CTA2021 FAC48624 Term 2 Lecture Notes 11012021

Term 2
Welcome to Term 2
Topics Live classes Screencast (Pre-recorded)
Joint arrangements Yes
Revenue Yes
© Endunamoo CTA Support Course 2021 126

Tutorial
Discussion Question: Manamela Inc.
Submission Date: 27 April 2021
Discussion Date: 4 May 2021

Screencasts
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Joint Arrangements
Exclusion: IFRS11
20 – 23 / B33A – B37: Joint operation accounting

Objective
The objective of IFRS11 Joint Arrangements is to establish principles for financial reporting by entities that have an interest
in arrangements that are controlled jointly (i.e. joint arrangements)
IFRS11 shall be applied by all entities that are a party to a joint arrangement
To primary issues are dealt with in IFRS11:

• Is the arrangement a joint arrangement, and
• If yes, how should the arrangement be classified?

Definitions
A joint arrangement is an arrangement of which two or more parties have joint control. A joint arrangement is either a
joint operation or joint venture
Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the
relevant activities require the unanimous consent of the parties sharing control
(Appendix A / :4 – :7)

Contractual arrangement
Contractual arrangements can be evidenced in several ways. The most common is a written contractual agreement
When joint arrangements are structured through a separate vehicle (e.g. a company or partnership), the contractual
arrangement may be incorporated in the memorandum of incorporation
The contractual arrangement generally deals with matters such as:

• The purpose, activity and duration of the joint arrangement
• How the governing body (e.g. board or committees) are appointed
• The decision making process
• The capital or other contributions required of the parties
• How the parties share assets, liabilities, revenues, expenses or profit or loss relating to the joint arrangement
(Appendix B: B2 – B4)

Concept of ‘joint control’
• An entity that is a party to an arrangement (‘the entity’) shall assess whether the contractual arrangement gives all the
parties, or a group of the parties, (‘all the parties’) control of the arrangement collectively
• All the parties control the arrangement collectively when they must act together to direct the activities that
significantly affect the returns of the arrangement (‘the relevant activities’)
• Once this has been established, joint control exists only when decisions about the relevant activities require the
unanimous consent of the parties that control the arrangement collectively
• In a joint arrangement, no single party controls the arrangement on its own. A party with joint control can prevent
any of the other parties from controlling the arrangement
• An arrangement can be joint arrangement even though not all of its parties have joint control of the arrangement
• (:8 – :11)

Joint control: decision-making process
Sometimes the decision-making process that is agreed upon by the parties in their contractual arrangement leads to
joint control (see LE1)
(Appendix B: B7)
In other circumstances, the contractual arrangement requires a minimum proportion of the voting rights to make
decisions about the relevant activities
However when that minimum proportion can be achieved by more than one combination of the parties agreeing
together, that arrangement is not a joint arrangement unless the contractual arrangement specifies which parties (or
combination of parties) are required to agreed unanimously to decisions about the relevant activities (see LE2)
(Appendix B: B8)

Joint control: protective rights / arbitration
If the requirement for unanimous consent relates only to decisions that give a party protective rights and not to
decisions about the relevant activities of an arrangement, that party is not a party with joint control
(Appendix B: B9)
Clauses on the resolution of disputes, such as arbitration
• These provisions allow for decisions to be made in the absence of unanimous consent among the parties that have joint
control
• The existence of such provisions does not prevent the arrangement from being jointly controlled and, consequently,
from being a joint arrangement
(Appendix B: B10)

LE1: Joint control
CA Ltd agreed with SA Ltd to establish Africa Ltd, an investment vehicle to facilitate their growth expansion into the Africa
continent. Each party agreed to initially acquire 50% of the voting rights in Africa Ltd.
The agreement stipulated that all decisions relating to which countries Africa Ltd should enter would require at least 51%
of the voting rights.
REQUIRED
Indicate whether CA Ltd would consider the arrangement to be a joint arrangement

LE2: Joint control
CA Ltd, SA Ltd and Africa Ltd agreed to establish Global Ltd, an investment vehicle to facilitate their growth expansion
into other countries. CA Ltd, SA Ltd and Africa Ltd each respectively hold 50%, 30% and 20% of the voting rights in Global
Ltd.
The agreement stipulated that all decisions relating to which countries Global Ltd should enter would require at least 75%
of the voting rights.
REQUIRED

LE3: Joint control
into other countries. CA Ltd, SA Ltd and Africa Ltd holds 50%, 25% and 25% of the voting rights of Global Ltd.
The agreement stipulated that all decisions relating to which countries Global Ltd should enter would require at least 70%
of the voting rights. The agreement does not stipulate which parties need to agree in order to achieve the minimum
requirement of 70%.
REQUIRED

LE4: Joint control
into other countries. CA Ltd, SA Ltd and Africa Ltd holds 50%, 25% and 25% of the voting rights of Global Ltd.
The agreement stipulate that all decisions relating to which countries Global Ltd should enter would require at least 70% of
the voting rights. The agreement also stipulated that CA Ltd and Africa Ltd have to agree in order to achieve the minimum
requirement of 70%.
REQUIRED

Classification of a joint arrangement
• A joint arrangement is either a joint operation or joint venture
• The classification depends upon the rights and obligations of the parties to the arrangement
• A joint operation is a joint arrangement whereby the parties that have joint control of the arrangement have rights to
the assets, and obligations for the liabilities, relating to the arrangement. Those parties are called joint operators
• A joint venture is a joint arrangement whereby the parties that have joint control of the arrangement have rights to
the net assets of the arrangement. Those parties are called joint venturers
(:6, :14 - :16)
• The classification of joint arrangements requires the parties to assess their rights and obligations arising from the
arrangement. When making that assessment, an entity shall consider the following:
(a) the structure of the joint arrangement
(b) when the joint arrangement is structured through a separate vehicle:
• the legal form of the separate vehicle
• the terms of the contractual arrangement
• when relevant, other facts and circumstances
(Appendix B: B15)

