FAC4864 102 2023 0 B

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Tutorial Letter 102/0/2023
APPLIED FINANCIAL ACCOUNTING II
FAC4864/NFA4864/ZFA4864
Year module
Department of Financial Governance
IMPORTANT INFORMATION:
This tutorial letter contains important information

about your module.
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INDEX Page
Due date 3
Personnel and contact details 3
Prescribed method of study 3
Suggested working programme 4
SAICA’s Principles of Examination Levels 4
Examination technique 5
United Nations Global Compact Principles 9
Learning unit 1 Revenue 10
2 Joint Arrangements 26
Self-assessment questions and suggested solutions 31
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DUE DATE
DUE DATE FOR THIS TUTORIAL LETTER: 7 FEBRUARY 2023
TEST 1 ON TUTORIAL 102: 14 MARCH 2023
PERSONNEL AND CONTACT DETAILS

Personnel Telephone
Number
Lecturers
Ms T Mahuma (course leader) 012 481 2716
Ms S Aboobaker 012 429 6831
Mr H Combrink 012 429 4792
Mr P Masha -
Mr S Mlotshwa -
Ms A Oosthuizen 012 429 8971
Ms T van Mourik 012 429 3549
Ms C Wright 012 429 2004
Please send all e-mail queries to: fac4864postgrad@unisa.ac.za
Please use the module telephone number to contact the lecturers: 012 429-4720
PRESCRIBED METHOD OF STUDY

1. Firstly, study the relevant chapter(s) in your prescribed textbook so that you master the basic
principles and supplement this with the additional information in the learning unit (where
applicable).
2. Read the standards and interpretation(s) covered by the learning unit.
3. Do the questions in the study material and make sure you understand the principles contained
in the questions.
4. Consider whether you have achieved the specific outcomes of the learning unit.
5. After completion of all the learning units, attempt the self-assessment questions (open book,
but within the time constraint) to test whether you have mastered the contents of this tutorial
letter.
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SUGGESTED WORKING PROGRAMME

FEBRUARY 2023
WEDNESDAY THURSDAY FRIDAY SATURDAY SUNDAY MONDAY TUESDAY
1 2 3 4 5 6 7
Revenue Revenue Revenue Revenue Joint Do self- Do self-
arrangements assessment assessment
questions questions
SAICA’S PRINCIPLES OF EXAMINATION LEVELS

The module is on NQF level 8 and has the following exit level outcomes:
1. Apply sound accounting theory and practice relevant to the accounting function in business.
2. Demonstrate the ability to communicate skills in a rational and logical manner.
3. Practise the ethics pertinent to Accounting, Business, Commerce and Management and in
particular those pertinent to an Accountant and Independent Auditor.
4. Demonstrate an advanced understanding of the theories and practices pertaining to the field of
Financial Accounting, Management Accounting, Auditing and Taxation specifically and also in
the related fields of business, commerce and management studies.
5. Identify and solve problems, specifically pertaining to the field of Financial Accounting,
Management Accounting, Auditing and Taxation, but also in the related fields of business,
commerce and management studies.
6. Demonstrate proficiency in managing the applied accounting sciences' activity and the ability to
conduct applied accounting engagements, both assurance and consulting, in diverse business
environments.
SAICA’s principles of examination levels provide guidance on how the standards (or topics within a
standard) will be examined.
Throughout the study material we will refer you to the following principles of examination levels:
1. Issues that are at a core level
Issues are at a core level if

• they are based on a significant conceptual underpinning/foundation of current financial
accounting (i.e., based on identification, recognition, measurement and presentation, and
the disclosure of elements); or
• they are prevalent (i.e., commonly encountered in practice in the course of an entry-level
chartered accountant’s work). Here, the emphasis is on issues that are of a more general
nature.
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2. Issues that are at an awareness level
Awareness means that an issue is not core, but an entry-level chartered accountant must know
about it. It is important for the chartered accountant to be able to identify that it is an issue that
potentially has significant accounting implications and requires additional or specialist
knowledge of International Financial Reporting Standards (IFRSs). The chartered accountant
would need to be able to identify and describe the accounting issue and read up on it further
and would be expected to perform basic processing of the transaction when the numbers are
given (e.g., obtained from an expert). A good example might be borrowing costs: an entry-level
chartered accountant should be able to prepare the journal for capitalising any qualifying
borrowing costs as part of property, plant and equipment when the borrowing cost amount has
been supplied.
3. Issues that are excluded
The following standards are excluded from the syllabus:
• IFRS 1, First-time Adoption of International Financial Reporting Standards

• IFRS 4, Insurance Contracts
• IFRS 6, Exploration for and Evaluation of Mineral Resources
• IFRS 8, Operating Segments
• IFRS 14, Regulatory Deferral Accounts
• IFRS 17, Insurance Contracts
• IAS 20, Government Grants
• IAS 26, Accounting and Reporting by Retirement Benefit Plans
• IAS 29, Financial Reporting in Hyperinflationary Economics
• IAS 33, Earnings per Share
• IAS 34, Interim Financial Reporting
• IAS 41, Agriculture
Please note the scope of all standards is at an awareness level, even if a standard is excluded.
Exclusions within any standard will be specifically identified in the study material.
The treatment of any interpretation note will follow the principles of examination levels pertaining to
the related standard.
EXAMINATION TECHNIQUE
1. Introduction
Examination technique remains the key distinguishing feature between candidates who pass
and those who fail this module. You should practise answering questions under exam conditions
by preparing the solutions within the given time limits and then marking your solutions. If you
mark your solutions, you will learn from your mistakes.
2. Examination technique
General issues relating to examination technique were identified from a review of candidates’
answers to past examination questions. These issues affected the overall performance of
candidates. Although these aspects seem like common sense, candidates who pay attention to
them are likely to obtain better marks.
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To improve your overall examination technique and performance, take note of the following
pointers:
• Discussion questions
When you answer a discussion question, lay the foundation of your answer by applying
the relevant theory and demonstrating insight into the question.
Identify all the issues and address all considerations in your application. Remember to
provide a conclusion.
Refer to the video on myUnisa detailing the examination technique for discussion type
questions.
Avoid using your own abbreviations (SMS writing style) because the marker will not be
able to interpret abbreviations that are not commonly used and will therefore not award
marks for the relevant section(s). The increased use of an SMS style of writing in a
professional examination is a major concern. You should pay specific attention to the
way in which you write your answers and bear in mind that, in a professional
examination, marks are awarded for presentation.
SAICA has adopted a competency framework that outlines pervasive and technical
competencies that entry-level chartered accountants (CAs) must be able to demonstrate.
These competencies include a number of professional skills, one of which is the ability to
communicate effectively and efficiently. Refer to SAICA’s guidelines for candidates relating
to the assessment of communication skills in the Initial Test of Competence.
Note that no marks are awarded for theory in an answer to a discussion question. Marks
are awarded for the application of the theory. However, the suggested solutions for
discussion questions will include the relevant theory for completeness and to assist you
with the application of the theory. Remember that the information in the scenario will
determine the applicable theory in the standards to use as basis for the answer.
You should not waste time by including theory in an answer to a discussion question
since you will not earn any marks for it.
• Journal entries
Describe the specific accounts that are affected by the journals and clearly convey the
classification of the accounts (e.g., P/L, OCI, SFP, SCE). Ensure that the journal entries
are processed the correct way round. Indicate the debit and credit of accounts clearly.
Narrations to journals should be provided, except when it is stated in a question that a

narration is not required.
Refer to the video on myUnisa detailing the examination technique for journal entry type
questions.
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• Layout and presentation
You should allocate time to planning the layout and the presentation of your answers
before committing thought to paper. Very often, candidates start to write an answer without
having read the question properly, which invariably leads to, for example, parts of the same
question being answered in several places, or facts being restated in different parts. Marks
are awarded for appropriate presentation and candidates should answer questions in the
required format, that is, in the form of a letter, a memorandum or a report, if that is what is
required.
The quality of handwriting is also an ongoing problem. The onus is on you, the
candidate, to produce legible answers.
• Irrelevancy
Marks are awarded for quality, not quantity. Long-windedness is no substitute for clear,
concise and logical thinking and good presentation. You should bear in mind that a display
of irrelevant knowledge, however sound, will not earn you any marks.
• Calculations
Always show all your calculations. Your calculations should contain a reference when used
in a solution. All calculations are marked, if used. Calculations done in pencil will not be
marked.
• Time management
Use the reading time allocated to a question wisely. Highlight important issues and try to
envisage what is required in the answer.
Budget time for each question. The marks allocated to a question are an indication of the
relevant importance the examiners attach to that question and thus the time that should
be spent on it. Beware of the tendency to spend too much time on the first question
attempted and too little time on the last. Never overrun on time on any question; rather
return to it after you have attempted all the other questions.
• Recommendations/interpretations
Responses to these requirements are generally poor, either because candidates are
unable to explain principles that they can apply numerically or because they are reluctant
to commit themselves to one course of action. It is essential to make a recommendation
when a question calls for it and to support it with reasons. Both the direction of the
recommendation (i.e., to do or not to do something) and the quality of the arguments – in
other words, whether they are relevant to the actual case and whether the final
recommendation is consistent with those arguments – are important. Unnecessary time is
wasted by stating all the alternatives.
• Open-book examination
You must familiarise yourself with the open-book policy, specifically with respect to the
following:
• No other sources (i.e., tutorial letters etc.) are allowed to be used or accessed during
the assessments and examinations.
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• Candidates are only allowed to highlight, underline, side-line and flag in the permitted
texts. Writing on flags is permitted for reference and cross-referencing purposes
only, that is, writing may only refer to the name or the number of the relevant
discipline, standard, statement, or section in the legislation.
Any contravention of this regulation is considered misconduct.
Refer to the video on myUnisa detailing the examination technique for presentation type
questions.
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THE UNITED NATIONS GLOBAL COMPACT PRINCIPLES
INTRODUCTION
The United Nations Global Compact (UNGC) is underpinned on the principle of

corporate sustainability which emphasises the value and principles-based approach of
conducting business.
The UNGC established the ten principles based on the four main values: human rights,
labour practices, environmental concerns and anti-corruption.
The summary of the principles is provided on the table below.
OBJECTIVES/OUTCOMES
After you have engaged this topic, you should be able to demonstrate an awareness of
the importance of the UNGC principles.
This topic is not examinable, but it is important that you should have sufficient awareness
of these principles, because they are applicable in practice.
The summary of the 10 UNGC principles
UNGC Human rights 1. Businesses should support and respect the protection of
Ten internationally proclaimed human rights.
principles 2. Businesses should ensure that they are not complicit in human
rights abuses.
Labour 3. Businesses should uphold the freedom of association and the
effective recognition of the right to collective bargaining.
4. Businesses should eliminate all forms of forced and compulsory
labour.
5. Businesses should effectively abolish child labour.
6. Businesses should eliminate discrimination in respect of
employment and occupation.
Environment 7. Businesses should support a precautionary approach to
environmental challenges.
8. Businesses should undertake initiatives to promote greater
environmental responsibility.
9. Businesses should encourage the development and diffusion of
environmentally friendly technologies
Anti-Corruption 10. Businesses should work against corruption in all its forms,
including extortion and bribery.
Source: Greenstone, 2014
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LEARNING UNIT 1 – REVENUE
INTRODUCTION
IFRS 15 establishes a single framework for the recognition and measurement of

revenue. The core principle is that a vendor recognises revenue when control over the
good or service is transferred to a customer.
UNGC principle 10 is applicable here, stating that businesses should work against
corruption in all its forms, including extortion and bribery.
OBJECTIVES/OUTCOMES
At the end of this learning unit, you should be able to
• Identify contracts with customers within the scope of IFRS 15.

• Identify combination of contracts and contract modifications.
• Identify separate performance obligations.
• Determine the transaction price and the allocation thereof to separate performance
obligations.
• Recognise revenue when performance obligations have been satisfied.
• Account for contract costs.
• Present and disclose revenue in the annual financial statements.
PRESCRIBED STUDY MATERIAL
The following must be studied before you attempt the questions in this learning unit:
1. IFRS 15 Revenue from Contracts with Customers (including the illustrative

examples).
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THE REST OF LEARNING UNIT 1 IS BASED ON THE ASSUMPTION THAT YOU

HAVE ALREADY STUDIED THE RELEVANT PRESCRIBED STUDY MATERIAL.
SECTION A - SAICA’S PRINCIPLES OF EXAMINATION LEVELS

The SAICA principles of examination levels provides guidance on how the standards (or topics
within a standard) will be examined.
The principles of examination levels for IFRS 15 are as follows:
Description Paragraph Level Notes

Objective 1 Core
2–4 Core Meeting the objective
Scope 5–8 Awareness
Recognition 9 – 17 Awareness Identification and combination of
contracts
18 – 21 Awareness Contract modifications
22 – 45 Core Identifying performance obligations
26 (i) Excluded Licensing
B52 – B63B Excluded Licensing
26 (j) Core Customer options for additional
goods or services
B39 – B43 Core Customer options for additional
goods or services
34 Core Repurchase agreements
B64 – B76 Core Repurchase agreements
B28 – B33 Core Warranties
B34 – B38 Core Principal versus agent
considerations
B44 – B47 Core Customers’ unexercised rights
B48 – B51 Core Non-refundable upfront fees
B77 – B78 Core Consignment arrangements
B79 – B82 Core Bill-and-hold arrangements
B83 – B86 Core Customer acceptance
Measurement 46 – 49 Core Determining the transaction price
50 – 58 Core Variable consideration
B20 – B27 Core Sale with a right of return
59 – 65 Core Significant financing component in
the contract
66 – 69 Core Non-cash consideration
70 – 72 Core Consideration payable to a
customer
73 – 90 Core Allocating the transaction price to
performance obligations
Contract costs 91 – 94 Core Incremental costs of obtaining a
contract
95 – 98 Core Costs to fulfil a contract
99 – 104 Core Amortisation and impairment
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Presentation 105 – 109 Core
Disclosure 110 – 122 Core
B87 – B89 Core Disclosure of disaggregated
revenue
123 – 129 Core Significant judgements in the
application of this Standard
Effective date and transition Appendix C Excluded
OVERVIEW OF THE FIVE-STEP REVENUE MODEL
IFRS
Step 1 - Identify the contract 15.9-21
A contract with a customer must meet all five criteria for recognition as 15.9
revenue.
Combination contracts 15.17

Two or more contracts with the same customer are treated as a single
contract if one of three criteria are met.
Contract modifications 15.18-21

A contract modification is accounted for as an additional contract if two
conditions are met.
Step 2 - Identify the performance obligations 15.22-30

• Determine if the contract contains more than one performance 15.22-25
Five-step revenue model
obligation.
• A performance obligation is a good or service that is distinct (two 15.26-30
criteria have to be met).
• Determining if a good or service is distinct is therefore critical to identify
separate performance obligations in a contract.
Step 3 - Determine the transaction price 15.46-72

The effects of the following on the transaction price should be
considered
• Variable consideration 15.50-59
• A significant financing component 15.60-65
• Non-cash consideration 15.66-69
• Consideration payable to a customer 15.70-72
Step 4 – Allocate the transaction price to separate performance 15.73-86

obligations (this step only applies to a contract with more than one
performance obligation)
Step 5 - Recognise revenue 15.31-45

Recognise revenue when performance obligations are satisfied: 15.32-34
• A good or service is transferred to a customer; and
• The customer obtains control of that good or service.
Performance obligations may be satisfied over time (measure of 15.35-45
progress) or at a point in time.
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SECTION B - QUESTIONS ON REVENUE

