mar3s1 0ii1 revenue arising from the use y other of entity assets yielding interest, royalties and dividends. 02 mar3s1 7alculate the amount of revenues for transactions 011, 021 and 031 to e recogniBed for the year ended 3= %eptem er 2==5. Kustify your ans-er. 0Lote that each transaction carries e!ual mar3s1 012 mar3s1 0+otal 25 mar3s1 0"#)$$+ Aaper @ $dvanced $ccounting Kune 2==6 711
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0 1

0c1

9uestion 4 M3eir 8imited sells furniture and fixtures from several retail outlets. )n previous years, the company has underta3en responsi ility for fitting the furniture and fixtures in customers4 premises. 7ustomers pay for the furniture and fixtures at the time they are ordered. +he average length of time from customer ordering furniture and fixtures to its fitting is 1= days. &=> of the sales invoice value relates to the goods and 2=> of the fitting services for the furniture and fixtures. )n previous years, M3eir 8imited had recogniBed sales revenue only -hen the furniture and fixtures had een successfully fitted as the rectification costs of any fitting error -ould e difficult to estimate. Fne of the directors of M3eir 8imited, ,r. 6an, is proposing to recogniBe sales revenue -hen customers order and pay for the goods, rather than -hen they have een fitted. Re"uired/ 0a1 0 1 Explain ho- should revenue associated -ith the rendering of services transaction e recogniBed in accordance -ith "#$% 1& C(evenueDN 06 mar3s1 Do you thin3 that2 0i1 the existing accounting policy, 0ii1 the accounting policy proposed y ,r. 6an, or 0iii1 oth of them for recogniBing revenue isHare LF+ correctN 0:ou should ignore the information given in part 0c1 -hen ans-ering this part1 01= mar3s1 .rom the next accounting year on-ard, M3eir 8imited is going to change its trading practice y outsourcing the fitting of furniture and fixtures at customers4 premises to approved contractors ecause the cost involved in such fitting services -ill e less than maintaining a service team in the company for this purpose. M3eir 8imited -ill pay a fixed account to the contractors for each ?o and the contractors -ill e responsi le for the fitting of furniture and fixtures and also paying compensation for any errors in the fitting. "o- to recogniBe and measure sales revenue in the next accounting yearN 0G mar3s1 0:our ans-er should e in line -ith the re!uirements of C.rame-or3 for the Areparation and Aresentation of .inancial %tatementsD and "#$% 1& C(evenueD.1 0+otal 25 mar3s1 0$dapted "#$$+ Aaper @ $dvanced $ccounting Kune 2==@ 731

0c1

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9uestion 4 .it 8imited, -hich is engaged in manufacturing and selling of office e!uipments, has an accounting yearIend of 31 Decem er. Fn 1 Kanuary 2==@, .it 8imited sold goods to a customer in four e!ual instalments of <15=,===, paya le in advance. +he mar3et orro-ing rate, at time of the sale, -as 15> per annum. Re"uired/ 0a1 0 1 )n accordance -ith "#$% 1& (evenue, explain -hen and ho- to recognise the revenue from sale of goods. 0@ mar3s1 "#$% 1& states that Cif the entity retains significant ris3s of o-nership, the transaction is not a sale and revenue is not recognised.D Arovide t-o examples of situations in -hich the entity may retain significant ris3s and re-ards of o-nership in the context of sale of goods. 02 mar3s1 Arepare ?ournal entries to record the transactions of instalment sales from years to 31 Decem er 2==@ to 2=1=. %ho- all your -or3ings. 016 mar3s1 0:our calculation should e rounded up to the nearest dollar.1 0+otal 25 mar3s1 0"#)$$+ Aaper @ .inancial $ccounting Ailot Aaper 2==& 721

0c1

9uestion 6 "#$% 1& E (evenue E -as issued -ith a vie- to standardising the recognition and measurement of revenue. +he principles of the standard are ased around the concept of income that -as developed in the "#)7A$4s .rame-or3 for the Areparation and Aresentation of .inancial %tatements. Re"uired/ 0a1 0 1 Explain ho- the "#)7A$4s frame-or3 defines income and ho- this definition compares to the definition of revenue given in "#$% 1&. 04 mar3s1 Futline the re!uirements of "#$% 1& regarding the recognition and measurement of revenue from2 0i1 +he sale of goods/ 0ii1 +he rendering of services/ 0iii1 +he use of entity assets. 0G mar3s1

)ota prepares financial statements to 3= %eptem er each year. During the year ended 3= %eptem er 2==5 )ota engaged in the follo-ing transactions2
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1.

2.

3.

Fn 1 Fcto er 2==4 )ota sold a plot of land to a an3 for <1=m. +he land had a oo3 value of <5m and a mar3et value of <15m at the date of sale. )ota continued to develop the land and had a call option to uy the land ac3 from the an3 for <12m on 3= %eptem er 2==6. +he an3 had a put option to sell the land to )ota for <12m on 3= %eptem er 2==6. Fn 3= %eptem er 2==5 )ota sold some products under a t-o year -arranty scheme. +he total invoiced price -as <5==,===. +he scheme re!uires )ota to repair any defects found in the products for a t-o year period from the date of sale. +he directors of )ota can relia ly estimate that their -arranty costs -ill average <5=,=== each year. $ reasona le profit margin on the repair of such products is 2=> of the normal invoiced price of such repairs. Fn 1 Fcto er 2==4 )ota sold some products for a total invoiced price of <6==,===. +he consideration -as receiva le from the customer on 3= %eptem er 2==6. )ota normally charges a finance cost of &> per annum on transactions for -hich it provides finance.