Decision tree for joint arrangement classification
Structure of
Is the joint arrangement structured as a separate vehicle? No
arrangement
Yes
Legal form of the Does the legal form of the separate vehicle give the parties rights and
Yes
JOINT OPERATION
vehicle obligations relating to the arrangement?
No
Terms of the Do the terms of the contractual arrangement specify that the parties rights and
contractual Yes
obligations?
arrangement
No
Have the parties designed the arrangement so that (a) its activities primarily aim
Other facts and to provide the parties with an output and (b) it depends on the parties on a Yes
circumstances continuous basis for settling the liabilities relating to the activity conducted
through the arrangement?
No
JOINT VENTURE

The structure of the joint arrangement
• A joint arrangement that is not structured through a separate vehicle is a joint operation
(Appendix B:B16)
• If the assets and liabilities are held in a separate vehicle, whose legal form cause the separate vehicle to be
considered in its own right, the arrangement can be either a joint venture or operation
• The terms agreed in their contractual arrangement and, when relevant, other facts and circumstances can override
the assessment of the rights and obligations conferred upon the parties by the legal form of the separate vehicle
(Appendix B:B23)
• The ultimate decision depends on the party’s rights to the assets, and obligations to the liabilities, that are held in a
separate vehicle
(Appendix B:B19 – :B20)

The terms of the contractual arrangement
In some cases, the parties use the contractual arrangement to reverse or modify the rights and obligations conferred
by the legal form of the separate vehicle in which the arrangement has been structured
(Appendix B: B26)
When the contractual arrangement specifies that the parties have rights to the assets, and obligations for the liabilities,
they are parties to a joint operation and do not need to consider other facts and circumstances for the purposes of
classifying the joint arrangement
(Appendix B: B26)
Issues to consider in a question – clear indication of the terms of the contractual arrangement, rights to assets, obligation for
liabilities, revenue, expenses, profit or loss, guarantees
(Appendix B: B27)

Assessing other facts and circumstances
• When the terms of the contractual agreement do not specify that the parties have rights and obligations, other facts
and circumstances need to be considered
• Consideration of other facts and circumstances can lead to an arrangement being classified as a joint operation even if
the legal form confers separation between the parties and the separate vehicle
• When the activities of an arrangement are primarily designed for the provision of output to the parties, this indicates
that the parties have rights to substantially all the economic benefits of the assets of the arrangement
• The parties to such arrangements often ensure their access to the outputs provided by the arrangement by preventing
the arrangement from selling output to third parties
• The effect of an arrangement with such a design and purpose is that the liabilities incurred by the arrangement are, in
substance, satisfied by the cash flows received from the parties through their purchase of the output
• When the parties are substantially the only source of cash flows contributing to the continuity of the operations of
the arrangement, this indicates that the parties have an obligation for the liabilities relating to the arrangement
(Appendix B: B29 - B32)

Structure for discursive questions
Step 1: State the theory. Define a joint arrangement and control
Step 2: Assess the key terms of the contract, e.g. the relevant activities, governing structure and the shareholding
Step 3: Conclude on whether joint control exists or not based on your assessment of the key terms of the contract
Step 4: State the theory relating to the classification
Step 4.1: Determine if there is a separate vehicle. If no separate vehicle, then conclude that it is a joint operation
Step 4.2: Assess the legal form of the entity. If separate vehicle does not confer separate, then conclude that it is a joint
operation
Step 4.3: If a separate vehicle, assess the terms of the contract. If they provide for rights of assets and obligations of the
liabilities, then conclude that it is a joint operation
Step 4.4: If the terms do not provide for rights and obligations, assess other facts and circumstance conclude
Step 5: Answer the question

LE5: Other facts and circumstances
CA Ltd entered into an arrangement with SA Ltd to establish a new private company, Africa (Pty) Ltd, a manufacturer of
home care products. CA Ltd and SA Ltd each own 50% of the ordinary equity of Africa. The board of Africa comprises four
directors and two of those directors are appointed by CA Ltd and SA Ltd respectively. The board is responsible for the
direction of the relevant activities of Africa.
In terms of the agreement, Africa is restricted from selling its output to any party other than CA Ltd and SA Ltd. However,
in the rare instances where there are surplus, this would be sold to third parties at prevailing market prices. The selling
price of the output sold to the parties is determined to ensure that all the operating costs of Africa are covered. If the
selling price is not sufficient to cover the operating costs, CA Ltd and SA Ltd have agreed to make additional capital
contribution in proportion to the equity interest in Africa.
REQUIRED:
Indicate how CA Ltd would classify the arrangement in its financial records
Adapted from a past paper

Accounting for a joint venture
A joint venture shall recognise its interest in a joint venture as an investment and shall account for that investment using
the equity method in accordance with IAS28 Investments in Associates & Joint Ventures
(:24)
A party that participates in, but does not have joint control of, a joint venture shall account for its interest in the
arrangement in accordance with IFRS9 Financial Instruments unless it has significant influence over the joint venture, in
which case it shall account for it in accordance with IAS28
(:25)
In other words, the principles discussed for associates are equally applicable in the instance of joint ventures

Revenue
Revenue
Introduction
Objective
• IFRS15 Revenue from Contracts with Customers establishes principles for reporting information about the nature,
amount, timing and uncertainty of revenue and cash flows arising from a contract with a customer
• The core principle is that an entity shall 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
(:1 - :4)

Scope…
A contract (an agreement between two or more parties that creates enforceable rights and obligations) must first exist
IFRS15 applies to all contracts with customers, except:

• Lease contracts within the scope of IFRS16;
• Financial instruments within the scope of IFRS9, IFRS10, IFRS11, IAS27 and IAS28; and
• Non-monetary exchanges that do not have commercial substance
(:5)
The counterparty must be a customer (a party that has contracted with an entity to obtain goods or services that are an
output of the entity’s ordinary activities in exchange for consideration)
(:6)

Scope
When a contract is partially within the scope of IFRS15 and also within the scope of standards excluded in IFRS15.5, the
parts of the contract should be separated and exclude from the transaction price the amount of that part of the contract
that are initially measured in accordance with other standards
(:7)
IFRS15 also specifies the accounting for the incremental costs of obtaining a contract with a customer and for the costs
incurred to fulfil a contract with a customer if those costs are not within the scope of another standard
(:8)

Revenue model
Step 1 Identify the contract(s) with customers
Step 2 Identity the performance obligations
Step 3 Determine the transaction price
Allocate the transaction price to the performance obligations in the

Step 4 contract
Recognise revenue when (or as) the entity satisfied the performance
Step 5 obligation

Revenue
RECOGNITION PRINCIPLES
Step 1: Identify the contract(s) with customers
Step 1: Identifying the contract
The following criteria must all be met before applying IFRS15 principles to a contract:
• The parties have approved the contract and are committed to perform their respective obligations;
• The entity can identify each party’s rights regarding the goods or services to be transferred;
• The entity can identify the payment terms;
• The contract has commercial substance; and
• It is probable that the entity will collect the consideration (i.e. probability of receipt). Only the customer’s ability and
intention to pay that amount of consideration when it is due are taken into consideration
(:9)

Step 1: Identifying the contract
• If each party to the contract has the unilateral enforceable right to terminate a wholly unperformed contract without
compensating the other party then a contract does not exist
• A contract that meets the requirements of IFRS15.9 at contract inception shall not be reassessed unless there is an
indication of a significant change in facts and circumstances
• However, if it did not initially meet those requirements, it shall continue to be assessed
(:12 - :16)
Consideration received for a contract that does not meet those requirements shall be recognised as a deposit liability
unless:
• the IFRS15.9 criteria are subsequently met when reassessed
• the entity has no remaining obligations to the customer and all, or substantially all, of the consideration has been
received by the entity and is non-refundable; or
• the contract has been terminated and the consideration received from the customer is non-refundable
(:12 - :16)

Step 1: Combination of contracts
One or more contracts entered into at or near the same time with the same customer (or related parties of the customer)
may be combined and accounted for as a single contract if one or more of the following criteria are met:
• the contracts are negotiated as a package with a single commercial objective;
• the amount of consideration to be paid in one contract depends on the price or performance of the other contract; or
• the goods or services promised in the contracts are a single performance obligation
(:17)

Step 1: Contract modifications
• A contract modification is a change in the scope or price (or both) of a contract that is approved by the parties to the
contract
• It is a requirement of IFRS15 that the contract modification be approved by the parties before IFRS15 is applied
• A contract modification may be accounted as a separate contract, an existing contract or a termination of the existing
contract and the creation of a new contract
(:18 - :19)

Revenue
Step 2: Identity the performance obligations
Step 2: Identifying performance obligations
At contract inception, an entity shall identify as a performance obligation each promise to transfer to the customer either:
(a) a good or service that is distinct; or
(b) a series of distinct goods or services that are substantially the same and that have the same pattern of transfer to the
customer, e.g. pay-television subscriptions, cleaning services, etc.
A series of distinct goods or services has the same pattern of transfer to the customer if both of the following criteria are
met:
• each distinct good or service in the series would meet the criteria to be a performance obligation satisfied over
time; and
• the same method would be used to measure the entity’s progress towards the complete satisfaction of the
performance obligation to transfer each distinct good or service in the series to the customer
(:22 - 23)

Step 2: Promises in contracts with customers
• Generally, a contract stipulates the goods or services that an entity promises to transfer to a customer
• However, performance obligations may be implied as a result of a constructive obligation
• Performance obligations do not include activities that an entity must undertake to fulfil a contract unless those
activities transfer a good or service to a customer
(:24 - :25)

Step 2: Distinct goods or services
A good or service is distinct if all of the following criteria are met:
• the customer can benefit from the good or service either on its own or together with other resources that are readily
available to the customer. The fact that the good or service has a standalone selling price is generally sufficient
evidence that the customer can benefit from the good or service on its own or together with other resources. If the
customer can benefit from the good or service on its own, the good is capable of being distinct; and
• within the context of the contract, the entity’s promise to transfer the good or service is separately identifiable from
other promises in the contract
(:27 – :29)
The factors that indicate that entity’s promise is separately identifiable include the following:
• the entity does not use the good or service as an input to produce or deliver the combined output;
• the good or service does not significantly modify or customise another good or service promised in the contract; or
• the good or service is not highly dependent on, or highly interrelated with, other goods or services promised in the
contract
(:27 – :29)

Step 2: Examination technique approach
Step 1: Define the PO
Step 2: Define a distinct good or service
Step 3: Apply the requirements from a customer perspective
Step 4: Provide a sub-conclusion
Step 5: Apply the requirements from a supplier perspective
Step 6: Provide a sub-conclusion
Step 7: Conclude on nature of goods or services
Step 8: Conclude on the number of performance obligation

LE1: Identifying performance obligations
CA Ltd is real estate company and has recently won a tender to market and sell the office blocks of Growthpoint. In terms
of the contract, CA Ltd will be paid a portion of the total promised consideration of R2 million upon selling each storey of
the 20-storeys.
At contract inception, CA Ltd estimated that it will incur R800 000 to sell the office blocks. During the year ended, CA Ltd
undertook a significant marketing campaign at a cost of R200 000 and sold none of the storeys. It also appointed an
experienced sales agent for a period of six months and it expects to pay the agent a total amount of R150 000 (thus far the
agent has been paid R60 000).
REQUIRED
Advise CA Ltd whether it has carried out any performance obligations that will entitle it to invoice its client