There are 63 examples provided in IFRS 15, illustrating the various aspects of revenue
recognition and measurement. These examples provide a practical overview of the
applicable sections in the standard.
QUESTION 1.1 (30 marks – 45 minutes)
Mr Smart has recently been appointed as the new financial manager of Berry Ltd. Even though he
held a financial position long ago, he has been working in the film industry for the past 15 years.
His knowledge of financial accounting is thus somewhat outdated, and he approached you for advice
on the correct accounting treatment for the products and services offered by Berry Ltd. The company's
year-end is 31 December 20.14.
Technology support services
Berry Ltd provides online technology support services to customers remotely via the internet. Berry Ltd
will scan a customer’s personal computer for viruses and optimise their computer’s performance for a
fixed fee of R800. When a customer calls to obtain the support services the following process is
followed:
- Berry Ltd describes to the customer the services it can provide and the price for those services.
All telephonic conversations with customers are recorded.
- When the customer agrees to the terms stated by the Berry Ltd representative, a payment is
made over the telephone via the customer’s credit card.
- After a successful payment has been made by the customer, Berry Ltd gives the customer an
access code for Berry Ltd’s website in order to obtain and use the scan services.
Software licenses and software customisation
Berry Ltd licenses accounting software to its customers. In addition, Berry Ltd also provides a service
to significantly customise the accounting software to the customer’s business environment and
information technology platform. The license, including the customisation of the software, is sold to
customers at R35 000.
Outsourcing
Berry Ltd entered into a contract with Motor Ltd in terms of which Motor Ltd outsources its information
technology data centre to Berry Ltd for five years at an amount of R160 000 per month. Berry Ltd
incurred selling commission costs of R15 000 to obtain the contract with Motor Ltd. Before providing
the services to Motor Ltd, Berry Ltd designed and built a technology platform that interfaces with Motor
Ltd’s systems. The platform is not transferred to the customer. The costs to set up the technology
platform were as follows:
R
Hardware 80 000
Software 35 000
Design services 25 000
Migration and testing of data centre 10 000
Total 150 000
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The above initial set-up costs and selling commission cost will be recovered by Berry Ltd through a
portion of the monthly outsourcing fee of R160 000. All of the above costs are incurred by Berry Ltd to
ensure that it is able to meet its future obligations in terms of the outsourcing contract.
Laptops
Berry Ltd sells laptops to the public via its website. Berry Ltd only sells the Bell X1 and Bell X2 model
laptops. The Bell X1 and Bell X2 are sold for R8 500 and R10 500 respectively.
Once the customer has paid for the laptop on Berry Ltd’s online shop using his/her credit card, the
laptop is dispatched to the customer. Berry Ltd uses a third-party carrier to deliver the laptops to its
customers. Berry Ltd’s delivery terms on its website stipulate that legal title of the product passes to
the customer when the laptop is handed over to the carrier.
REQUIRED
Marks
Advise Mr Smart on the following:
(a) If the technology support services provided by Berry Ltd is a contract with a customer. 6
(b) If the software licenses and software customisation are separate performance
obligations in a single contract. 8
(c) The accounting treatment of the incremental costs and initial set-up costs of the
outsourcing contract with Motor Ltd. 11
(d) When should revenue from the laptops sold through the online shop be recognised
by Berry Ltd. 5
Please note:
• Ignore any normal income tax implications.

• Ignore any value-added taxation (VAT) implications.
• Your answer should be limited to IFRS 15 Revenue from Contracts with Customers.
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QUESTION 1.1 - Suggested solution
(a) A contract with a customer is in the scope of IFRS 15 if it meets the following five criteria
(IFRS 15.9):
• The parties to the contract have approved the contract and are committed to perform
their respective obligations.
• The rights of each party regarding the goods or services can be identified.
• The payment terms are identified.
• The contract has commercial substance.
• It is probable that the entity will collect the consideration to which it is entitled to.
The technology support service is a contract with a customer because

• Benny Ltd and the customer enter into an oral agreement (call) which is legally
enforceable (IFRS 15.10). (1)
• In terms of the agreement, Benny Ltd will deliver scanning services in return for a
specified amount of R800, immediately payable by the customer with a credit card. (1)
• The payment terms are, therefore, clear as the customer pays immediately with a
credit card. Thus, the rights of each party can be identified.
• After payment the customer receives an access code which gives him/her the right to (1)
access the technology support services on the website at any time. Considering the
above, the contract with the customer has commercial substance. (1)
• The collection of the consideration for the services is probable, since payment by the
customer is immediate. (1)
As such, this agreement would be a contract within the scope of IFRS 15 at the time of
the receipt of payment during the telephone conversation. (1)
(6)
(b) In terms of the contract, Benny Ltd promises to deliver a software license and the
customisation of software. To identify whether these promises are separate performance
obligations, Benny Ltd must determine if they are distinct (IFRS 15.22(a)). (1)
A good or service is distinct if both of the following criteria are met (IFRS 15.27):
• The customer can benefit from the good or service on its own or together with other
resources readily available to the customer.
• The good or service to be transferred by the entity is separately identifiable from
other promises in the contract.
A good or service is not separately identifiable (IFRS 15.29) if

• the entity provides a significant service of integrating the goods or service promised
into a bundle of goods or services that represent a combined output
• one or more of the goods or services significantly modifies/customises one or more of
the other goods or services in the contract, or
• the goods or services are highly interdependent or highly interrelated
It is possible that a customer may benefit from the license and the customisation of the
software on its own or together with its own resources (for instance, a customer may have
the expertise to customise its own software). Therefore, the good and service is distinct.
(1)
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The license and software customisation are not separately identifiable for the following
reasons: (1)
• Benny Ltd is providing a significant service of integrating the goods and services (the
license and the software customisation services) into a single combined output for
which the customer has contracted. (1)
• In addition, the software is significantly customised by Benny Ltd in accordance with
the specifications negotiated with the customer. (1)
• The license and software are highly interdependent or highly interrelated with other
goods or services in the contract. The license and software cannot be used without
the other. (1)
The license and consulting services offered in a single contract to Benny Ltd’s customers
are not distinct and are, therefore, not separate performance obligations. Hence, the
entity would account for the license and software customisation services together as one
performance obligation. (2)
The contract to provide the license and customisation is a single contract, since it was
negotiated as a package with a single commercial objective (IFRS 15.17(a)). (1)
Total (9)
Maximum (8)
(c) Incremental costs

Incremental costs are those costs that an entity incurs to obtain a contract with a customer
(IFRS 15.92).
To recognise incremental costs to obtain a contract as an asset, these costs must be

recoverable by the entity (IFRS 15.91). Costs that are incurred regardless of whether a
contract was obtained, are not recognised as an asset but as an expense (IFRS 15.93).
Benny Ltd should recognise the selling commission costs of R15 000 as an asset, since
it was specifically incurred to obtain the outsourcing contract and will be recovered
through the outsourcing fee. (2)
The asset for the incremental costs is amortised over the term of the contract, i.e., five
years. (2)
Initial set-up costs

The first test is to determine if the initial set-up costs are within the scope of another
Standard (for example IAS 16 Property, Plant and Equipment). If the costs are not within
the scope of another Standard, those costs may only be recognised as an asset if the
following requirements are met:
• The costs relate directly to the contract and are specifically identified.
• The costs generate or enhance resources of the entity that will be used in satisfying
performance obligations in the future.
• The costs are expected to be recovered (IFRS 15.95).
Benny Ltd will account for the initial set-up costs as follows:
• The hardware costs of R80 000 are within the scope of IAS 16 Property, Plant and
Equipment and should be accounted for in terms of this Standard. (2)
• The software costs of R35 000 are within the scope of IAS 38 Intangible Assets and
should be accounted for in terms of this Standard. (2)
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• The costs of design of R25 000 and the migration service of R10 000 are not within
the scope of another Standard and should be considered for capitalisation in terms of (1)
IFRS 15.95. The design costs and migration services will be used to meet Benny Ltd’s
obligations in terms of the contract, are related to and identified in the contract, and (1)
will be recovered through the monthly outsourcing fee. Therefore, the costs of design
of R25 000 and the migration services of R10 000 are recognised as an asset in terms
of IFRS 15 and are amortised over the term of the contract. (2)
Total (12)
Maximum (11)
(d) An entity shall recognise revenue from a transaction when the entity satisfies a
performance obligation by transferring a good or service (an asset) to a customer
(IFRS 15.31).
An asset is transferred when the customer obtains control of that asset

(IFRS 15.31).
A performance obligation is performed over time or at a point in time

(IFRS 15:32).
To determine the point in time that a customer obtains control of an asset and the entity
satisfies a performance obligation, the requirements of control (IFRS 15.31-.35) and the
indicators of control (IFRS 15.38) are to be considered.
The performance obligation is satisfied at a point in time, since the customer obtains
control of the product at the point of shipment for the following reasons: (1)
• Although the customer does not have physical possession of the product at that point,
it has legal title and therefore can sell the product to (or exchange it with) another party
(IFRS 15.38(b)). Physical possession and control of the asset need not coincide (IFS
15.38(c)). (2)
• Benny Ltd is also precluded from selling the customer’s laptop to another customer at
this point (IFRS 15.33). (1)
Therefore, revenue from the laptops should be recognised by Benny Ltd at the point of
shipment (i.e., when the product is handed over to the carrier). (1)
(5)
COMMENT
Please refer to IFRS 15 Part B2 for more illustrative examples on revenue principles.
EXAM TECHNIQUE
Please note that no marks will be awarded for theory in a discussion question. The
suggested solutions for discussion questions will, however, include the theory for
completeness purposes, and to assist students with the application of the theory.
Students should not waste time by stating the theory in the tests or the exam. Marks are
awarded for the application of the theory, using the information in the scenario.
Always ensure that you stick to the time allocated for each question. Once the time for
the question has lapsed, move on to another question.
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You were recently appointed as the new financial director of Confident Ltd (‘Confident’) and you are
also responsible for the consolidated statements of the Confident Group. Confident is listed on the
JSE Ltd and owns shares in two other companies, namely Positive Ltd (‘Positive’) and Brave Ltd
(‘Brave’). All companies in the group have a financial year end of 31 December.
The consolidated annual financial statements of t h e Confident Group for the year ended
31 December 20.15 are in the process of being finalised.
ROOT division operating within Positive Ltd
Positive also has a division called Running-out-of-time Ltd (ROOT). ROOT is not a separate legal
entity and operates within the legal entity of Positive.
ROOT only designs and sells state-of-the-art Rolux watches to the rich and famous. ROOT prides
itself that they put their customers first and that their satisfaction is guaranteed. The watches (Rolux
and customised watches) are sold with a two-year warranty from the date of purchase. The warranty
provides the customer assurance that the product complies with agreed-upon specifications and that
it will operate as promised for a period of two years.
In September 20.15, ROOT signed a contract with KeKe, a famous model, in terms of which Root
promised to design and manufacture a custom-made JUST TIME watch according to KeKe’s
specifications. KeKe will fund the custom-made JUST TIME watch from her various sponsorships. The
terms and conditions of the contract determines that any payments made to ROOT in advance are
refundable and that ROOT has the right to cancel the contract if they cannot perform as stipulated in
the contract. If KeKe is not satisfied with the watch and does not accept it, ROOT will easily be able to
sell the watch to one of KeKe’s fans.
A standard JUST TIME watch is normally sold at a stand-alone price of R45 000. Warranties,
packaging and accessories are not sold separately from the watches. ROOT incurs the following costs
for each standard JUST TIME watch manufactured:
Wooden box (packaging) 500

Alternative leather band 1 000
Artwork, precious gems and gold 8 000
904L steel (special type of stainless steel) 10 000
Consumables 5 000
24 500
Because of the specifications of KeKe’s design, ROOT had to incur an additional cost of R4 000.
ROOT considers a mark-up of 25% (on the additional cost) as an appropriate profit margin.
KeKe agreed to be the new face of ROOT’s 20.16 winter watch collection. ROOT agreed to pay her
R10 000 as an upfront, non-cancellable deposit to secure her availability for the winter launch.
On 30 September 20.15, ROOT invoiced her for a net amount of R40 000.
ROOT completed KeKe’s watch on 30 November 20.15. KeKe only collected the watch set on
21 June 20.16, since she was in the United Kingdom promoting her new cosmetics line. KeKe settled
the outstanding amount with ROOT on 31 July 20.16.
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REQUIRED
Marks
Write an email to the financial director of Positive Ltd, discussing the recognition and 24
measurement of revenue from the sale of the watch to KeKe in accordance with IFRS 15
Revenue from contracts with customers. Use the five steps listed in IFRS 15 to structure
your answer.
Communication skills: logical flow, conclusion and format 1
Please note:
• Round off all amounts to the nearest rand.

• Your answer should comply with International Financial Reporting Standards (IFRS).
(Source: North-West University)
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QUESTION 1.2 – Suggested solution
From: CA@gmail.com
To: Student@Yahoo.co.za
Subject: Recognition and measurement of Revenue from the sale of the watch
Dear Financial Director
In terms of IFRS 15 an entity recognises and measures 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.
1. Identify the contract with a customer:
ROOT should account for a contract with a customer when all the following criteria are met:
1.1 The parties to the contract have approved the contract. Approval might be in writing,
orally or implied by customary business practice. ROOT and KeKe signed a contract in
September 20.15, creating a legally enforceable contract. (1)
1.2 The entity can identify each party’s rights regarding the goods or services to be
transferred.
• ROOT has agreed to design and manufacture a custom-made watch for KeKe and
is also obliged to provide a warranty service. ROOT has the right to receive payment
for the watch set. (1)
• The customer (KeKe) agrees to take legal ownership and effective control of the
watch and to pay for the watch. KeKe has the right to receive the watch and under
the warranty is entitled to, for example, "free" repairs or replacement. (1)
Although ROOT has the right to cancel the contract if they cannot perform as stipulated
in the contract, it prides itself in putting their customers first and guaranteeing their
satisfaction. (1)
It seems as if both (ROOT and KeKe) are committed to perform their obligations (KeKe
has sufficient funds to pay for the watch and ROOT wants to keep its promise of
customer satisfaction). (1)
1.3 The entity can determine the payment terms for the goods or services to be transferred.
• Customers can pay in advance (included in terms and conditions of the contract) or
make a once-off payment once the watch is completed (implied). (1)
1.4 The contract has commercial substance.