Re"uired/ 0c1 Explain ho- each of the transactions 1E3 should e recognised in the financial statements of )ota for the year ending 3= %eptem er 2==5. :ou should !uantify the amounts recognised and ma3e reference to relevant provisions of "#$% 1& -herever possi le. 012 mar3s1 0+otal 25 mar3s1 0$dapted $77$ Dip ).( Decem er 2==5 J41

9uestion 8 0a1 (evenue is usually one of the largest num ers that appears in the financial statements of an entity. +herefore it is important to ensure that revenue is recognised and measured appropriately. "#$% 1& C(evenueD -as issued in order to provide standard accounting practice in this area. Re"uired/ 0i1 0ii1 Descri e the meaning of revenue and the asis on -hich it should e measured under the principles of "#$% 1&/ 03 mar3s1 Futline the criteria that need to e satisfied efore revenue can e recognised under the principles of "#$% 1&. :ou should consider revenue from the sale of goods and from the rendering of services separately.
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0 1

05 mar3s1 #appa is an entity that prepares financial statements to 31 ,arch each year. During the year ended 31 ,arch 2=1= the follo-ing transactions occurred2 0i1 Fn 2G ,arch 2=1= #appa delivered t-o machines to a customer. Details relating to the machines are as follo-s2 ,achine $ 5 7onstruction cost < 1G=,=== 2==,=== )nvoiced price < 25=,=== 3==,===

,achine $ -as unpac3ed and connected to the po-er supply necessary to operate the machine on 2 $pril 2=1=. $s soon as this -as done, the machine -as a le to operate immediately. ,achine 5 needed to e installed y an expert fitter efore it -as capa le of operating in the intended manner. +he installation process -as complete, and the machine passed ready for use, on 4 $pril 2=1=. +he customer paid for oth machines on 3= $pril 2=1=. 05 mar3s1 0ii1 Fn 15 ,arch 2=1= #appa transferred goods to a third party, Fmicron, on a consignment asis. Fmicron undertoo3 to sell the goods on ehalf of #appa and remit the proceeds, less a commission of 1=>, -hen the final purchaser paid Fmicron for them. +he invoiced value of these goods 0the price paya le y the final purchaser -as <4==,===1. +he goods cost #appa <32=,=== to manufacture. 5y 31 ,arch 2=1= Fmicron had sold goods at an invoiced price of <24=,=== and received payments of <16=,===. Lo payment had een made to #appa y Fmicron y 31 ,arch 2=1=. %ince 31 ,arch 2=1= Fmicron has sold the remaining goods, received all the proceeds, and remitted <36=,=== 0<4==,=== x G=>1 to #appa. 05 mar3s1 0iii1 Fn 1 $pril 2==G #appa sold a property it o-ned to a an3 for <3,===,===. +he carrying value of the property at 1 $pril 2==G -as <2,===,===, of -hich <1,2==,=== -as deprecia le. +he remaining useful economic life of the deprecia le element -as 3= years from 1 $pril 2==G. #appa continued to occupy the property and e responsi le for its security and
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maintenance. +he mar3et value of the property on 1 $pril 2==G -as <5,===,=== and it is considered unli3ely that this -ill fall significantly in the foreseea le future. #appa measures all its property, plant and e!uipment under the cost model. +he terms of the sale allo-ed #appa the option to repurchase the property as follo-s2 Fn 31 ,arch 2=1= for <3,3==,===. Fn 31 ,arch 2=11 for <3,63=,===. Fn 31 ,arch 2=12 for <3,GG3,===. 0@ mar3s1 Re"uired/ .or each of the a ove transactions2 Explain and compute, y applying the principles of "#$% 1&, ho- much revenue should e recognised in the statement of comprehensive income for the year ended 31 ,arch 2=1=. )dentify and compute any other amounts relating to each transaction that -ill e included in the statement of comprehensive income for the year ended 31 ,arch 2=1= and the statement of financial position at 31 ,arch 2=1=. 0+otal 25 mar3s1 0$dapted $77$ Dip ).( Kune 2=1= J41 9uestion : Aart-ay is in the process of preparing its financial statements for the year ended 31 Fcto er 2==6. +he company4s main activity is in the travel industry mainly selling pac3age holidays 0flights and accommodation1 to the general pu lic through the )nternet and retail travel agencies. +he terms under -hich Aart-ay sells its holidays are that a 1=> deposit is re!uired on oo3ing and the alance of the holiday must e paid six -ee3s efore the travel date. )n previous years Aart-ay has recognised revenue 0and profit1 from the sale of its holidays at the date the holiday is actually ta3en. .rom the eginning of Lovem er 2==5, Aart-ay has made it a condition of oo3ing that all customers must have holiday cancellation insurance and as a result it is unli3ely that the outstanding alance of any holidays -ill e unpaid due to cancellation. )n preparing its financial statements to 31 Fcto er 2==6, the directors are proposing to change to recogniBing
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revenue 0and related estimated costs1 at the date -hen a oo3ing is made. +he directors also feel that this change -ill help to negate the adverse effect of comparison -ith last year4s results 0year ended 31 Fcto er 2==51 -hich -ere etter than the current year4s. Re"uired/ 7omment on -hether Aart-ay4s proposal to change the timing of its recognition of its revenue is accepta le and -hether this -ould e a change of accounting policy. 06 mar3s1 0$77$ 2.50"#'1 .inancial (eporting Decem er 2==6 J50 10ii1

N4-19