LE2: Distinct goods
CA Ltd enters into a contract with a customer that will result in the delivery of multiple units of a highly complex,
specialised device. The terms of the contract require CA Ltd to establish a manufacturing process in order to produce the
contracted units. The specifications are unique to the customer and it was established that each unit can function
independently of the other units.
CA Ltd is responsible for the overall management of the contract, which requires the performance and integration of
various activities including procurement of materials, identifying and managing subcontractors, and performing
manufacturing, assembly and testing.
REQUIRED
Identify the performance obligations in the contract

Step 2: Special considerations - Warranties
• A warranty generally provides a customer with assurance that the related product will function as the parties intended
because it complies with agreed-upon specifications
• If a customer has the option to purchase a warranty separately, the warranty is a distinct service because the entity
promises to provide the service to the customer in addition to the product that has the functionality described in the
contract. In such a case, the warranty would be accounted for as a separate performance obligation
• If there is no option to purchase a warranty separately, the warranty shall be accounted for as a provision in terms of
IAS37
• It is necessary to access: (i) whether the warranty is required by law; (ii) the length of the warranty coverage period; and
(iii) the nature of the tasks that the entity promises to perform to determine the nature of the warranty
(:B28 - B31)

LE3: Warranties
CA Ltd sells Universe smartphone device. A Universe device sold by CA Ltd to customers is covered by a 12-month
warranty provided by CA Ltd. If a faulty device is returned is returned, CA Ltd will repair the device at CA Ltd’s expense.
The warranty only covers manufacturing defects and excludes liquid contact damage and cosmetic damage such as
scratches, dents and broken screens or ports as required by the Consumer Protection Act. Defective devices returned after
the 12-month warranty period are still repaired, but at the cost of the customer.
Every device has its own unique serial number. CA Ltd’s systems link the serial number to the warranty, the date of
purchase and the customer’s details. Customers do not have the option of purchasing the 12-month warranty separately
from CA Ltd.
REQUIRED
Is the warranty a separate performance obligation? (9 marks)

Step 2: Special considerations - Agency
An entity needs to determine whether the nature of its promise is to provide goods and services to a customer (as a
principal) or to arrange or another party to provide the goods and services (as an agent)
To determine the nature of its promise the entity shall:

• identify the specified goods or services to be provided to the customer by another party; and
• assess whether it controls each specified good or service before that good or service is transferred to the customer
(:B34)

When another party is involved in providing goods or services to a customer, an entity that is a principal obtains control
of any one of the following:
• a good or another asset from the other party that it then transfers to the customer (e.g. motor dealer)
• a right to a service to be performed by the other party, which gives the entity the ability to direct that party to provide
the service to the customer on the entity’s behalf (e.g. concerts)
• a good or service from the other party that it then combines with other goods or services in providing the specified
good or service to the customer
(:B35A)

Indicators that an entity is a principal (and therefore does not control the good or service before it is provided to a
customer) include the following:
• The entity is primarily responsible for fulfilling the promise to provide the specified good or service
• The entity has inventory risk before the specific goods or service is transferred to the customer or after the transfer of
control to the customer
• The entity has discretion in establishing prices of the specified goods or services
(:B37)

Revenue
Step 5: Satisfaction of performance obligations
Step 5: Satisfaction of performance obligations
• An entity shall recognise revenue when (or as) the entity satisfies a performance obligation by transferring a promised
good or service (i.e. an asset) to a customer
• At contract inception, an entity determines whether it satisfies the performance obligation over time (default) or at a
point in time
• An asset is transferred when (or as) the customer obtains control of that asset. Control of an asset refers to the ability to
direct the use of, and obtain substantially all of the remaining benefits from, the asset
• When evaluating whether a customer obtains control of an asset, an entity shall consider any agreements to
repurchase the asset
(:31 - :34)

Step 5: Performance obligations satisfied over time
An entity transfers control over time and, therefore, satisfies a performance obligation and recognises revenue over time,
if one of the following criteria is met:
• the customer simultaneously receives and consumes the benefits provided by the entity’s performance as the
entity performs, e.g. provision of security services;
• The entity’s performance creates or enhances an asset that the customer controls as the asset is created or
enhanced, e.g. leasehold improvements; or
• The entity’s performance does not create an asset with an alternative use and the entity has an enforceable right
to payment for performance completed to date. The payment should include a reasonable profit margin, e.g. audit
(:35)

LE4: Satisfaction of performance obligations
CA Ltd manufactures fire engines on an order basis based on customers’ specifications. CA Ltd received an order from
Oakbay to construct a fire engine. The contract price is R3 million and costs to complete are expected to be R2 400 000.
Oakbay has a mine in Kimberly and this is the only mine in Kimberly. The terrain and weather conditions in Kimberly are
unique relative to other parts of the country and as a result the fire engine manufactured in accordance with Oakbay’s
specifications cannot be sold to any other client without major modifications.
If Oakbay cancels the contracts before construction is completed, Oakbay would be required to pay CA Ltd all the costs
incurred to date plus a margin of 20%. On 1 December 2017, the total construction costs incurred amounted to R1 920 000.
REQUIRED: Advise CA Ltd whether its performance obligations will be satisfied over time or at a point in time if
(i) The profit margin of 20% is considered a reasonable profit margin in terms of IFRS15.B9
(ii) The profit margin of 20% is not considered a reasonable profit margin in terms of IFRS15.B9