• The contract has commercial substance in terms of the risk, timing and amount of cash
flows for ROOT. ROOT will receive R50 000 (see discussion below) and will settle the
manufacturing costs of R24 500 plus an additional R4 000. (2)
• Further potential cash flows could result due to the warranty. (1)
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1.5 It is probable that the entity will collect the consideration to which it is entitled in exchange
for goods/services transferred to customer.
• There is no indication that ROOT will not collect the consideration from KeKe. (1)
Conclusion
In light of the above, a contract with a customer exists. (1)
2. Identify the performance obligations in the contract
• In order for goods and services in a contract to each be accounted for as separate
performance obligations, ROOT has to assess at contract inception the goods and
services promised in the contract and identify, as a performance obligation, each promise
to transfer either
(a) a good or service (or a bundle of goods or services) that is distinct, or
(b) a series of distinct goods and services that are substantially the same and that have
the same pattern of transfer to the customer (IFRS 15.22). (1)
• A good or service is distinct if both the following criteria are met:

(a) The customer can benefit from the goods or services, either on their own or together
with other resources, AND
(b) Their promise to transfer the goods and services is separately identifiable from
other promises in the contract (IFRS 15.27).
Watch
• The watch is a distinct separate performance obligation, as the customer can enjoy it on
its own or together with other resources, such as the warranty and wooden box promised
in the package. (1)
• IFRS 15.30 states that if a promised good is not distinct, an entity shall combine that good
or service with other promised goods or services until it identifies a bundle of goods or
services that is distinct.
• The wooden box and alternative leather band are highly dependent on the sale of the
watch (packaging and accessories are not sold separately from the watches) and the
artwork, precious gems and gold (input to produce the combined output specified by the
customer (a custom-made watch)) are not separately identifiable and should be combined
with the watch as one performance obligation. (3)
Warranty
• The warranty does not provide the customer with a good or service in addition to the
assurance, nor does the customer have the option to purchase the warranty separately;
therefore, the entity does not account for the warranty as a separate performance
obligation. (2)
• The warranty will be accounted for in terms of IAS 37. (1)
Finance component
• Although KeKe only paid 8 months after the watch was completed, this is not a significant
financing component and not a separate performance obligation, as the practical
expedient would apply (one year or less between settlement and transferring of control of
good). (2)
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3. Determine the transaction price
• The transaction price of KeKe's custom-made JUST TIME watch is R50 000, calculated
as the stand-alone price of R45 000 for a standard JUST TIME watch plus the revenue
from the additional cost (R4 000 plus 25% profit margin = R5 000). (2)
• ROOT cannot recognise revenue for the net amount of R40 000 (R50 000 revenue from
the watch less R10 000 deposit to secure KeKe's availability for the winter launch). The
consideration payable to KeKe is an upfront payment for a distinct service
(advertising/marketing) receivable from KeKe and should be accounted for as a purchase
from a supplier. (2)
4. Allocate the transaction price to the performance obligations in the contract
• Transaction price should be allocated on the relative stand-alone selling prices of goods.
The total transaction price of R50 000 will be allocated to the watch set. (1)
5. Recognise revenue when the entity has satisfied the performance obligations
• Revenue can be recognised at a point in time or over a period of time (IFRS 15.32).
• ROOT should recognise revenue when KeKe (the customer) obtains control of the asset
(IFRS 15.31). (1)
• Control indicators (IFRS 15.38 (a-e)) include the following:
- ROOT having the right to receive payment once the watch is completed on
30 November 20.15 and/or KeKe having title to the asset/taking physical possession
of the asset/accepting the asset on 21 June 20.16.
- KeKe does not control the asset, as it is created (the terms and conditions of the
contract determines that ROOT has the right to cancel the contract if they cannot
perform as stipulated in the contract).
- ROOT's performance does not create an asset with no alternative use (although KeKe
specifically asked for a custom-made JUST TIME watch, any rich fan would buy the
watch from ROOT).
- Although ROOT has an enforceable right to payment for performance completed to
date (the contract determines that any payment made in advance is refundable if
ROOT cannot perform), they are still able to sell the watch to a KeKe fan if she does
not accept the watch.
- ROOT has the ability to direct the watch to another customer until KeKe takes legal
title/possession of the watch. (4)
• Revenue should thus be recognised on 21 June 20.16 (at a point in time), the date when
ROOT has a present right to payment and legal ownership passed to KeKe, i.e., the date
control passed to KeKe. (1)
• The fact that ROOT invoiced KeKe on 30 September 20.15 does not necessarily mean it
had an unconditional right to consideration nor that control passed to KeKe. (1)
Conclusion
Revenue should be recognised on 21 June 20.16 (at a point in time) and measured at R50 000
(the stand-alone transaction price of the watch set). (1)
Total (34)
Maximum (24)
Communication skills: logical flow, conclusion and format (1)
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Coolworth Ltd (Coolworth) is a respected retail chain company that supplies clothing, food and
homeware. Coolworth launched a new customer loyalty programme on 1 January 20.13 that rewards
a customer with one customer loyalty point for every R150 of purchases. Each point is redeemable for
discount on future purchases of Coolworth products. The estimated stand-alone selling price of one
point is R0,90.
Sales to Coolworth customers amounted to R2 700 000 (the stand-alone selling prices of the products)
during the financial year ended 31 December 20.13. Coolworth expects that 12 000 points will be
redeemed during the financial year ending 31 December 20.13. At the end of the 20.13 financial year,
10 000 points have been redeemed by customers. On 31 December 20.14 11 800 points have been
redeemed cumulatively in respect of the 20.13 sales. Coolworth continues to expect that 12 000 points
will be redeemed in respect of the 20.13 sales.
Sales to Coolworth customers amounted to R3 300 000 (the stand-alone selling prices of the products)
during the financial year ended 31 December 20.14. At the end of the 20.14 financial year, 12 500
points on the 20.14 sales were redeemed by customers and Coolworth expects that 15 000 points will
be redeemed in total in respect of the 20.14 sales.
All sales made in 20.13 and 20.14 were cash sales.
REQUIRED
Marks
Provide the journal entries to account for the customer loyalty program in the financial 13
statements of Coolworth Ltd for the year ended 31 December 20.13 and
31 December 20.14.
Communication skills: presentation and layout 1
Please note:

• Journal narrations are required.
• Your answer must comply with International Financial Reporting Standards (IFRS).
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COMMENT
In this case the contract with a customer includes two performance obligations, i.e., the
promise to provide goods and the promise to provide loyalty points to the customer. Since
these two performance obligations are distinct in terms of IFRS 15.27, the entity has to
allocate the transaction price to these two performance obligations.
Journal entries to account for customer loyalty program
Dr Cr
R R
31 December 20.13
J1 Bank (given) 2 700 000 (1)
Revenue: products (P/L) [C2] 2 683 897 (3)
Revenue: loyalty points (P/L)
(10 000/12 000 x R16 103 [C2]) 13 419 (2)
Contract liability (SFP) [C3] 2 684 (1)
Recognition of revenue from products and loyalty points
31 December 20.14
J2 Contract liability (SFP) 2 415 (1)
((11 800 – 10 000)/12 000 x R16 103 [C2]) 2 415 (1)
Recognise revenue from 20.13 loyalty points redeemed in
20.14
J3 Bank (given) 3 300 000 (1)
(12 500/15 000 x R19 682 [C5]) 16 402 (2)
Total (16)
Maximum (13)
Communication skills: presentation and layout (1)
CALCULATIONS
C1. Loyalty points incurred during 20.13 (R2 700 000/R150) 18 000 [1]
Stand-alone selling price of loyalty points (18 000 x R0,90) R16 200 [1]
C2. Allocation of transaction price in 20.13

Revenue allocated to products
[2 700 000 x (2 700 000/(2 700 000 + 16 200 [C1]))] 2 683 897 [1]
Revenue allocated to points
[2 700 000 x (16 200 [C1]/(2 700 000 + 16 200[C1]))] 16 103 [1]
C3. Contract liability for 20.13

16 103 x 2 000 unredeemed points / 12 000 expected points 2 684 [1]
C4. Loyalty points earned during 20.14 (R3 300 000/R150) 22 000 [1]
Stand-alone selling price of loyalty points (22 000 x R0,90) R19 800 [1]
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C5. Allocation of transaction price in 20.14

[3 300 000 x (3 300 000/(3 300 000 + 19 800 [C4]))] 3 280 318 [1]
Revenue allocated to points
[3 300 000 x (19 800 [C4]/(3 300 000 + 19 800[C4]))] 19 682 [1]
C6. Contract liability for 20.14

19 682 x 2 500 unredeemed points/15 000 expected points 3 280 [1]
COMMENT
In this question, you were given both the estimated future price and the stand-alone
selling price/value for the points. Where the stand-alone selling price is given, it is used
in calculating the allocation of the transaction price.
Note: Where the stand-alone selling price is not given, an estimation of the selling
price/value should be used. Also, refer to IFRS 15.78 and IFRS 15.B42. You can also
refer to Example 52 that deals with customer loyalty programs in the illustrated examples
to IFRS 15.
The principle behind the allocation of the transaction price is that the transaction price
that is usually given constitutes two performance obligations and each performance
obligation needs to be allocated a transaction price.
EXAM TECHNIQUE
The first process in allocating the transaction price in two performance obligations that
are distinct in terms of IFRS 15.27 is to get the stand-alone selling price of the loyalty
points (the other performance obligation)
COMMENT
Did you know? During the implementation phase of IFRS 15, the IASB and the FASB
formed the joint Revenue Transition Resource Group. There were five topics identified
requiring further consideration. Those five topics were identifying performance
obligations, principal versus agent considerations, licensing, collectability, and
measuring non-cash consideration. This led to the issuing of the document Clarifications
to IFRS 15 Revenue from Contracts with Customers to assist with the implementation
of the standard as well as provide practical expedients.
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LEARNING UNIT 2 – JOINT ARRANGEMENTS
INTRODUCTION
IFRS 11 establishes the principles for financial reporting by parties to a joint arrangement
and the criteria for determining the type of arrangement. A joint arrangement is classified
as either a joint operation or a joint venture.
UNGC principle 10 is applicable here, stating that businesses should work against
corruption in all its forms, including extortion and bribery.
OBJECTIVES/OUTCOMES
At the end of this learning unit, you should be able to
• Define a joint arrangement in terms of IFRS 11.

• Define and distinguish between the types of joint arrangements as follows:
• joint operations
• joint ventures
• Account for the interest in a joint venture in the separate financial statements of the
investor in accordance with IAS 27.
• Disclose the required information in accordance with IFRS 12 in the financial
statements of the investor relating to significant judgements and assumptions used
in determining the type of joint arrangement.
PRESCRIBED STUDY MATERIAL
The following must be studied before you attempt the questions in this learning unit:
1. Group Statements, 18th edition, Volume 2.
2. IFRS 11 Joint Arrangements.
3. IFRS 12 Disclosure of Interests in Other Entities (par 1 to 9 and 20 to 22).
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THE REST OF LEARNING UNIT 2 IS BASED ON THE ASSUMPTION THAT YOU

HAVE ALREADY STUDIED THE RELEVANT PRESCRIBED STUDY MATERIAL.
SECTION A - SAICA’S PRINCIPLES OF EXAMINATION LEVELS

The SAICA principles of examination levels provides guidance on how the standards (or topics
within a standard) will be examined.
The principles of examination levels for IFRS 11 are as follows:

Objective 1–2 Core
Scope 3 Awareness
Joint arrangements 4–6 Core
B2 – B4 Core
Joint control 7 – 13 Core
B5 – B11 Core
Types of joint arrangements 14 – 19 Core
B12 – B33 Core
Joint operation accounting 20 – 23 Excluded
B33A – B37 Excluded
Joint venture accounting 24 – 25 Core Refer to Learning Unit 5
Separate financial statements 26 – 27 Core Excluding fair value option
Effective date and transition Appendix C Excluded
COMMENT
As part of its quality processes, the International Accounting Standards Board (IASB)
conducts a Post-implementation Review (PIR) of each new IFRS Standard or major
amendment. The IASB completed its PIR of IFRS 11 during June 2022 and determined
that the standard is meeting its objectives and functioning as intended.
However, the PIR identified collaborative arrangements outside the scope of IFRS 11 as
a low priority, which might be explored further at its next agenda meeting.
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SECTION B – QUESTION ON JOINT ARRANGEMENTS
Kallis Ltd is a listed company that operates mainly in the Western Cape. As part of its expansion
strategy, both locally and internationally, the following investment has been made:
Investment in Pollock Ltd
The management of Kallis Ltd has approached Tendulker Ltd to form a partnership to manufacture
sporting goods from 1 January 20.12. A separate entity, Pollock Ltd, has been formed. Each entity will
have a 50% shareholding in Pollock Ltd. In terms of the South African Companies Act, 2008, Pollock
Ltd is a separate legal entity.
The companies have signed an agreement that outlines the activities of the arrangement and
establishes a joint operating committee. A representative from each company sits on the joint
operating committee and decisions require unanimous consent. Kallis Ltd and Tendulker Ltd will each
be responsible for their own area of expertise.
The companies carry out different parts of the manufacturing process, each using its own resources
and expertise to manufacture and distribute the goods jointly. The two companies share the revenues
from sales and jointly incur expenses. The revenues and common costs are shared as contractually
agreed in the agreement.
A separate bank account is established through which revenue will be received and shared costs will
be paid. The bank account is in the names of both companies. Each company incurs its own separate
costs, such as labour costs, manufacturing costs, supplies, inventory of unused parts and work in
progress, and recognises their separately incurred costs in full.
Kallis Ltd and Tendulker Ltd have committed to purchase Pollock Ltd’s entire product line.
The products must, therefore, adhere to the quality control of both Kallis Ltd and Tendulker Ltd.
Any cash shortages that the partnership may incur will be financed by both parties in accordance with
their shareholding.
REQUIRED
Marks
Provide a memorandum to the management of Kallis Ltd, dealing with the following 14
questions:
(a) Is the agreement with Tendulker Ltd a joint arrangement?

(b) If yes, what is the classification of the joint arrangement?
Please note:
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MEMORANDUM
To: Management
From: CTA Student
Date: 13 April 20.13
Subject: Consortium agreement with Tendulker Ltd
(a) IFRS 11 Joint Arrangements is applicable to all entities that are a party to a joint
arrangement. A joint arrangement is an arrangement of which two or more parties have
joint control. Joint control is the contractual sharing of control of an arrangement, which
exists only when decisions regarding the relevant activities require unanimous consent of
the parties sharing control (IFRS 11.4; IFRS 11.7).
The agreement between Kallis Ltd and Tendulker Ltd sets out the terms upon which the
two parties participate in the manufacture of sporting goods. The following matters are
dealt with in the contract:
• The arrangement is entered into for the manufacture of sporting goods; (1)
• Each company appoints a representative to the joint operating committee; (1)
• The decisions made by the joint operating committee require unanimous consent;
• The responsibilities of Kallis Ltd and Tendulker Ltd are defined; and (1)
• The sharing of the revenue and expenses are stipulated. (1)
(1)
Kallis Ltd and Tendulker Ltd have rights to the variable returns of the arrangement and
are able to direct the manufacturing and assembly activities that affect the returns of the
arrangement through their partnership arrangement. Unanimous consent is required to
direct these relevant activities. (2)
The arrangement is, therefore, a joint arrangement as both Kallis Ltd and Tendulker Ltd
are bound by the contractual arrangement that give both parties joint control.
(1)
(b) The rights and obligations of both parties to the joint arrangement must be assessed to
determine the classification of the arrangement as either a joint operation or joint venture
(IFRS 11.14).
This joint arrangement is structured through a separate entity, Pollock Ltd, which has its
own separate financial accounting records in respect of shared revenues and costs and
a separate bank account. The arrangement can, therefore, still be classified as either a
joint operation or joint venture (IFRS 11.B19).
(2)
When an arrangement is structured through a separate entity, the following must also be
considered:
• It is a public company in terms of the Companies Act. The legal form causes
separation between Kallis Ltd, Tendulker Ltd and Pollock Ltd. The assets and
liabilities held by Pollock Ltd are Pollock Ltd’s assets and liabilities and the
shareholders are entitled to the net assets. (2)
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• The agreement between Kallis Ltd and Tendulker Ltd does not outline whether the
parties have rights to the assets and liabilities of the arrangement. Kallis Ltd and
Tendulker Ltd share the common costs of Pollock Ltd in proportion to their 50%
shareholding interests. (2)
• The activities primarily aim to provide Kallis Ltd and Tendulker Ltd with an output of
all the goods manufactured. Furthermore, Pollock Ltd depends on Kallis Ltd and
Tendulker Ltd for settling of the liabilities. All products are sold to Kallis Ltd and
Tendulker Ltd to generate cash and both are liable for any cash shortages. They
will, therefore, have rights to all the economic benefits. (2)
The arrangement would, therefore, be classified as a joint operation, as each company

has direct rights to the assets and obligations for the liabilities of the arrangement. (1)
You are welcome to contact me should you require any further information.
Yours sincerely
CTA Student
Total (17)
Maximum (14)
EXAM TECHNIQUE
Please note that no marks will be awarded for theory in a discussion question.
The suggested solutions for discussion questions will, however, include the theory for
completeness purposes and to assist students with the application of the theory.
Students should not waste time by stating the theory in the tests or the exam, as no marks
are awarded for theory. Students should also pay attention to the required format of
answering, e.g., this question required students to provide a memorandum. No
presentation mark(s) will be awarded if the student did not adhere to this requirement.
Students should also provide a conclusion in discussion questions. Marks are lost for not
concluding the discussions.
COMMENT
If the consortium arrangement had not been structured through a separate entity, then the
arrangement can only be a joint operation (IFRS 11.B16). Refer to the helpful flow chart
included under IFRS 11.B21.
The terms and conditions of the contractual arrangement will always be inspected, as these
can override the legal form of the separate entity in determining who has the rights to the
underlying assets and obligations for the liabilities. Refer to the helpful table included under
IFRS 11.B27.
In accordance with IFRS 11.B29-.B33, when the activities primarily aim to provide the
parties with an output and the joint arrangement is dependent on the parties for the settling
of the liabilities, the other facts and circumstances indicate that the arrangement is a joint
operation (as is the case in this question).
The standard further includes six examples in the Illustrative Examples IFRS 11 Part B.
which are important to work through. These examples illustrate the judgement and
reasoning applied when classifying a joint arrangement as a joint operation or joint venture.
The flow chart included under IFRS 11.B33 also assists in the classification of the joint
arrangement and page 155 of Group Statements, 17th edition, volume 2.
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SELF-ASSESSMENT QUESTIONS AND SOLUTIONS

Question Question name Source Marks Topics covered Page
1 PlantWorld Ltd FAC4864 35 • Discussion on joint 33

Mega Construct Ltd Test 2 of arrangements (IFRS 11)
Perfect Healthcare Ltd 2014 • Calculation of revenue to
(adapted) be recognised (IFRS 15)
• Journal entries to account
for revenue (IFRS 15)
HlukileWena Ltd SAICA ITC 5 • Discussion on identifica-
2019/2 tion of performance obli-
(adapted) gations (IFRS 15)
• Discussion on accounting
policy on revenue
(IFRS 15)
2 Cellular Connect Ltd SAICA ITC 53 • Discussion on identifica- 43
2017/1 tion of performance obli-
(adapted) gations (IFRS 15)
• Discussion on significant
financing components in
contract (IFRS 15)
• Discussion on transaction
prices (IFRS 15)
• Journal entries to account
3 Thingamajig Ltd FAC4864 28 • Discussion on recog- 54
Test 2 of nising and measuring of
2018 revenue with reference to
(adapted) step 2 to step 5 (IFRS 15)
• Pro forma journal entries
relating to the elimination
of intragroup sale
CarSmart Ltd 12 • Discussion of classifica-
tion of the joint arrange-
ment (IFRS 11)
4 Hoi Paloi Dentists Ltd FAC4864 40 • Discussion on identifica- 63
Test 2 of tion of performance obli-
2019 gations (IFRS 15)
(adapted) • Journal entries to account
• Discussion of classifica-
ment (IFRS 11)
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Question Question name Source Marks Topics covered Page

5 Umbrella Ltd Group FAC4864 40 • Discussion of step 4 and 73
Test 2 of 5 of the revenue recog-
2020 nition model (IFRS 15)
• Discussion on contract
cost (IFRS 15)
ment (IFRS 11)
6 Happy Residents Ltd FAC4864 40 • Discussion- Revenue 80
Test 2 of recognition and
2021 measurement
• Discussion – classifica-
ment (IFRS 11)
7 Prop100 Ltd FAC4864 40 • Discussion – Contract 87
Test 2 of modification
2022 • Journal entries –
Recognition of revenue &
returned goods
ment (IFRS 11)
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QUESTION 1 40 marks
YOU HAVE 15 MINUTES TO READ THIS QUESTION
This question consists of four independent parts.
PART I 10 marks
PlantWorld Ltd entered into a strategic agreement with LawnDoctor Ltd on 28 February 20.14 to
expand their services to also include garden design services. LawnDoctor Ltd is a leading service
provider of irrigation and garden maintenance services.
The financial manager of PlantWorld Ltd provided you with the following extract of the agreement
between PlantWorld Ltd and LawnDoctor Ltd:
Contractual agreement (“Agreement”) entered into on 28 February 20.14 by and between

PlantWorld Ltd (“PlantWorld”) and LawnDoctor Ltd (“LawnDoctor”), hereafter referred to as “the
Parties” when referred to together.
The Parties wish to enter into an Agreement and define the respective rights and obligations of the
Parties with respect to the Agreement. The Parties agree as follows:
Name: The Parties hereby agree to incorporate a company with the name Greenscapes Ltd
(“Greenscapes”) in terms of the Companies Act, 2008.
Purpose: Greenscapes will provide garden design services.
Terms and conditions:
1. The Parties agree that PlantWorld and LawnDoctor will subscribe to 60% and 40%, respectively,
of the issued ordinary share capital of Greenscapes.
2. The Parties are each entitled to equal representation on the board of directors.
3. The Parties will share in the profit or loss of Greenscapes in a ratio of 50:50.
4. Operational decisions are decided by means of voting rights associated with ordinary shares.
Each ordinary share is entitled to one vote.
5. Decisions regarding the sourcing of plants and the pricing of garden design services are decided
by a 51% majority vote. Voting rights are exercised in accordance with the profit-sharing ratio.
Each percentage profit share is entitled to one vote.
6. The Parties agree to provide the necessary funds to honour any commitments made by
Greenscapes to financial institutions with regard to asset financing. The Parties’ commitment is
limited to the agreed profit-sharing ratio. The Parties agree that assets that are financed will be
registered in Greenscapes’ name.
7. The Agreement will continue until such date that the Parties decide to amend or terminate the
Agreement.
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PART II 10 marks
Mega Construct Ltd is a construction and project management company. Mega Construct Ltd has a
December year end. On 1 June 20.14 Mega Construct Ltd entered into a contract with a local
municipality whereby they agreed to refurbish an old office block used by the municipality as offices
for an amount of R8 000 000. The refurbishing included painting, tiling of all office floors and the
repairing of service counters. In terms of the requirement of the contract, the municipality made a
R1 000 000 cash payment to Mega Construct Ltd on the date they entered into the contract.
The municipality will settle the outstanding contract price in two equal progress payments on
31 December 20.14 and 31 July 20.15. The refurbishing project has to be completed by 31 July 20.15.
The total expected cost of the project is as follows:
R
Painting 1 250 000

Tiling 2 500 000
Repairs to service counters 1 750 000
Total expected costs 5 500 000
The entity uses an input method based on costs incurred to measure its progress towards complete
satisfaction of the performance obligation. Based on the accountant’s cost schedule for the year ended
31 December 20.14, Mega Construct Ltd incurred the following costs for the year:
R
Painting 900 000

Tiling 1 200 000
Repairs to service counters 100 000
Total costs 2 200 000
The above costs were journalised by the accountant in the financial records of Mega Construct Ltd for
the year ended 31 December 20.14. The accountant is, however, unsure of the accounting of all the
other amounts related to the refurbishing contract and has not yet processed any other journals in
respect of the refurbishing contract for the year ended 31 December 20.14.
Mega Construct Ltd concludes that the advance payment made by the municipality contains a
significant financing component. In terms of IFRS 15.64 the rate that reflects Mega Construct Ltd’s
credit characteristics is the entity’s own incremental borrowing rate of 6% per annum.
PART III 15 marks
Perfect Healthcare Ltd (Perfect Healthcare) is one of the world’s largest medical equipment providers
to hospitals and is listed on the Johannesburg Stock Exchange. Perfect Healthcare developed a highly
specialised 3D vascular imaging system, called the Angio Zee. The Angio Zee imaging system
comprises an industrial robot with a C-arm, a control module and 3D visualisation software. The
C-arm of the industrial robot, operated by the physician through the control module, rotates around
the patient at a high velocity to provide the physician with a 3D image of the patient’s anatomical
details. The industrial robot and control module are unable to function without the 3D visualisation
software.
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Perfect Healthcare sells the Angio Zee system to hospitals at a contract amount of R8 500 000.
The selling price of this contract includes the Angio Zee system as described above and also
installation services. The installation of the Angio Zee system is complex and can only be performed
by Perfect Healthcare engineers. The Angio Zee system is only operational after installation by the
engineers. The software of the Angio Zee system remains functional without updates or technical
support.
As part of the marketing and launching of the Angio Zee system, all contracts signed during the
financial year ending 28 February 20.17 will include free maintenance services on the Angio Zee
system for one year at no additional costs. Perfect Healthcare will outsource the maintenance services
to a medical engineering company, MedEng Ltd. Perfect Healthcare is obliged to compensate
MedEng Ltd an agreed amount of R120 000 per maintenance service per customer for any
maintenance services that were performed by MedEng Ltd during the first year. If a customer does
not make use of the maintenance services, Perfect Healthcare has no obligation to pay MedEng Ltd.
After the financial year ending 28 February 20.17, Perfect Health will sell the Angio Zee system with
the installation services on a stand-alone basis. As a result, customers will be required to pay for any
required maintenance services.
The Angio Zee system is a contract within the scope of IFRS 15 Revenue from Contracts with
Customers. You may assume that Perfect Healthcare early adopted IFRS 15. The financial manager
of Angio Zee system is unsure of the accounting of the Angio Zee system, installation and maintenance
services in accordance with IFRS 15.
PART IV 5 marks
Background information
HlukileWena Ltd (HW) was started by a group of young ambitious CAs(SA) and the company
specialises in unique clothing items for individuals. The company was incorporated on 1 January 20.10
and has grown rapidly since then. It expanded and now has two subsidiaries, namely
Leopard Designs Ltd (Leopard) and Boutique Emporium Ltd (Boutique) as well as an associate,
DLH Ltd. It has a 31 December year end and is listed on the Johannesburg Stock Exchange.
The following is an extract from the ‘about us’ section on the HW website:
HlukileWena is an online service that delivers a truly personalised shopping experience, just for
you. Complete your Style Profile and a personal fashion consultant will hand-pick items to fit
your tastes, needs and budget – and deliver them directly to your door. Each box contains five
items of clothing, shoes and accessories for you to try on at home. Keep what you love and send
the rest back in a prepaid DLH package within 30 days. Shipping and returns are free – even
for exchanges!
Initially 50% of goods shipped to customers were returned within 30 days, but the personal fashion
consultants of HW learned from customer preferences, resulting in a decline in returns to only 15%
during the last few years. Control of goods shipped to customers passes on date of delivery.
Samira provided you with the following extract and additional information from the draft consolidated
financial statements of HW:
1.1 Accounting policy – revenue recognition
Revenue from contracts with customers is measured based on the consideration that the entity
expects to be entitled to, in exchange for transferring promised goods to a customer. It excludes
amounts collected on behalf of third parties. The group recognises revenue when it transfers
risks and rewards relating to a product to a customer, which is deemed to be the date on which
the products are dispatched to the customer. (SAICA – adapted)
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REQUIRED
YOU NOW HAVE 60 MINUTES TO ANSWER THIS QUESTION
Marks
PART I
Discuss the appropriate classification and recognition of the strategic agreement between 9
PlantWorld Ltd and LawnDoctor Ltd in accordance with IFRS 11 Joint Arrangements in the
financial statements of the PlantWorld Ltd Group for the year ended
28 February 20.14.
Communication skills: logical flow and conclusion 1
Please note:
• Discussions regarding disclosure are not required.

PART II
(a) Calculate the revenue from the refurbishing contract that should be recognised by the 2
accountant in the financial statements of Mega Construct Ltd for the year ended 31
December 20.14.
(b) Provide the accountant with the additional journal entries necessary to account for the 7
refurbishing project of Mega Construct Ltd for the year ended
31 December 20.14.
Please note:

• Ignore any value-added tax (VAT) implications.
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Marks
PART III
With reference to Perfect Healthcare Ltd, identify the performance obligation(s) in the 14
Angio Zee system contracts signed during the financial year ending 28 February 20.17 in
terms of IFRS 15 Revenue from Contract with Customers. You answer should clearly
indicate if the promised goods or services in the Angio Zee contract are separate
performance obligations or not.
Please note:
• You can assume all amounts to be material.

PART IV
Discuss any concerns that you may have and recommend any improvements regarding the 5
revenue recognition policy of HlukileWena Ltd that was stated in note 1.1.
Please note:
• You are not required to reproduce an accounting policy note.

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QUESTION 1 - Suggested solution
PART I
Appropriate classification and recognition of the strategic agreement between PlantWorld Ltd
and LawnDoctor Ltd for the year ended 28 February 20.14
IFRS 11
A joint arrangement is an arrangement of which two or more parties have joint control
(IFRS 11.4).
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 (IFRS 11.7).
PlantWorld Ltd and LawnDoctor Ltd entered into a contractual agreement. (1)
The contractual terms of the agreement require a 51% majority decision to direct the relevant
activities (sourcing of plants and determining the price of garden design services). (1)
Both PlantWorld Ltd and LawnDoctor Ltd are entitled to a 50% voting right in making decisions
with regard to relevant activities (based on the profit share ratio of 50:50). (1)
Thus, unanimous consent is implied, as both PlantWorld Ltd and LawnDoctor Ltd has to be
in agreement in order to finalise a decision. (1)
A joint arrangement thus exists as PlantWorld Ltd and LawnDoctor Ltd have joint control
over Greenscapes Ltd. (1)
The classification of the joint arrangement as a joint operation or joint venture will depend upon
the rights and obligations of the parties to the arrangement (IFRS 11.14).
The contractual agreement is carried out through a separate vehicle, Greenscapes Ltd, and
therefore it can either be classified as a joint venture or a joint arrangement (IFRS 11.B19). (1)
A joint operation is a joint arrangement whereby the parties that have joint control have rights
to the assets and obligations for the liabilities relating to the arrangement (IFRS 11.15).
A joint venture is a joint arrangement whereby the parties that have joint control have rights to
the net assets of the arrangement (IFRS 11.16).
Legal form of the vehicle

The joint arrangement is carried out through a separate vehicle whose legal form confers
separation between the parties and the separate vehicle. (1)
Other terms of the contractual agreement

The commitment by the parties to provide funding if Greenscapes Ltd is not able to meet
commitments made to financial institutions is not by itself a determinant that the parties have
an obligation for the liabilities of Greenscapes Ltd (IFRS 11.B27). (1)
The contractual agreement establishes that assets are financed are registered in
Greenscapes Ltd’s name; therefore PlantWorld Ltd and LawnDoctor Ltd have no interests in
these assets and the terms do not change the legal form of the entity. (1)
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Conclusion
The contractual agreement should, therefore, be classified as a joint venture in the
consolidated financial statements of the PlantWorld Ltd Group for the year ended
28 February 20.14. (1)
PlantWorld Ltd will recognise their rights to the net assets of Greenscapes Ltd as investments
and account for them using the equity method in accordance with IAS 28 Investments in
Associates and Joint Ventures. (1)
Total (11)
Maximum (9)
Communication skills: logical flow and conclusion (1)
Once a Joint arrangement is carried through a separate vehicle, the terms of the
agreement, other factors and circumstances should be considered as these are the
factors that will influence the classification of the joint arrangement.
Please note that NO marks will be awarded for theory in a discussion question. However,
the suggested solutions for discussion questions will include the theory for purposes of
completeness, and to assist students with the application of the theory. Remember that
the information in the scenario will determine the applicable theory in the standards to
use as basis for the answer.
Students should not waste time by stating the theory in the tests or the examination as
no marks are awarded for theory.
PART II
(a) Revenue recognition
Measurement of progress
2 200 000/5 500 000 x 100 = 40% (1)
Revenue amount to be recognised for 20.14