Step 5: Measuring progress towards complete satisfaction of
a performance obligation
• Appropriate methods of measuring progress include output (value based/units based) and input (cost based/labour
hours) methods
• Revenue is recognised only if the progress towards complete satisfaction of the performance obligation can be
reasonably measured
• If the outcome of a performance cannot be reasonably measured, but the entity expects to recover the costs incurred
revenue shall be recognised only to the extent of costs incurred
• A shortcoming of input methods is that there may not be a direct relationship between the entity’s inputs and the
transfer of control of goods or services to a customer
(:39 - :45 / :B15)

Input methods
Cost-based input method might require an adjustment to the measure of progress may be required in the following
circumstances:
• costs that do not contribute to an entity’s progress in satisfying the performance obligation, e.g. abnormal losses or
wastage
• costs incurred are not proportionate to the entity’s progress in satisfying the performance obligation. Revenue
would be recognised in at an amount equal to the cost of good incurred if the following conditions are met:
(i) the good is not distinct;
(ii) customer is expected to obtain control of the good significantly before receiving the services related to the
good;
(iii) cost incurred is significant relative to the total expected costs; and
(iv) the entity procures the good from a third party and is not significantly involved in designing and manufacturing
the good.
(:B19)

LE5: Input or cost-based methods
CA Ltd entered into a contract to construct a stadium for the City of Tshwane. The estimated contract price is R36 million
and the total costs of construction are estimated at R30 million, including the cost of R12 million for world-class folding
chairs to be installed in the stadium.
In accordance with the agreement, City of Tshwane has control over any work in process and should the contract be
terminated, it will be entitled to all the materials and work performed to date.
During the first year, CA Ltd incurred total costs amount to R18 million relating to the construction of the stadium.
Included in the cost was R1 million for wasted labour and materials and R12 million for the procured but yet uninstalled
stadium chairs. The chairs will be installed in the second year.
CA Ltd determined that the contract is one performance obligation that is satisfied over time as the stadium is
constructed, and that it is the principal in the arrangement.
REQUIRED
Assuming the appropriate method of recognising revenue is the cost based approach, determine, with reasons, the
appropriate revenue to be recognised in the first year

Step 5: Performance obligations satisfied at a point in time
An entity considers the requirements of control including whether:

• the entity has a present right to payment for the asset
• the customer has legal title to the asset. If legal title is retained by the entity solely as protection against the customer’s
failure to pay, this would not preclude the customer from obtaining control of the asset
• the entity has transferred physical possession of the asset – although it may not coincide with control of an asset for
some repurchase agreements and consignment arrangements
• the customer has significant risk and rewards of ownership of the asset
• the customer has accepted the asset
(:38)

Step 5: Bill and hold arrangements
• In some contracts, a customer may obtain control of a product even though that product remains in the entity’s
physical possession
• In that case, the customer has the ability to direct the use of, and obtain substantially all of the remaining benefits from,
the product even though it has decided not to exercise its right to take physical possession of that product
• Consequently, the entity does not control the product. Instead, the entity provides custodial services to the customer
over the customer’s asset
• A bill-and-hold arrangement is a contract under which an entity bills a customer for a product but the entity retains
physical possession of the product until it is transferred to the customer at a point in time in the future
• For a customer to have obtained control of a product in a bill-and-hold arrangement, all of the following criteria must
be met:
(a) the reason for the bill-and-hold arrangement must be substantive (for example, the customer has requested the
arrangement);
(b) the product must be identified separately as belonging to the customer;
(c) the product currently must be ready for physical transfer to the customer; and
(d) the entity cannot have the ability to use the product or to direct it to another customer.
(Appendix B: B79 – B81)

Revenue
MEASUREMENT PRINCIPLES
Step 3: Determine the transaction price
Step 3: Determining the transaction price
• When (or as) a performance obligation is satisfied, an entity shall recognise as revenue as the amount of the
transaction price that is allocated to that performance obligation
• An entity shall consider the terms of the contract and its customary business practises to determine the transaction
price
• The transaction price is the amount of consideration to which an entity expects to be entitled in exchange for
transferring promised goods or services to a customer, excluding amounts collected on behalf of third parties (e.g. VAT)
• The consideration promised may include fixed amount, variable amounts, or both
(:46 - :47)

Step 3: Variable consideration
• The amount of consideration can vary because of discounts, rebates, refunds, credits, price concessions, incentives,
performance bonus, penalties or other similar items
• The promised consideration can also vary if the entitlement to the consideration is contingent on a future event
• The variability relating to the contract may be explicitly stated in the contract, arise from a constructive obligation to
offer a price concession or other facts and circumstances which indicate that the entity’s intention at contract inception
was to offer a price concession to the customer
• The variable consideration may be estimated based on expected values or the most likely amount
(:53 - :50)
• An entity shall recognise a refund liability if the entity receives a consideration from a customer and expects to refund
some or all of that consideration to the customer at the amount which will be refundable (i.e. amount not included in
the transaction price)
• The transaction price shall include variable consideration only to the extent that it is highly probable that a significant
reversal in the amount of the cumulative revenue recognised will not occur when the uncertainty is resolved
• The assessment of highly probable shall consider both the likelihood and the magnitude of the revenue reversal and
consider other factors, e.g. susceptibility to external influence, period, entity’s experience
(:55 - :57)

LE6: Variable consideration
CA Ltd entered into two significant contracts in the most recent year end. The year end is 30 June. You are required to
provide journal entries to account for the following contracts:
Contract 1
On 1 January 2020, CA Ltd was awarded a contract to manufacture and deliver 1 000 items. All the items were delivered on
1 May 2020. The contract consideration was R2 million and CA Ltd generated a gross margin of 25%. It terms of company
policy, customers may return the goods within a period a 90 days for a full refund. Based on history, on 30 June 2020 the
customer was expected to return 55 items for a full refund. On 31 July 2020, only 40 items were returned for a full refund.
Contract 2
On 28 February 2019, CA Ltd entered into an 18 months contract to deliver a minimum of 1 000 items and a maximum of
2 000 items. The stand-alone selling price of each item was agreed at R600 per unit. In order to incentivise the customer,
CA Ltd offered the customer a volume discount of 10% for all purchases to the extent that the total purchases over the
contract period exceeds 1 500 items. The volume discount will be applied retrospectively.
On 30 June 2019: Customer had bought 250 items and it was not likely that it will reach the threshold of 1 500 items.
On 30 June 2020: Customer had purchased a total of 1 300 items and it was likely that it will purchase a further 300 items
before the end of the contract.