R8 000 000 x 40% = R3 200 000 (1)
(2)
(b) Journal entries

Dr Cr
R R
1 June 20.14
J1 Bank (SFP) (given) 1 000 000 (1)
Contract liability (advance payment) (SFP) 1 000 000 (1)
Account for advance payment received on
refurbishing project
J2 31 December 20.14
Interest expense (P/L) (1 000 000 x 6% x 7/12) 35 000 (1)
Contract liability (advance payment) (SFP) 35 000 (1)
Adjust the contract liability with the financing
component
J3 Bank (SFP) [(8 000 000 – 1 000 000)/2] 3 500 000 (2)
Contract liability (progress payment) (SFP) 3 500 000 (1)
Account for the first progress payment
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Dr Cr
R R
J4 Contract liability (progress payment) (SFP) 3 200 000 (1)

Revenue (P/L) (from (a) above) 3 200 000 (1)
Recognise revenue from the refurbishing project for
20.14
Total (9)
Maximum (7)
COMMENT
Journal 1
Remember that revenue will be recognised as and when the entity performs or satisfies
the performance obligation, using either the input or output method. The costs incurred
to date were 40% of R8 000 000; therefore, R3 200 000 will be recognised as revenue.
The R 4 600 000 would be recognised as contract liability because the entity
(Mega Construct Ltd) has not performed or satisfied the performance obligation.
PART III
Identify the performance obligations
Perfect Healthcare should assess at contract inception if the promised goods or services in
the contract is a performance obligation by determining if
• a good or service (or bundle of goods or services) is distinct, or
• a series of distinct goods or services that are substantially the same have the same
pattern of transfer (IFRS 15.22).
A good or service that is promised to a customer is distinct if both the following criteria are met:
(a) The customer can benefit from the goods or services either on its own or together with
other resources (capable of being distinct), and
(b) The entity’s promise to transfer the goods or services to the customer is separately
identifiable from other promises in the contract (IFRS 15.27).
Angio Zee system and installation services
The customer cannot benefit from the Angio system and installation services on their own or
together with other resources for the following reasons (IFRS 15.27(a)):
• The Angio Zee system is an integrated system; the robot, control panel and software
cannot function independently of each other. (1)
• The customer can only benefit from the Angio Zee system with the installation services
that are exclusively provided by Perfect Health. (1)
• Furthermore, Perfect Health regularly sells the Angio Zee system with the installation
services. This indicates that a customer cannot benefit from the Angio Zee system or (1)
installations services on its own. (1)
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The Angio Zee system and installation services are not separately identifiable from each other
for the following reasons (IFRS 15.27(b)):
• The entity provides a significant service of integrating the goods or services with other
goods or services in the contract into a bundle of goods or services that represent a
combined output (IFRS 15.29(a)).
Perfect Health integrates the Angio Zee system and the installation services and sells it
at R8 500 000 as a combined output (bundle). (1)
• The goods or services are highly interdependent or highly interrelated (IFRS 15.29(c).
Perfect Health’s promise to deliver installation services is necessary for the Angio Zee
system to function. Therefore, the Angio Zee system and installation services are
interdependent. (2)
Due to the above, the Angio Zee system is not distinct from the installation services promised
in the contract. (1)
If a promised good or service is not distinct, the entity has to combine it with other promised
goods or services until it identifies a bundle of goods or services that are distinct (IFRS 15.30).
Conclusion: The bundle of the Angio Zee system, combined with the installation services, is
distinct and is, therefore, treated as one separate performance obligation. (1)
Maintenance services
The customer can benefit from the Angio Zee system and maintenance services on their own,
or together with other resources for the following reasons (IFRS 15.27(a)):
• Perfect Health will sell the Angio Zee system on a stand-alone basis in the future, without
the maintenance services being promised in the contract. (1)
• Customers will be able to benefit from the maintenance services together with an Angio
Zee system already obtained by the customer. (1)
The Angio Zee system and maintenance services are separately identifiable (IFRS 15.27(b))
for the following reasons:
• The Angio Zee system and maintenance services are not inputs resulting in a combined
output in terms of the contract. (1)
• The entity is not providing a significant integration service, because the presence of the
maintenance services and the Angio Zee system together in this contract do not result in
combined functionality. (1)
• The Angio Zee system and maintenance services are not highly interdependent;
Perfect Health is able to transfer the Angio Zee system even if the customer declined the
maintenance services. (1)
Conclusion: The maintenance services are distinct and are, therefore, a separate
performance obligation. (1)
Total (15)
Maximum (14)
EXAM TECHNIQUE
When applying the theory to the scenario in identifying performance obligations,

students don’t have to repeat the theory for every performance obligation being
identified. The theory can only be stated once as per the above.
Always conclude on the discussion when identifying the performance obligations.
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PART IV
Discuss any concerns that you may have and recommend any improvements regarding the
revenue recognition policy.
1. The current revenue accounting policy may be considered to be boiler plate and not
specific to HW’s business. (1)
2. Furthermore, the current policy recognises revenue when risks and rewards are
transferred to the customer (when products are mailed). IFRS 15 Revenue from
Contracts with Customers (IFRS 15) specifies that revenue should only be recognised
when control of goods passes to the customer (date of delivery). (1)
3. While the transfer of risks and rewards is one potential indicator of the transfer of
control of goods to a customer, it should not be considered in isolation but rather
together with the other potential indicators within IFRS 15. (1)
4. The current accounting policy does not mention the accounting treatment of product
returns. This should be included in the accounting policy based on the specific facts
and return policy of HW. (1)
5. IFRS 15 only permits revenue to be recognised for goods when control of the goods is
transferred to the customer. If the customer has a right of return, IFRS 15.B21 states that
an entity is required to account for the following:
(a) Revenue for the transferred products in the amount of consideration to which
the entity expects to be entitled (therefore, revenue would not be recognised for
the products expected to be returned)
(b) A refund liability
(c) An asset (and corresponding adjustment to cost of sales) for its right to
recover products from customers on settling the refund liability (1)
6. HW should, therefore, include the following in its accounting policy:
6.1 The estimate for products that are expected to be returned (i.e., 15%) (1)
6.2 The impact this has on revenue recognition (i.e., only 85% of consideration received
is initially recognised as revenue), and (1)
6.3 The accounting treatment when the right of return expires (i.e., any remaining refund
liability is recognised as revenue after 30 days) (1)
Total (8)
Maximum (5)
COMMENT
The question assessed the critical thinking ability of the students. Students must be able
to critically evaluate the accounting treatment of various items in the annual financial
statements of the entity. The disclosure requirements are stipulated in the standard, and
detailed knowledge of the standard is required to be able to identify the shortcomings in
the disclosure provided in the scenario.
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QUESTION 2 53 marks
Cellular Connect Ltd (Cellular) is a South African telecommunications company listed in the wireless
telecommunications sector on the Johannesburg Stock Exchange. Cellular was established in 20.01
and listed in 20.05 Cellular provides over 12 million customers with voice, messaging and data
services. Cellular is the third largest mobile network in South Africa.
Industry information
South Africa has one of the largest telecommunications markets on the African continent.
The telecommunications industry is a capital-intensive industry which requires continuous investment
in technology and infrastructure to ensure a reliable network that is technologically up to date and that
has the capacity to deal with growth. There are approximately 80 million active cell phone activations
in South Africa, a country with a population of about 53 million.
The voice revenue in the South African cellular industry has been under pressure over the past three
years due to limited growth in voice minutes and declining voice rates per minute. The major players
have been reducing voice rates in response to competitive pressure. Changing customer needs and
cheaper smart phones have resulted in significant growth in mobile data usage over the past few years
and this trend is expected to continue.
Innovation in product offerings occurs frequently in the industry. Rewarding loyalty by means of free
data and minutes, based on usage, has also become very popular. Customer care remains an
important differentiator between cellular networks and, as a result, network operators are placing more
and more emphasis on customer experience, especially as competition becomes fiercer.
Cellular Connect
In the 20.16 financial year Cellular had two types of customers, namely mobile contract customers and
mobile prepaid customers.
Mobile contract customers may choose between a number of different contracts, offering a variety of
voice minutes, numbers of short message service (SMS) messages and units of data, depending on
the specific package. Most mobile contracts include ‘in bundle’ voice calls, SMS messages and units
of data. All voice calls, SMS messages and units of data used outside bundles are charged to
customers over and above their monthly contract fee. All contracts are of 24 months’ duration and
customers receive handsets upon signing the contracts.
Mobile prepaid customers need to purchase ‘airtime’ which they then use to make voice calls, send
SMS messages and access data. These customers need to buy their own handsets.
Outstanding matters
The Chief Financial Officer (CFO) of Cellular is in the process of analysing the service revenue
performance of the company for the 20.16 financial year and is considering a number of financial
reporting matters arising from its contracts.
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Financial reporting matters
Cellular offers different types of cellular packages to serve the needs of its customers. The latest
offerings are the following:
1. Pay-now-and-then-go
The Pay-now-and-then-go options allow customers to purchase data, SMS messages and voice
minutes (or bundles thereof) separately for cash up front (based on Pay-now-and-then-go rates)
without the commitment of a 24-month contract and the additional cost of financing a smartphone
or tablet. The observable stand-alone selling prices of data, SMS messages and voice minutes
are as follows:
Pay-now-and-then-go rates Per unit Per bundle

Data R0,20 per MB R17,00 for 100 MB
SMS messages R0,30 per SMS R25,50 for 100 SMS messages
Voice minutes R1,65 per minute R140,25 for 100 minutes
2. MyLife contracts
The MyLife100 contract is an example of the MyLife contracts. This contract offers 100 MB of
data, 100 SMS messages and 100 voice minutes per month in return for a fixed monthly payment
in advance, for the duration of a 24-month contract period, as well as an iFoni SPEED
smartphone (iFoni SP), supplied to the customer once the contract has been concluded and
signed. The fixed monthly fee for a MyLife100 contract is R589 per month.
To enter into a MyLife contract, customers select a contract based on their requirements,
complete an application form and provide the required regulatory documentation (Regulation of
Interception of Communications and provision of communication-related information, known as
RICA documentation) to Cellular. Cellular performs a credit check to assess the creditworthiness
of the customer. This normally takes 25 minutes to complete and is done while the customer
waits. Cellular makes use of a credit verification system offered by CreditCheck (Pty) Ltd. Once
the credit check has been successfully completed, a sales representative explains the contract
terms and conditions to the customer, who then signs the contract.
Data, SMS messages and voice minutes that form part of a MyLife contract are priced at a
discount of 15% to the equivalent stand-alone bundle selling prices applicable to the Pay-now-
and-then-go options.
Data, SMS messages and voice minutes not used by a customer in a particular month are not
carried forward to the next month and are thus forfeited.
The iFoni SP is the latest smartphone in the iFoni line of smartphones and incorporates a 3D
touch screen, 12-megapixel camera and 4G LTE. The price of an iFoni SP, if sold separately
and not as part of a MyLife contract, is R8 000.
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3. 12-month warranty
A smartphone or tablet granted by Cellular to customers is covered by a 12-month warranty

provided by Cellular. If a faulty device is returned within seven days of purchase, the customer
receives a new device as a replacement. If it is returned after seven days, Cellular will repair the
device at Cellular’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 smartphone has its own unique serial number. Cellular’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 Cellular.
Cellular’s management made the following reliable estimates in respect of warranties:
(a) Smartphones offered in terms of MyLife contracts are returned for repairs as follows:
• 0% is returned for exchange during the first week after signing the contract.
• 28% are returned for repairs during the 12 months following sale. 25% of these returns
are as a result of liquid contact or cosmetic damage.
• 15% are returned for repairs after the 12-month warranty period.
(b) The probable cost per smartphone that Cellular will incur to repair a smartphone covered
by the 12-month warranty is as follows:
• 60% probability that Cellular will incur an average cost of R4 800.
• 40% probability that Cellular will incur an average cost of R6 700.
4. Computer and data contracts
Cellular introduced a new type of contract in the 20.17 financial year which bundles a computer,
sim card and 3 gigabyte (GB) of monthly mobile data at a special promotional price of R349 per
month over a 24-month period, payable monthly in arrears. There is no upfront connection fee.
The stand-alone selling price of the computer is R5 000. The 3 GB of mobile data are provided
at the beginning of each month and can be rolled over to the following month, at the end of which
the unused data will expire. The stand-alone selling price of a 3 GB mobile data bundle is R180
per month. Extra mobile data is charged at normal out of bundle rates as and when used.
The contract also stipulates a returns policy. The contract can be cancelled without penalty within
seven days of signature, provided that no data on the contract has been used. It is expected
that, on average, 3% of computers will be returned under the returns policy.
Following a successful credit application, the computer is given to the customer and the sim card
and data are activated. Cellular sold 100 contracts on 1 December 20.16. Of the 100 sold, one
customer cancelled the contract in terms of the returns policy. With regard to the remaining
99 contracts, actual information shows that 75% of the data was used in the first month and the
rest was carried forward to the next month. Cellular purchased the computers for R3 500 each
in November 20.16.
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5. Other information
• An appropriate discount rate in respect of the contracts is 9% per annum, compounded

monthly where required.
• Cellular has:
o a 31 October year end
o early adopted IFRS 9 Financial Instruments and IFRS 15 Revenue from Contracts with
Customers
o not applied the portfolio approach as defined in par. 4 of IFRS 15
• All contracts are within the scope of IFRS 15.
REQUIRED
Marks
(a) Discuss the following with regard to a MyLife100 contract in terms of IRFS 15:
(i) Whether the 12-month warranty offered on the iFoni SP should be identified as 9
a separate performance obligation. Do not discuss the seven-day returns
policy.
(ii) Whether a significant financing component exists for each separate 6

performance obligation in a MyLife100 contract.
(iii) The allocation of the transaction price to the separate performance obligations 14
in a MyLife100 contract. Assume that the iFoni SP, data, SMS messages and
voice minutes are each separate performance obligations in the MyLife100
contract. Ignore the 12-month warranty.
(b) Prepare the journal entries to be processed in December 20.16 for 23

Cellular Connect Ltd to account for all consequences arising from the 100 computer
and data contracts sold on 1 December 20.16. Assume there are only two distinct
performance obligations in the contract, namely the computer and 3 GB of mobile
data. The cost of the sim card is negligible and can be ignored.
Please note:

• Journal narrations are not required.
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QUESTION 2 – Suggested solution
(a) Discuss the following with regard to a MyLife100 contract in terms of IFRS 15:
(i) Whether the 12-month warranty offered on the iFoni SP should be identified as a separate
performance obligation. Do not discuss the seven-day return policy.
Determine whether the 12-month warranty should be identified as a separate performance

obligation in the MyLife100 contract that Cellular has to assess at contract inception, if the 12-
month warranty is distinct: (1)
• a good or service (or a bundle of goods or services) that is distinct, or