Step 3: A significant financing component
• Involves a situation where consideration is deferred by the client or where consideration has been advanced by the
client to the entity
• The promised consideration shall be adjusted for the effects of the time value of money if the timing of payments
agreed to by the parties provides the customer or the entity with a significant benefit of financing the transfer of goods
or services to the customer
• If the financing period is estimated, at the contract inception, to be one year or less, then the effects of financing may
be ignored
• The effects of financing (interest revenue or interest expense) shall be accounted for separately
(:61 - :63)

Step 3: A significant financing component
A contract with a customer would not have a significant financing component if any of the following factors exists:
• The customer paid for the goods or services in advance and the timing of the transfer is at the discretion of the
customer
• A substantial amount of the promised consideration is variable and the amount or timing is based on the occurrence or
non-occurrence of a future event that is not substantially within the control of the customer or entity (e.g. sales-based
royalty)
• The difference between the promised consideration and the cash selling price arises for reasons other the provision of
finance, and the difference between those is proportional to the reason for the difference (e.g. milestone payment)
(:62)
• The discount rate shall reflect a separate financing transaction between the customer and the entity, at contract
inception, taking into consideration the credit characteristics of the party receiving financing in the contract as well as
any security to be provided
• In other words, the rate applicable to the entity or customer will be utilised and not necessarily the market rate
• The discount rate shall not be subsequently adjust for changes in interest rates or other circumstances
(:63 - :65)

LE7: A significant financing component
CA Ltd, a property developer, entered into a transaction with PropCo to sell a property in Cape Town. The selling price of
the property was R10 million. CA Ltd and PropCo agreed that the consideration of R10 million would be paid over five
equal annual instalments and the instalments would include an interest charge of 8% per annum.
CA Ltd assessed the contract and considered that it included a significant financing component. The annual interest rate
charged does not reflect a rate for a separate financing transaction. The rate for a separate transaction is 15% per annum.
REQUIRED
Calculate the revenue and interest to be recognised inYear 1

LE8: A significant financing component
CA Ltd, a property developer, entered into a transaction with PropCo to develop a property in Cape Town over a period of
two years. PropCo was given the option to either pay R10 million in advance or R15 million at the end of the completion of
the property. PropCo elected to pay R10 million at contract inception, which was based on a market related interest rate of
22,4745% per annum.
CA Ltd assessed the contract and considered that it included a significant financing component. CA Ltd’s incremental
borrowing interest rate was 15% per annum.
REQUIRED
Prepare the necessary journal entries forYear 1 & 2

Step 3: Non-cash consideration
• The non-cash consideration shall be measured at fair value
• If fair value cannot be reasonably estimated, the consideration shall be measured indirectly by reference to the stand-
alone selling price of the goods or services promised
• Any asset arising from the non-cash consideration would be accounted with the relevant standard, e.g. IFRS9. As a
result, variations in the fair value of the non-cash consideration because of the form of consideration shall be accounted
for in accordance with the other relevant standard
• However, any other variations in the fair value of the non-consideration shall be accounted for in terms of IFRS15
variable consideration principles
• If a customer contributes goods or services to facilitate an entity’s fulfilment of the contract, the entity shall assess
whether it obtains control of those contributed goods or services
• If so, the contributed goods or services shall be accounted for as non-cash consideration received from the customer
(:66 - :69)

LE9: Non-cash consideration
On 1 January 2021, CA Ltd entered into a contract with a customer for the delivery of a machine for a consideration of R3
million. The customer settled the consideration due by transferring its own ordinary shares.
The fair value of the ordinary shares on 1 January 2017 date were reliably estimated at R3 100 000. On 28 February 2021,
the financial year end of CA Ltd, the fair value of the shares was R3 250 000. The shares were carried at fair value through
profit or loss.
REQUIRED
Prepare the necessary journal entries. Ignore tax.

Step 3: Consideration payable to a customer
• Consideration payable may include cash amounts, credit or other items that can be applied against future purchases
• The consideration payable shall be accounted for as a reduction of the transaction price and, therefore, of revenue
unless the payment to the customer is in exchange for a distinct good or service that the customer transfers to the
entity
• In which case, the purchase of the good or service from the customer shall be accounted for as other purchases
from suppliers
• If the amount of the consideration payable exceeds the fair value of the good or service received, the excess shall be
accounted for as a reduction of the transaction price
• If the entity cannot reasonably estimate the fair value of the good or service received, the entire consideration
payable shall be accounted for as reduction of the transaction price
• If accounted as a reduction to the transaction price, an entity shall recognise the reduction of the revenue when (or as)
the later of either of the following events occurs:
➢ the entity recognises revenue for the transfer of the related goods or services to the customer; and
➢ the entity pays or promises to pay the consideration
(:70 - :72)

LE10: Consideration payable to a customer
CA Ltd is a manufacturer of tablets. During the most recent year end, CA Ltd sold 1 000 tablets to Cell C for a consideration
of R970 000. In terms of the purchase agreement, CA Ltd will pay an amount of R30 000 to Cell C towards the
advertisement of the tablets on the cover page of Cell C’s next quarterly marketing booklet. Other market participants
would normally pay an amount of R20 000 to place an advert on the cover page of Cell C’s quarterly marketing booklet.
The marketing booklet is managed by another division of Cell C. Therefore, the services offered by this division are
considered to be distinct.
REQUIRED
Determine how much revenue would be recognised by CA Ltd in the most recent financial year end

Revenue
MEASUREMENT PRINCIPLES
Step 4: Allocating the transaction price
Step 4: Allocation of a discount
• An entity shall allocate the transaction price to each performance obligation identified in the contract based on a
relative stand-alone selling price basis
• The stand-alone selling price is the price at which an entity would sell a promised good or service separately to a
customer
• The stand-alone selling price is often the observable price; however, in instances where it is not provided it can be
estimated based on the adjusted market assessment approach, expected costs plus a margin approach or residual
approach
(:73 - :80)
• The discount is received when the sum of the stand-alone selling prices of the promises goods or services in the
contract exceeds the promised consideration in a contract
• The entity shall allocate a discount proportionately to all performance obligation in the contract based on the
relative stand-alone selling prices of the underlying goods or services unless there is observable evidence that the
entire discount relates to only one or more, but not all, performance obligations in a contract
(:81)

Step 4: Allocation of a discount
The latter is the case when all of the following criteria are met:
• the entity regularly sells each distinct good or service in the contract on a stand-alone basis;
• the entity also regularly sells on a stand-alone basis a bundle of some of those distinct goods or services at a discount to
the stand-alone selling prices; and
• the attributable discount is substantially the same as the discount in the contract and analysis of the goods or services
in each bundle provides observable evidence of the performance obligation to which the entire discount in the contract
belongs
The discount is allocated before the residual approach is applied

(:82 - :83)

LE11: Allocation of a transaction price
CA Ltd entered into two significant contracts in the most recent year end. The year end is 30 June. You are required to
provide journal entries for the following contracts:
Transaction 1
CA Ltd, a motor dealer, entered into a contract with a customer for a consideration of R300 000. In terms of the contract,
CA Ltd is required to provide the customer with a motor vehicle with a market price of R280 000 and one year service
worth R40 000. The motor vehicle was delivered in the first year while the service was performed in the second year.
Transaction 2
CA Ltd, a household appliance retailer, entered into a contract with a customer for a consideration of R11 500. The contract
provides for the delivery of 1 television set, 1 Dstv decoder and 1 Dstv installation voucher. The stand alone selling prices of
these items are R9 000, R3 000 and R500 respectively. CA Ltd normally sells the Dstv decoder and the installation voucher
together for R2 500. The television set is normally not discounted. The television set and decoder were delivered in the first
year while the installation voucher were delivered in year 2.
REQUIRED
Determine the amount of revenue to be recognised inYear 1 andYear 2

Step 4: Customer options
• Customer options include customer award credits (or points), contract renewal options or other discounts on future
goods or services
• If, in a contract, an entity grants a customer the option to acquire additional goods or services, that option gives rise to
a performance obligation only if the option provides a material right to the customer that it would not receive
without entering into that contract
• If the option provides a material right to the customer, the customer in effect pays the entity in advance for future
goods or services, and the entity recognises revenue when those future goods or services are transferred or when the
option expires
• If a customer has the option to acquire an additional good or service at its stand-alone price, that option does not
provide the customer with a material right even if the option can be exercised only by entering into a previous
contract
(:B40)

LE12: Customer loyalty
CA Ltd launched a new customer loyalty programme on 1 January 2019 that rewards a customer with one customer loyalty
point for every R200 of purchases. Each point is redeemable for discount on future purchases of CA Ltd products. The
estimated stand-alone selling price of one point is 80 cents. The financial year end of CA Ltd is 31 December.
During FY2019, CA Ltd made sales of R40 million (the stand-alone selling prices of the sold products). During the year, a
total of 100 000 points were redeemed. On 31 December 2019, it expected a total of 180 000 points to be redeemed.
During FY2020, CA Ltd made sales of R45 million. During the year, 170 000 points were redeemed, of which 50 000 points
related to points awarded in FY2019. On 31 December 2020, it expected a total of 130 000 more points to be redeemed in
the future, of which 40 000 points related to points awarded in the prior year.
REQUIRED
Prepare the necessary journal entries for FY2019 and FY2020

Revenue
Contract costs
Contract costs: incremental costs of obtaining a contract
• An entity shall recognise as an asset the incremental costs (i.e. avoidable costs) of obtaining a contract with a customer
if the entity expects to recover those costs (e.g. sales commission)
• However, if the amortisation of those costs would be recognised over a period one year or less, then those costs could
be expensed when incurred
• Costs to obtain a contract that would been incurred regardless of whether the contract was obtained shall be
recognised as an expense when incurred (e.g. marketing costs) unless those costs are explicitly chargeable to the
customer regardless of whether the contract is obtained
(:91 – :94)

Contract costs: incremental costs of obtaining a contract
Did the entity incur costs in its
efforts to obtain a contract with a
customer?
Yes
Are those costs incremental No Are those costs explicitly chargeable

(only incurred if the contract to the customer regardless of
is obtained)? whether the contract is obtained?
Yes No
Does the entity expect to recover No

Expense costs as incurred
those costs?
Yes
Yes
Is the amortisation period of the Yes The entity may either expense as
asset one year or less? incurred or recognise as an asset
No
Recognise as an asset the incremental costs of obtaining a contract
Adapted from PwC – Revenue Guide