• a series of distinct goods and services that are substantially the same and that have the
same pattern of transfer to the customer (IFRS 15.22).
Goods and services promised are distinct if both 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 (i.e., the good or service is capable of being distinct),
and
• The entity’s promise to transfer the good or service to the customer is separately
identifiable from other promises in the contract (i.e., the good or service is distinct within
the context of the contract) (IFRS 15.27).
The customer cannot benefit from the warranty on its own, since the warranty will only entitle
the holder of an iFoni SP with a unique serial number to specified repairs. Without the iFoni
SP, the warranty will not provide any benefit to the customer. Customers do not have the option
of purchasing the 12-month warranty separately. (2)
The customer can, however, benefit from the warranty together with other readily available
resources. A readily available resource is a good or service that is sold separately (by the entity
or another entity), or a resource that the customer has already obtained from the entity
(including goods or services that the entity has already transferred to the customer under the
contract). (1)
The iFoni SP is, therefore, a readily available resource, which the customer has already
obtained from the entity (CC).
The warranty is, therefore, capable of being distinct, as the customer can benefit from it
together with other resources that are readily available. (1)
Factors that indicate that an entity’s promise to transfer a good or service to a customer is
separately identifiable (in accordance with IFRS 15.27(b)) include, but are not limited to, the
following:
• The entity does not provide a significant service of integrating the goods or service with
other goods or services promised in the contract into a bundle of goods or services that
represent the combined output for which the customer has contracted.
• The good or service does not significantly modify or customise another good or service
promised in the contract.
• The good or service is not highly dependent on, or highly interrelated with, other goods
or services promised in the contract (IFRS 15.29).
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The warranty is highly dependent on and highly interrelated with the iFoni SP, since the
customer cannot choose to buy the warranty without buying the iFoni SP. (1)
The warranty is, therefore, not separately identifiable (i.e., not distinct within the context of the
contract). (1)
The 12-month warranty is, therefore, not distinct. (1)
Furthermore, IFRS 15 gives specific guidance to identify whether a warranty should be

identified as a separate performance obligation in the contract. If a customer does not have the
option to purchase the warranty separately, the entity shall account for the warranty in terms
of IAS 37 Provisions, Contingent Liabilities and Contingent Assets, unless the promised
warranty, or part of the promised warranty, provides the customer with a service in addition to
the assurance that the product complies with the agreed-upon specifications (IFRS 15.B30).
Customers do not have the option to purchase the 12-month warranty separately. (1)
In assessing whether the warranty provides the customer with a service in addition to the
assurance that the product complies with the agreed-upon specifications, the following facts
should be considered: (IFRS 15.B31)
• Whether the warranty is required by law – indicating that the warranty is not a separate
performance obligation.
• Whether the 12-month warranty provided by Cellular is required by the Consumer
Protection Act of South Africa. (1)
• The length of the warranty coverage period – the longer the coverage, the more likely it
is that the warranty is a separate performance obligation.
• The warranty provided by Cellular is for 12 months only, which is considered to be a
short period when compared to actual warranties on electronics. (1)
• The nature of the tasks that the entity promises to perform – if the entity has to perform
specified tasks to provide assurance that the product complies with agreed-upon
specifications, then those tasks likely do not give rise to a separate performance
obligation.
• CC will repair a defective iFoni SP at its own cost within the first 12 months. This
suggests that Cellular is only providing assurance that their product will function as
intended for a period of at least 12 months. (1)
To conclude, the warranty does not provide a service in addition to the assurance that the iFoni
SP will function as intended for a period of at least 12 months, and should not be identified as
a separate performance obligation in the MyLife100 contract, but should rather be bundled with
the sale of the iFoni SP. (1)
Total (13)
Maximum (9)
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(ii) Whether a significant financing component exists for each separate performance
obligation in a MyLife 100 contract. Provide reasons to support your discussion
In determining the transaction price, an entity shall adjust the promised amount of consideration
for the effects of the time value of money if the timing of payments agreed to by the parties to
the contract (either explicitly or implicitly) provides the customer or the entity with a significant
benefit of financing the transfer of goods or services to the customer. In those circumstances,
the contract contains a significant financing component.
A significant financing component may exist, regardless of whether the promise of financing is
explicitly stated in the contract or implied by the payment terms agreed upon between the
parties to the contract (IFRS 15.60).
An entity shall consider all relevant facts and circumstances in assessing whether a contract
contains a financing component, and whether that financing component is significant to the
contract, including both of the following:
• the difference, if any, between the amount of promised consideration and the cash selling
price of the promised goods or services, and
• the combined effect of both of the following:
° the expected length of time between when the entity transfers the promised goods
or services to the customer and when the customer pays for those goods or
services, and
° the prevailing interest rates in the relevant market (IFRS 15.61)
The data, SMS and voice minutes are transferred to the customer on the same day the monthly
payment is received, and consequently there is no timing difference between transferring the
goods and services and receiving the consideration – no significant financing component. (2)
The following factors support that a significant financing component exists upon the transfer of
an iFoni SP in a MyLife100 contract:
• The difference between the promised consideration and the current cash selling price of
the iFoni SP is considered to be significant. (1)
• The combined effect of the 24-month period between the transfer of the iFoni SP at (1)
inception of the contract and receipt of the final instalment and the discount rate is also
considered to be significant. (1)
Furthermore, none of the following factors, which indicate that a significant financing
component does not exist, is present in the contract: (IFRS 15.62)
• The customer did not pay in advance for the iFoni SP. The iFoni SP is transferred at
contract inception (therefore, not at the customer’s discretion) and deferred payments
are received. (1)
• The consideration promised in the MyLife100 contract is fixed at R589 per month for 24
months, and is neither variable nor dependent on the occurrence or non-occurrence of a
future event. (1)
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• Pay-now-and-then-go options: The wording without the commitment of a 24-month

contract and the additional cost of financing a smartphone, as in the case of a MyLife100
contract, supports that the difference between the promised consideration and the cash
selling price of the iFoni SP is as a result of a significant financing component in the
contract, and does not arise for reasons other than the provision of finance.
(1)
The practical expedient is not available for the transfer of an iFoni SP in a MyLife100 contract,
because the full settlement/payment for the iFoni SP only takes place after 24 months; thus,
after the transfer of the iFoni SP (a timing difference of more than 12 months and, therefore,
not one year or less). (1)
It can be concluded that a significant financing component does exist for the transfer of the
iFoni SP in a MyLife100 contract. (1)
Total (10)
Maximum (6)
(iii) The allocation of the transaction price to the separate performance obligations in a
MyLife100 contract. Assume that the iFoni SP, data, SMS messages and voice minutes
are each separate performance obligations in the MyLife100 contract
The transaction price should be allocated to each performance obligation (or distinct good or
service) in an amount that depicts the amount of consideration to which the entity expects to
be entitled to, in exchange for transferring the promised goods or services to the customer
(IFRS 15.73).
The transaction price must be allocated to each performance obligation identified in the
contract on a relative stand-alone selling price basis as at contract inception (IFRS15.74).
STAND-ALONE SELLING PRICES
The stand-alone selling price is the price at which an entity would sell a promised good or
service separately to a customer.
• The best evidence of the stand-alone selling price of the iFoni SP is its observable price
of R8 000 when Cellular sells the phone separately. (1)
• The best evidence of the stand-alone selling prices of the data, SMS messages and voice
minutes are the observable prices when Cellular sells these items separately under
Pay-now-then-go options. (1)
Performance obligation Option 1 (per unit) Option 2 (per unit)

iFoni SP R8 000 R8 000 (1)
Data R480 (R20 x 24) R408 (R17 x 24) (2)
SMS messages R720 (R30 x 24) R612 (R25,50 x 24) (1)
Voice minutes R3 960 (R165 x 24) R3 366 (R140,25 x 24) (1)
R13 160 R12 386
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TRANSACTION PRICE
The promised amount of consideration of R14 136 (R589 per month x 24) or R589 per month
must be allocated to each performance obligation based on the relative stand-alone selling
prices as determined above (calculations below are based on Option 2, above, but can also be
based on Option 1). (1)
Relative stand-
Performance alone selling Allocation of cash
obligations prices consideration
R R
iFoni SP 8 000 (8 000/12 386 x 14 136) 9 130

Data 408 (408/12 386 x 14 136) 466
SMS messages 612 (612/12 386 x 14 136) 698
Voice minutes 3 366 (3 366/12 386 x 14 136) 3 842 (2)
12 386 14 136
Since a significant financing component exists in respect of the iFoni (see part d(ii)), the
promised amount of consideration must be adjusted for the effects of the time value of money
to determine the transaction price (IFRS15.60). (1)
• Therefore, the promised amount of consideration allocated to the iFoni must be

discounted at 9% over 24 months to determine the present value of the consideration
receivable. (1)
• Alternative 1:
BGN; PMT = 380,42 (9 130 / 24); P/YR = 12; i = 9%; n = 24; compute PV = 8 389 (2)
• Alternative 2: OR
BGN; PMT = 589; P/YR = 12; i = 9%; n = 24; compute PV = 12 989
PV attributable to iFoni: 8 000 / 12 386 x 12 989 = 8 389 (2)
The allocation of the transaction price to each separate performance obligation will, therefore,
be as follows: (2)
Relative Allocation of Finance Allocation of

stand-alone cash element transaction
selling price consideration price
PO’s R R R
iFoni SP 8 000 9 130 Yes 8 389

Data 408 466 No 466
SMS messages
612 698 No 698
Voice minutes 3 366 3 842 No 3 842
12 386 14 136 13 395
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DISCOUNT
A customer receives a discount for purchasing a bundle of goods or services if the sum of the
stand-alone selling prices of those promised goods or services exceed the promised
consideration (IFRS 15.81).
Option 1 (per unit) Option 2 (per unit)

Sum of stand-alone selling prices R13 160 R12 386 (1)
Promised consideration R14 136 R14 136 (1)
No discount No discount
Except when an entity has observable evidence that the entire discount relates to only one or
more, but not all, performance obligations in a contract, the entity shall allocate a discount
proportionately to all performance obligations in the contract (IFRS 15.81).
Total (18)
Maximum (14)
(b) Prepare the journal entries for Cellular to account for all consequences arising from the
100 computer and data contracts for the month of December 20.16.
Dr Cr
R R
1 December 20.16
J1 Contract debtor (SFP) (4 098 [C1] x 100) 409 800 (3)
Revenue – computer (P/L) 397 506 (1)
Refund liability (SFP) (409 800 x 3%) 12 294 (1)
Recognition of computer revenue
J2 Cost of sales (P/L) (3 500 x 100 x 97%) 339 500 (1)
Inventory (SFP) 339 500 (1)
Recognition of cost of sales
J3 Asset for right to recover product to be returned (SFP) 10 500 (1)
Inventory (SFP) (3 500 x 100 x 3%) 10 500 (1)
Recognition of right to recover inventory
7 December 20.16
J4 Refund liability (SFP) [J1] 12 294 (1)
Contract debtor (SFP) [C1] 4 098 (1)
Revenue – computer (P/L) (balancing) 8 196 (1)
Accounting for the returns policy and return of one
computer
J5 Inventory (SFP) 3 500 (1)
Cost of sales (P/L) (10 500 – 3 500) 7 000 (1)
Asset for right to recover product to be returned
(SFP) 10 500 (1)
Accounting for the returns policy and return of one
computer
31 December 20.16
J6 Contract debtor (SFP) (4 098 x 99 x 9% x 1/12) 3 043 (2)
Interest income (P/L) 3 043 (1)
Interest income accrued
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Dr Cr
R R
J7 Bank (349 x 99) 34 551 (1)

Revenue – data (P/L) (161,79 [C2] x 99 x 75%) 12 013 (5)
Income received in advance (SFP)
(161,79 x 99 x 25%) 4 004 (1)
Contract debtor (balancing) 18 534 (1)
Recording receipt of cash and data revenue
Total (26)
Maximum (23)
As the customers are allowed to return the laptops, the consideration received from the
customer on 1 December is variable. Cellular will recognise a refund liability on that date,
which will realise once the laptops are returned or the period for return lapses
(7 December). Also refer to IFRS 15 Example 22 for additional practice.
CALCULATIONS
C1. Transaction price
HP Sharp
FV = 0 FV = 0
N = 24 N = 24 [1]
P/YR = 12 I = 9%/12 [1]
I = 9% PMT = 349 [1]
PMT = 349 PV = 7 639
PV = 7 639
PV attributable to computer: 5 000/9 320 [C2] x 7 639 = 4 098 [1]

PV attributable to data: 4 320/9 320 [C2] x 7 639 = 3 541 [1]
Total [5]
Maximum [3]
C2. Allocation of transaction price
Relative Allocation
stand-alone of Allocation Final
Financing
selling transaction of cash Revenue
element
prices price consideration for the PO
Computer 5 000 4 098 Financed 4 493 4 098 [1]
Data 4 320 3 541 Not financed 3 883 3 883 [3]

(180 x 24) or 161,79
per month
9 320 7 639 8 376 [2]
[C1] (349 x 24)
Total [6]
Maximum [4]
MJM
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QUESTION 3 40 marks
This question consists of two independent parts.
PART I 27 marks
Thingamajig Ltd (Thingamajig) is a company listed on the Johannesburg Stock Exchange and is the
parent of a number of subsidiaries. Thingamajig operates in the manufacturing industry and is based
in Gauteng.
The Thingamajig Group manufactures and distributes widgets and owns a huge widget plant in the
West Rand. The operations of the widget plant are housed in one of the subsidiaries, Gizmo Ltd
(Gizmo). Thingamajig acquired the plant on 1 February 20.15 and paid a cash consideration of
R8,2 million.
During the current financial year, the Thingamajig Group’s business consultants proposed that the
group restructure to be more cost effective. On 15 February 20.17, Thingamajig entered into an
agreement with Gizmo for the sale of the widget plant on condition that Gizmo obtains a loan of
R8 million to be paid as cash consideration. The balance of the consideration is settled through the
transfer of a trademark, used by all companies in the group, from Gizmo to Thingamajig.
Based on previous experience, it was considered highly probable that Gizmo’s loan application would
be successful and that the funds would be paid over to Thingamajig by 31 August 20.17.
The sales agreement negotiated between Thingamajig and Gizmo included a maintenance contract
whereby Thingamajig will maintain the widget plant for the next five years. There is no stand-alone
price for the maintenance contract, but Thingamajig could determine the fair value of similar
maintenance contracts for the same period and on plants of a similar size. The maintenance service
will be delivered as and when needed, at the discretion of Gizmo. The maintenance contract was
identified as a major significant component.
The group’s attorneys compiled all the necessary paperwork, and Thingamajig and Gizmo signed the
sales agreement on 31 March 20.17.
The application for the loan was formally started on 15 April 20.17, including the necessary guarantees
and compliance with FICA requirements. The loan was duly approved and registered on 1 July 20.17.
On this date, Gizmo paid the total cash consideration and transferred the trademark to Thingamajig.
The carrying amount of the widget plant and the trademark on 1 July 20.17 was R6 million and
R1,3 million, respectively. Gizmo obtained control over the widget plant on 1 July 20.17.
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The fair values on the relevant dates were as follows:
15 February 20.17 31 March 20.17 1 July 20.17

R R R
Trademark (included in Gizmo) 1 450 000 1 460 000 1 470 000

Plant (included in Thingamajig) (note 1) 9 100 000 9 110 000 9 125 000
Similar maintenance contracts (note 2) 480 000 490 000 495 000
Note 1: These amounts are the market based stand-alone prices, since an adjusted market
assessment approach was duly followed.
Note 2: These amounts are the market based stand-alone price, since an adjusted market assessment
approach was duly followed, calculated by taking into account the time value of money and current
market conditions.
Additional information
1. The Thingamajig Group measures plant and intangible assets in accordance with the cost model
per IAS 16 and IAS 38 respectively. Impairment testing is performed annually at year end.
2. Assume a normal income tax rate of 28% and a capital gains tax inclusion rate of 80%.
Ignore value-added tax (VAT) and dividend tax.
3. All the companies in the group have a 31 January year end.
PART II 13 marks
CarSmart Ltd (CarSmart) is listed on the Johannesburg Stock Exchange. The company’s main
business is providing labour fitment services of car security systems.
AlarmsCo Ltd (AlarmsCo) is the largest distributer of alarms and immobiliser anti-hijack systems in
Gauteng. Designa Cars Ltd (Designa Cars) is a new and used car dealership which also sells spare
parts. Its spares division stocks a variety of car parts and accessories.
On 31 May 20.17, CarSmart entered into negotiations with AlarmsCo and Designa Cars to form a
partnership to manufacture gear locks. On 1 July 20.17 a separate legal entity, Gripping Gears Ltd
(Gripping Gears), was formed in accordance with the South African Companies Act, 2008.
The contractual agreement between the parties specified the following:
• Voting rights of the arrangement are conferred as follows:
CarSmart 50%
AlarmsCo 21%
Designa Cars 29%
• The agreement requires a 60% majority vote for operational decisions and a 75% majority vote
for decisions that significantly affect the parties’ returns.
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• Relevant activities include labour, inventory supply and after-sales services to meet customer
needs.
• AlarmsCo has rights to the alarms inventory supplied to CarSmart and are liable for any product
defects and additional costs incurred in that regard. Certain products bear a product warranty
and other products have a full guarantee with a money back option.
• CarSmart is responsible for the service and any costs related to installing the equipment in the
cars. CarSmart will continue to use their current employees. Any part of the car that is damaged
during fitment will be repaired and the costs shared between AlarmsCo and CarSmart.
• Designa Cars is responsible for supplying CarSmart with imported motor spare parts if damage
occurs during fitment, for example, a cracked dashboard or shattered windscreen.
These imported spare parts are not supplied to parties outside this framework agreement.
Designa Cars only uses CarSmart for all their car security requirements for cars purchased to
resell on its floor.
• All after-sales services will be the responsibility of the particular parties in proportion to the
relevant fitment and supply of products and services to the client.
• The parties allowed to vote in this arrangement have agreed that all revenue and expenses are
allocated based on the relative voting rights of each party to this arrangement.
REQUIRED
Marks
PART I
(a) Discuss how the proceeds from the contract to dispose of the widget plant should be 21
recognised and measured in the separate accounting records of Thingamajig Ltd for
the year ended 31 January 20.18, with reference to step 2 to step 5 of revenue
recognition in accordance with IFRS 15 Revenue from Contracts with Customers.
Your discussion should include related amounts.
(b) Prepare only the pro forma consolidation journal entry relating to the elimination of 6
the intragroup sale transaction of the widget plant in the consolidated financial
statements of the Thingamajig Ltd Group on 1 July 20.17. The journal entry relating
to deferred taxation is not required.
PART II
Discuss, with reasons, the appropriate classification of the arrangement in the financial 11
statements of the CarSmart Ltd Group in accordance with IFRS 11 Joint Arrangements.

Please note:

• Show all your calculations.
MJM
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PART I
(a) Discuss how the proceeds from the contract to dispose of the widget plant should be
recognised and measured in the separate accounting records of Thingamajig Ltd (only
step 2 to step 5)
Step 2: Identify the performance obligations in the contract
According to IFRS 15.22, a performance obligation is identified if the goods or services are
distinct. A performance obligation is a promise of a good or a service.
For a good or service to be distinct, both criteria of paragraph 27 should be met: customer must
gain benefit from a good or service and the good or service should be separately identifiable
(IFRS 15.27).
The widget plant and maintenance contract on their own will benefit Gizmo Ltd, since all benefits
from the plant and maintenance contract will be transferred. (1)
For a good or a service to be separately identifiable, the product and service should not be
integrated or significantly modified or inter-dependent (IFRS 15.29).
The sale of the plant is a separate performance obligation and could be separately identified
and distinct from the maintenance contract. (1)
The sale of the plant and the maintenance contract are two separate performance obligations.
(1)
Step 3: Determine the transaction price
The transaction price is the consideration the entity expects to be entitled to in a contract (IFRS
15.47).
If the transaction includes a non-cash consideration, the entity shall measure the non-cash
consideration at fair value (IFRS 15.66).
IFRS 15.87-.90 refers to changes in transaction price due to various reasons, including the
resolution of uncertain events. The entity shall allocate subsequent changes to the performance
obligations on the same basis as at contract inception.
The contract is only exercisable on 1 July 20.17, when the asset is transferred. (1)
Therefore, the fair value of R1 470 000 on 1 July 20.17 for the trademark is taken into
consideration. (1)
In this case, the total consideration will be R9 470 000 (cash of R8 000 000 and the fair value
of trademark of R1 470 000). (2)
In terms of IFRS 15.62(a), a contract with a customer would not have a significant financing
component if the customer paid for the goods or services in advance and the timing of the
transfer of those goods or services is at the discretion of the customer.
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Gizmo Ltd can decide when the maintenance service will be delivered and, therefore, the
maintenance contract does not have a significant financing component. (1)
Step 4: Allocate the transaction price to the performance obligations
In terms of IFRS 15.76, the transaction price shall be allocated to the performance obligation,
based on their stand-alone prices at contract inception.
As IAS 16 does not specify how to separate one or more parts of the contract, IFRS 15 applies
(IFRS 15.7(b)). If there are two or more performance obligations, the transaction price should
be allocated to those performance obligations based on their stand-alone prices.
(1)
According to step 2 above, there are two performance obligations and, therefore, the
transaction price should be allocated to the plant and the service contract. (1)
The stand-alone prices can be based on the market assessment approach. (1)
On 15 February 20.17, the contract inception date, the fair value of the plant was R9 100 000
and the service contract was R480 000, totalling R9 580 000. (1)
The contract price allocated to the plant will be R8 995 511 (9 100/9 580 x R9 470 000) and to
the maintenance contract R474 489 (480/9 580 x R9 470 000). (3)
Step 5: Recognise revenue as (when) the entity satisfies the performance obligation
An entity shall recognise revenue when the entity satisfies the performance obligation by
transferring goods or services to the customer (IFRS 15.31), when control is transferred.
At inception of the contract the entity shall determine if the performance obligation is satisfied
over a period of time or at a point in time when control is transferred to the customer
(IFRS 15.32).
Revenue is recognised at a point in time if the performance obligation is not satisfied over a
period of time (IFRS 15.38). It is satisfied over a period of time if any one of the three
requirements of IFRS 15.35 apply.
The plant performance obligation is not satisfied over a period of time and should, therefore,
be recognised at a point in time on 1 July 20.17. (1)
Revenue from the service contract should be recognised over a period of time (IFRS 15.35(a)).
With respect to the maintenance contract performance obligation, Gizmo Ltd consumes
benefits, as Thingamajig Ltd performs the maintenance over the next five years.
(1)
Thingamajig Ltd will account for the progress on the maintenance contract using the input
method in accordance with IFRS 15.41 with reference to time lapsed. (1)
For the financial year ended on 31 January 20.18, Thingamajig Ltd will recognise proceeds of
R55 357 (R474 489 x 7/60) relating to the maintenance contract. (2)
For the sale of the widget plant, Thingamajig Ltd will recognise proceeds of R8 995 511 on
1 July 20.17. (1)
Total (21)
MJM
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COMMENT
The required stated that only step 2 to 5 should be discussed; yet many students
discussed step 1. Read the required carefully.
Also note that the required stated that the proceeds should be discussed and not the
actual sale of the plant.
(b) Pro forma consolidation journal entry for the year ended 31 January 20.18
Dr Cr
R R
J1 Other income (P/L) (balancing) 3 165 511 (1)

Intangible asset: Trademark (SFP)
(1 470 000 – 1 300 000) 170 000 (2)
PPE: Plant (SFP) (8 982 718 [C1] – 6 000 000) 2 982 718 (2)
Maintenance service to be provided (SFP) 474 489 (1)
PPE: Maintenance component of plant (SFP) [C1] 487 282 (1)
Elimination of intragroup plant sale transaction
Total (7)
Maximum (6)
COMMENT
To explain the above journal, the journals in the separate accounting records of
Thingamajig and Gizmo are provided below.
Dr Cr
R R
Thingamajig
J1 Bank (SFP) 8 000 000
Trademark (SFP) 1 470 000
Plant (SFP) 6 000 000
Maintenance service to be provided (SFP)
(Step 4 above) 474 489
Other income (P/L) (balancing) 2 995 511
Recognition of sale of plant
Gizmo
J1 Plant (SFP) [C1] 8 982 718
Plant (service contract) (SFP) [C1] 487 282
Trademark (SFP) 1 300 000
Loan payable (SFP) 8 000 000
Other income (P/L) (balancing) 170 000
Recognition of plant and services acquired
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The consolidation will be performed as follows:
Thinga- Pro forma Conso-

majig Gizmo consoli- lidated
accounting accounting dation accounting
records ** records ** entry records
R R R R
Bank (SFP) 8 000 000 - - 8 000 000
Trademark (SFP) 1 470 000 - (170 000) 1 300 000
Plant (SFP) - 8 982 718 (2 982 718) 6 000 000
Plant (service contract)
(SFP) - 487 282 (487 282) -
Maintenance service to
be provided (SFP) (474 489) - 474 489 -
Loan payable (SFP) - (8 000 000) - (8 000 000)
Other income (P/L) (2 995 511) (170 000) 3 165 511 -
Other net assets
(balancing) (6 000 000) (1 300 000) - (7 300 000)
- - - -
** Balances after J1 was processed
CALCULATIONS
C1. Fair value allocation by purchaser
Fair value of consideration paid (8 000 000 + 1 470 000) 9 470 000
Fair value of plant and maintenance contract received
(9 125 000 + 495 000) 9 620 000
Proportionate allocation of purchase price to assets acquired:

Plant (9 125 000 / 9 620 000 x 9 470 000) 8 982 718
Maintenance contract (495 000 / 9 620 000 x 9 470 000) 487 282
9 470 000
MJM
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PART II
Discuss, with reasons, the appropriate classification and recognition of the arrangement in the
financial statements of the CarSmart Ltd Group
A joint arrangement is an arrangement of which two or more parties have joint control
(IFRS 11.5).
Joint control is the contractually agreed sharing of control of an arrangement, which only exists
when decisions about the relevant activities require the unanimous consent of the parties
sharing control (IFRS 11.7).
CarSmart, AlarmsCo and Designa Cars entered into a contractual agreement. (1)
The terms of the agreement require a 60% majority vote for operational decisions and a 75%
majority vote for decisions that significantly affect the parties’ returns. (1)
CarSmart is entitled to a 50% voting right, AlarmsCo to a 21% voting right and Designa Cars to
a 29% voting right. (1)
Unanimous consent is implied as both CarSmart and Designa Cars have to agree in order to
finalise a decision, as they have a combined 79% voting right. (2)
A joint arrangement thus exists, as CarSmart and Designa Cars have joint control over Gripping
Gears. (1)
An entity shall determine the type of joint arrangement in which it is involved. The classification
of a joint arrangement as a joint operation or joint venture depends upon the rights and
obligations of the parties to the arrangement (IFRS 11.14).
The joint arrangement is carried out through a separate vehicle whose legal form confers
separation between the parties and the separate vehicle.
The contractual agreement is carried out through a separate vehicle, Gripping Gears, and,
therefore, it can either be classified as a joint venture or a joint operation. (1)
A joint operation is a joint arrangement whereby the parties that have joint control have rights
to the assets and obligations for the liabilities relating to the arrangement (IFRS 11.15).
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 (IFRS 11.15).
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Other terms of the contractual agreement
• The arrangement provides CarSmart and Designa Cars with rights to the assets supplied
in the arrangement. Therefore, the parties share rights to the assets in proportion to the
activity carried out through the arrangement that is directly attributed to them.
(1)
• The terms establish that CarSmart and Designa Cars are liable for claims raised by third
parties. Thus, obligations rest with all the parties.
(1)
• All revenues and expenses are allocated based on the relative voting rights of each party
to this arrangement.
(1)
The contractual agreement should, therefore, be classified as a joint operation in accordance
with IFRS 11 Joint Arrangements. (1)
Total (11)
COMMENT
A joint arrangement is dependent upon the joint control and unanimous consent on
operational decisions that significantly affect the parties’ returns. No joint arrangement
can be discussed without these factors. Refer to the helpful flow chart included under
IFRS 11.B21.
The terms and conditions of the contractual arrangement will always be inspected as
these can override the legal form of the separate entity in determining who has the right
to the underlying assets and obligations for the liabilities. Refer to the helpful table
The standard further includes six examples in the Illustrative Examples IFRS 11 part B
which is important to work through. These examples illustrate the judgement and
reasoning applied when classifying a joint arrangement as a joint operation or joint
venture. The flow chart included under IFRS 11.B33 also assists in the classification of
a joint arrangement structured through a separate vehicle.
For further guidance on joint arrangements, refer to the joint arrangement chapter in
Group Statements.
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QUESTION 4 40 marks
Hoi Paloi Dentists Ltd (Hoi Paloi) is listed on the Johannesburg Stock Exchange. Hoi Paloi is a
manufacturer of dental units and wholesaler of various mouth hygiene products. A dental unit includes
a dental chair, an instrument tray and an LED operation light. The items in these dental units cannot
be purchased separately.
Dental units and other contract additions
The contract terms and conditions relating to the sale of a dental unit are as follows:
• The contract provides the customer with a 30-day 100% money-back guarantee. During the past
three years only 3,33% of all dental units have been returned for a full refund.
• Included in the contract is a free one-year warranty which covers the full replacement of any
dental unit due to manufacturing defects. The warranty assures the customer that the dental unit
complies with agreed-upon specifications and will operate as specified for one year from the
date of purchase. The warranty is not sold separately, and the estimated cost of this warranty is
R15 000 per dental unit. During the past five years only 6% of all dental units have required
replacement within a period of one year due to manufacturing defects.
• The contract also provides the customer the right to receive training services regarding the use
of the dental unit at no extra cost. Hoi Paloi regularly sells separate training services to
customers, without the purchase of a dental unit. The customer has the option to purchase these
training services separately.
Mouth hygiene products
During the financial year ended 28 February 20.19, Hoi Paloi sold mouth hygiene products at a stand-
alone selling price of R13 750 000. On 1 March 20.17, Hoi Paloi introduced a customer loyalty program
that rewards customers with one customer loyalty point for every R250 spent on any mouth hygiene
product purchased from Hoi Paloi. Each loyalty point is redeemable for a discount on future purchases
of mouth hygiene products. The estimated stand-alone price of one point is R5,50.
Hoi Paloi expects that 35 000 points will be redeemed cumulatively for revenue earned during the
financial year ended 28 February 20.18. At the end of the 20.18 financial year, only 22 580 points have
been redeemed by customers. As on 28 February 20.19, 34 850 points have been redeemed
cumulatively in respect of the 20.18 sales. Hoi Paloi still expects that 35 000 points will be redeemed
in total. Total sales for the 20.18 financial year amounted to R10 800 500 (the stand-alone selling
prices of the products).
At the end of the 20.19 financial year, 32 540 points have been redeemed by customers and Hoi Paloi
expects that 38 000 points will be redeemed in total, in respect of the 20.19 sales.
MJM
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The accountant correctly posted the following journal entry for the year ended 28 February 20.18:
Dr Cr
R R
Bank (SFP) 10 800 500