Contract costs: costs to fulfil a contract
If the costs incurred in fulfilling a contract with a customer are not within the scope of another standard (e.g. IAS2, IAS16
or IAS38), an entity shall recognise as an asset from the costs incurred to fulfil a contract only if those costs meet all of the
following criteria:
• the costs relate directly to a contract or to an anticipated that the entity can specifically identify;
• the costs generated or enhance resources of the entity that will be used in satisfying performance obligations in the
future; and
• the costs are expected to be recovered
Costs that are specifically included and excluded are discussed

(:95 - :98)

Contract costs: amortisation and impairment
• An asset recognised shall be amortised on a systematic basis that is consistent with the transfer to the customer of the
goods or services to which the asset relates
• An entity shall recognise an impairment loss in profit or loss to the extent that the carrying amount of an asset
recognised exceeds:
➢ the remaining amount of the consideration that the entity expects to receive in exchange for the goods or services
to which the asset relates; less
➢ the costs that relate directly to providing those goods or services and that have not been recognised as expenses
(:99 - :101)

Contract costs: amortisation and impairment
On 1 January 2020, CA Ltd won a tender from SAA to manufacture a new regional aircraft. The expected delivery date is 30
June 2021. The transaction price was agreed at R50 million. The total costs expected to be incurred under the contract was
R40 million (excluding design costs). On contract inception, CA Ltd incurred R2 400 000 in designing the exterior and the
engineering aspects of the aircraft. This cost was capitalised in accordance with the requirements of IFRS15 paragraph 95.
The year end of CA Ltd is 31 December 2020.
On 31 December 2020, the aircraft was 80% complete and on that date SAA had paid a total of R47 750 000 to CA Ltd. Total
costs incurred to date was R38 million (excluding the design costs). CA Ltd expected to incur a further R2 million in order to
complete the aircraft.
REQUIRED
Calculate the impact on profit or loss arising from the design costs in FY2020

Revenue
Presentation and disclosure

Presentation issues
• After performance by either the entity or the customer, an entity shall recognise either a contract asset, contract
liability or a receivable
• The presentation is dependent on the entity’s performance and customer’s payments
• A contract asset is presented when an entity has transferred goods and services to the customer before payment is
made or due
• A contract liability shall be presented when the customer has paid a consideration, or when payment is unconditionally
due to the entity (whichever is earlier) to the entity before the entity has transferred goods or services
• A receivable shall be presented separately when an entity has unconditional right to consideration
• A right to consideration is unconditional if only the passage of time is required before payment is due
(:105 - :108)

LE14: Presentation
On 1 July 2020, CA Ltd was awarded a contract to construct a hospital in exchange for a consideration of R20 million. The
contract includes a 10% retention fee, which is payable six months after the completion of the contract. The contract is for
a duration of two years. All contract work to be certified by an external engineer. The year end of CA Ltd is 31 December.
In terms of the contract, the contract payments are structured as follows:
• A payment of R7 million is due when the hospital is 30% complete
• A payment of R11 million is payable when the hospital is 100% complete
• Balance of payment is payable six months after the completion
CA Ltd requested an advance payment of R500 000 from the customer on contract inception. This payment will be offset
from the first payment due from by customer to CA Ltd.
On 31 December 2020, it was certified that CA Ltd was 25% complete with regards to the construction of the hospital.
Total costs of R3 500 000 were incurred towards the construction. On 15 January 2021, an engineer certified that CA Ltd
was 30% done. On that date, an invoice for the first payment was issued to the client and it was paid on 31 January 2021.

LE14: Presentation
REQUIRED
Prepare all the journal entries required to correctly present the contract in the financial statements of CA Ltd for the years
ended 31 December 2020 and 2021.
Please note:
• There is no significant financing component in the deposit paid
• The construction is single performance obligation satisfied over time
• CA Ltd uses the output based method in recognising revenue

Disclosure requirements
• Users need to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts
with customers
• An entity shall disclose qualitative and quantitative information about all of the following:
➢ Its contracts with customers
➢ The significant judgements, changes in the judgments, made
➢ Any assets recognised from the costs to obtain or fulfil a contract
• The level of detail shall be carefully considered
(:110 - :111)

Disclosure: contracts with customers
• An entity shall separately disclose revenue recognised from contracts with customers and any impairment losses
recognised on any receivables or contract assets
• An entity shall disaggregate revenue recognised from contracts with customers into categories (see B87 – B89 for
guidance)
• An entity shall disclose qualitative and quantitative information about the following:
➢ Contract balances
➢ Performance obligations
➢ Transaction price allocated to the remaining performance obligations
(:113 - :122)

Disclosure: significant judgements
• The judgements that significantly affect the determination of the amount and timing of revenue
• The following shall be explained:
➢ The timing of satisfaction of performance obligations
➢ The transaction price and the amounts allocated to the performance obligations
(:123 - :126)

Disclosure: contract cost assets
• An entity shall describe both the judgements to determine contract costs and the amortisation method
(‘qualitative information’)
• An entity shall disclose the closing balance of contract cost assets by main category, and the amortisation
and any impairment losses recognised
(:127 - :128)

Lecturers
Rendani Muthelo & Ziphozonke Hadebe
Lecturer’s WhatsApp: +2782 432 1267
CTA Caretaker: ctacare@endunamoo.co.za

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Term 2

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Screencast available for UNISA Test 2 (2019)

Screencast available for UNISA Test 2 (2018)

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To primary issues are dealt with in IFRS11:

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The contractual arrangement generally deals with matters such as:

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IFRS15 applies to all contracts with customers, except:

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Step 1 Identify the contract(s) with customers

Step 2 Identity the performance obligations

Step 3 Determine the transaction price

Allocate the transaction price to the performance obligations in the

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To determine the nature of its promise the entity shall:

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