Revenue: products (P/L) 10 568 004
Revenue: loyalty points (P/L) 149 993
Contract liability (SFP) 82 503
Contract with SayAah Ltd (SayAah)
SayAah is a major dentist facility that provides dental units to the medical departments of universities
nationally. On 15 January 20.19, SayAah entered into a contract with Hoi Paloi and purchased 150
dental units at a stand-alone price of R85 000 each. Hoi Paloi manufactures these dental units at a
cost price of R55 000. SayAah Ltd has returned two dental units for a full refund within the 30-day
period.
On 28 February 20.19, although being unconditionally entitled to payment for the units delivered to
SayAah, Hoi Paloi has not received any payment from them.
Joint arrangement with OpenWide Ltd (OpenWide)
Hoi Paloi has identified an ideal opportunity to assist children in the rural areas in the countryside of
South Africa by taking dental services to them by means of mobile dental units. Management of
Hoi Paloi has approached OpenWide, an unrelated entity, to form a consortium to make this
opportunity a reality.
A separate entity, MilkyTeeth Ltd (MilkyTeeth) has been formed. Hoi Paloi and OpenWide each have
a 50% shareholding in MilkyTeeth. The companies have signed a consortium agreement that outlines
the activities of the arrangement and establishes a joint arrangement committee. Each company has
a representative in the joint arrangement committee and all decisions require unanimous consent.
Hoi Paloi is responsible for the manufacturing of the dental units, while OpenWide is responsible for
supplying and fitting of the mobile vehicles.
Each company individually uses its own resources and expertise to manufacture, supply and distribute
the mobile dental units jointly. The two companies share the revenues from the sale of mobile dental
units and jointly incur expenses. The revenues and common costs are shared as contractually agreed
in the consortium agreement.
A separate bank account is established through which revenue is received and shared costs are paid.
The bank account is in the name of MilkyTeeth. Each company incurs its own separate costs and
recognise these cost fully in their separate financial statements. These costs include labour costs,
manufacturing costs, supplies, inventory of unused parts and work in progress. Hoi Paloi and
OpenWide retain full ownership of the assets used in the arrangement and are separately liable for
the obligations incurred.
You may assume that the terms of the consortium agreement did meet the criteria for joint control in
accordance with IFRS 11 Joint Arrangements.
1. Assume a normal income tax rate of 28% and a capital gains tax inclusion rate of 80%.
2. Ignore value-added tax (VAT) and dividend tax.
MJM
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REQUIRED
Marks
(a) With reference to Hoi Paloi Dentists Ltd, identify and discuss the performance 12
obligation(s) of the dental units and other contract additions, in terms of IFRS 15
Revenue from Contracts with Customers. Your answer should clearly indicate if the
promised goods or services in the contract are separate performance obligations or
not.
(b) Prepare the journal entries to account for the customer loyalty program in the financial 9
statements of Hoi Paloi Dentists Ltd for the year ended 28 February 20.19.
(c) Prepare the journal entries in the financial statements of Hoi Paloi Dentists Ltd to 13
account for all the possible journal entries arising from the contract with SayAah Ltd
for the year ended 28 February 20.19.
(d) Provide a memorandum to the management of Hoi Paloi Dentists Ltd to discuss the 4
classification of the joint arrangement.
Please note:

• Journal narrations are not required.
MJM
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(a) Identify and discuss the performance obligation(s) of the dental units and other contract
additions, in terms of IFRS 15 Revenue from Contract with Customers. Your answer
should clearly indicate if the promised goods or services in the contract are separate
performance obligations or not.
At contract inception, Hoi Paloi Dentists Ltd must assess the goods and services promised in
a customer contract and identify a separate performance obligation for each promise to
transfer, namely
• a good or service (or a bundle of goods or services) that is distinct, or

• a series of distinct goods or services that are substantially the same and that have the
same pattern of transfer to the customer (1)
Goods and services promised are distinct if both of the following criteria are met:
• The customer can benefit from the goods or services either on their own or together with
other resources that are readily available to the customer.
• The entity’s promise to transfer the goods or services to the customer is separately
identifiable from other promises in the contract.
Dental unit
The dental unit, as a whole, is capable of being distinct, because the customer can benefit from
its use on its own without the warranty or the training services. (1)
The dental unit is also separately identifiable, since
• the dental unit is not highly dependent on, or highly interrelated with, other goods or
services promised in the contract (1)
• the dental unit is not significantly modified or customised for any customer (1)
• Hoi Paloi does not provide a significant service of integrating the dental unit with other
goods or services promised in the contract (the dental unit is not used as an input to
deliver a combined output) (1)
Therefore, the dental unit is distinct and will be a separate performance obligation. (1)
Thirty-day money-back guarantee
This guarantee is not a separate performance obligation, since it is a promise to stand ready
to accept a returned product. It is not accounted for as a performance obligation in addition to
the obligation to provide a refund (IFRS 15.B22). (2)
One-year warranty
A free one-year warranty provides a customer with an assurance that the dental unit will
function as intended. Failure within a year of purchase will result in a full replacement of any
dental unit (IFRS 15.B28).
Customers do not have the option to purchase the warranty separately, as Hoi Paloi does not
sell it separately. (1)
Furthermore, the promised warranty or any part of the warranty does not provide the customer
with a service in addition to the assurance that the dental unit complies with agreed
specifications (IFRS 15.B30). (1)
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Thus, the warranty is not a distinct service and thus is not a performance obligation. (1)
Hoi Paloi shall be accountable for the warranty in terms of IAS 37 Provision, Contingent
Liabilities and Contingent Assets, unless the warranty provides a customer with a service in
addition to the assurance that the product complies with the agreed-upon specifications
(IFRS 15.B30). (1)
Furthermore, the 30-day money-back guarantee, as well as the one-year warranty, should be
bundled together and included with the sale of the dental unit. (1)
Training services
The training services is capable of being distinct, as the customer can benefit from it on its own.
(1)
The training services are sold separately and, therefore, the promise is separately identifiable
from other promises in the contract as follows:
• The training services are not integrated with the dental unit itself, as the dental unit can
be used without the training services.
(1)
• The training services do not significantly modify or customise the dental unit.
(1)
• The training services are not highly dependent on, or highly interrelated with the dental
unit, as the customer can purchase the dental unit without the training services.
Therefore, the training services are distinct and will be a separate performance obligation. (1)
(1)
Conclusion
Based on the discussion above, Hoi Paloi will have two performance obligations, namely the
dental unit and the training services. (1)
Total (19)
Maximum (12)
COMMENT
Dental unit
The reading part stated that “The items in these dental units cannot be purchased
separately”. There is, therefore, no need to discuss each individual item within the dental
unit.
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(b) Prepare the journal entries to account for the customer loyalty program in the financial
statements of Hoi Paloi Dentists Ltd for the year ended 28 February 20.19.
Dr Cr
R R
28 February 20.19
J1 Contract liability (SFP) [C1] 81 506 (5)
Revenue: loyalty points (P/L) 81 506 (1)
Recognise revenue from 20.18 loyalty points redeemed in
20.19
J2 Bank (SFP) 13 750 000 (1)
Revenue: loyalty points (P/L) [C1] 253 459 (2)
Total (12)
Maximum (9)
Alternative combined journal
Dr Cr
R R
Bank (SFP) 13 750 000
Revenue: products (P/L) [C1] 13 454 012
(81 506 (20.18) + 253 459 (20.19)) 334 965
Contract liability (SFP) 38 977
redeemed at 20.18
COMMENT
The journal entry for 28 February 20.18 was provided in the question. The marks would,
therefore, not be awarded for the 20.18 calculations, except for the 20.18 points
redeemed in 20.19.
MJM
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(c) Prepare the journal entries in the financial statements of Hoi Paloi Dentists Ltd to account
for all the possible journal entries arising from the contract with SayAah Ltd for the year
ended 28 February 20.19.
Dr Cr
R R
15 January 20.19
J1 Debtors (SFP) (85 000 x 150) 12 750 000 (1)
Revenue: dental units (P/L) 12 325 425 (1)
Refund liability (SFP) (12 750 000 x 3,33%)
Recognition of dental units’ revenue 424 575 (1)
J2 Cost of sales (P/L)
(55 000 x 150 x 96,67%) or (balancing) 7 975 275 (2)
Asset for right to recover product to be returned (SFP)
(55 000 x 150 x 3,33%) 274 725 (2)
Inventory (SFP) (55 000 x 150) 8 250 000 (1)
Recognition of cost of sales and right to recover inventory
15 February 20.19
J3 Refund liability (SFP) 424 575 (1)
Revenue: dental units (P/L) (424 575 x 3/5) 254 745 (1)
Debtors (SFP) 169 830 (1)
Accounting for the returns policy and return of two dental
units
J4 Inventory (SFP) (274 725 x 2/5) 109 890 (1)
Cost of sales (P/L) (274 725 x 3/5) 164 835 (1)
(SFP) 274 725 (1)
Accounting for the returns policy and return of two dental
units
28 February 20.19
J5 Expenses under assurance warranty (P/L)
(150 x 6% x 15 000) 135 000 (1)
Provision for expenses under assurance
warranty (SFP) 135 000 (1)
Provision for warranty expenses
Total (16)
Maximum (13)
MJM
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COMMENT
The number of units expected to be returned can also be calculated as (150 units x
3,33%) = 5 units, instead of using the return percentage x the Rand amount. This would
still be marked and the journal entries would be as follows:
Dr Cr
R R
15 January 20.19
J1 Debtors (SFP) (85 000 x 150) 12 750 000
Revenue: dental units (P/L) 12 325 000
Refund liability (SFP) (3,33% x 150 = 5 x 85 000) 425 000
Recognition of dental units’ revenue
J2 Cost of sales (P/L)
(55 000 x (150 – 5) or (balancing) 7 975 000
(SFP) (55 000 x 5) 275 000
Inventory (SFP) (55 000 x 150) 8 250 000
Recognition of cost of sales and right to recover
inventory
15 February 20.19
J3 Refund liability (SFP) 425 000
Revenue: dental units (P/L) (425 000 x 3/5) 255 000
Debtors (SFP) 170 000
Accounting for the returns policy and return of two
dental units
J4 Inventory (SFP) (275 000 x 2/5) 110 000
Cost of sales (P/L) (275 000 x 3/5) 165 000
(SFP) 275 000
Accounting for the returns policy and return of two
dental units
28 February 20.19
J5 Expenses under assurance warranty (P/L)
(150 x 6% x 15 000) 135 000
Provision for expenses under assurance
warranty (SFP) 135 000
Provision for warranty expenses
MJM
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(d) Provide a memorandum to the management of Hoi Paloi Dentists Ltd to discuss the
classification of the joint arrangement.
MEMORANDUM
To: Management
From: Accountant
Date: 23 April 20.19
Subject: Consortium agreement with OpenWide Ltd
The rights and obligations of both parties to the joint arrangement must be assessed to
determine the classification of the arrangement as either a joint operation or a joint venture.
As specifically stated, the arrangement is a joint arrangement. (1)
The structure of the entity should be considered:

• This joint arrangement is structured through a separate entity, MilkyTeeth. (1)
• MilkyTeeth has its own separate financial accounting records in respect of shared
revenues and costs and a separate bank account. (1)
• The arrangement may, therefore, still be classified as either a joint operation or joint
venture. (1)
When an arrangement is structured through a separate entity, the following must also be
considered:
• The legal form of the separate entity: MilkyTeeth is a private company registered in terms
of the Companies Act, 2008, of South Africa. The legal form confers separation between
Hoi Paloi, OpenWide and MilkyTeeth. The assets and liabilities held by MilkyTeeth are the
company’s assets and liabilities and the shareholders are entitled to the net assets.
• Features of the contractual arrangement between the Hoi Paloi and OpenWide are: (2)
• The consortium agreement outlines that the parties have rights to the assets and
liabilities of the arrangement. (1)
• The parties are also individually liable for the claims of MilkyTeeth. (1)
The terms of the consortium arrangement override the legal form of MilkyTeeth. Therefore, (1)
the joint arrangement would be classified as a joint operation, as each company has direct
rights to the assets and obligations for the liabilities of the arrangement. (1)
Total (10)
Maximum (4)
COMMENT
If the consortium arrangement had not been structured through a separate entity, then
the arrangement can only be a joint operation (IFRS 11.B16). Refer to the helpful flow
chart included under IFRS 11.B21.
The terms and conditions of the contractual arrangement will always be inspected, as
these can override the legal form of the separate entity in determining who has the
rights to the underlying assets and obligations for the liabilities. Refer to the helpful
table included under IFRS 11.B27.
MJM
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CALCULATIONS
C1. Loyalty points
R
28 February 20.18
Loyalty points incurred during 20.18 (10 800 500/250) 43 202 [1]
Stand-alone selling price of loyalty points (43 202 x 5,50) 237 611 [1]
Allocation of transaction price in 20.18:

(10 800 500/(10 800 500 + 237 611) x 10 800 500) 10 568 004
Revenue allocated to loyalty points

(237 611/(10 800 500 + 237 611) x 10 800 500) 232 496 [1]
Redeemed in 20.18
(22 580/35 000 x 232 496) 149 993 [1]
Unredeemed revenue for loyalty points (232 496 – 149 993) 82 503
28 February 20.19
Redeemed in 20.19 (20.18 sales)
((34 850 - 22 580)/35 000 x (149 993 + 82 503)) 81 506 [1]
[5]
OR Alternative
(34 850 – 22 580)/(35 000 – 22 580) x 82 503
20.19 sales
Loyalty points incurred during 20.19 (13 750 000/250) 55 000
Stand-alone selling price of loyalty points (55 000 x 5,50) 302 500
Allocation of transaction price in 20.19:

(13 750 000/(13 750 000 + 302 500) x 13 750 000) 13 454 012 [2]
Revenue allocated to loyalty points

(302 500/(13 750 000 + 302 500) x 13 750 000) OR
(13 750 000 – 13 454 012) 295 988
Redeemed in 20.19 (32 540/38 000 x 295 988) 253 459 [2]
Unredeemed revenue for loyalty points (295 988 – 253 459) 42 529 [1]
MJM
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QUESTION 5 40 marks
Ignore taxation and value-added tax (VAT)
Advertising revenue
Umbrella FM is a private radio station in South Africa and owned by the Umbrella Ltd Group (Umbrella).
The station broadcasts on FM stereo as well as the SDtv audio bouquet, a direct broadcast satellite
service owned by PolyChoice Ltd. Umbrella has a 31 March year end and is listed on the
Johannesburg Stock Exchange.
Advertising makes up a major part of Umbrella’s revenue, both on-air as well as via Umbrella’s website,
social media profiles and streaming services. Umbrella sells advertising as airtime to clients. Airtime
slots vary in price, depending on the length, the time of the day and the show during which they air. In
some cases, advertisements are read by on-air personalities in the hope that more people will pay
attention. These slots tend to cost more than the traditional airtime slots.
On 1 June 20.19, Umbrella entered into a contract with Salt and Pepper Ltd (Salt and Pepper).
Salt and Pepper is trying to boost their sales and, based on the market research conducted internally,
they have identified radio as one of the marketing tools. In terms of the arrangement, the parties have
both agreed and committed that:
• Umbrella FM will air the Salt and Pepper’s 90-second advertisement during one of their prime
time shows, “Back to Brilliance”, effective from 1 July 20.19 to 30 June 20.20.
• Umbrella FM cannot air an ad for any of Salt and Pepper’s direct competitors or associates
during these slots for the duration of the contract.
• Salt and Pepper is expected to pay Umbrella a fixed amount of R1 425 000 per month for 150
ads per month.
In terms of this twelve-month arrangement, neither Umbrella nor Salt and Pepper is allowed to
terminate the contract without the consent of the other party. Should any of the parties decide to
terminate the contract, a penalty fee of R15 million may be imposed by the other party to the contract.
Radio special events
Umbrella FM often hosts special events. These events serve the dual purpose of attracting new
listeners to the station and bringing in extra revenue through ticket sales and merchandising.
One of these events is an annual boat cruise and gala dinner during which on-air personalities will
mingle with listeners and give speeches. Tickets are sold at a premium and the proceeds earned by
the station are substantial.
During the previous financial year, Umbrella entered into a two-year contract with
League Ltd (League), an advertising partner, to organise the annual boat cruise and gala dinner.
League will be responsible for selling the tickets and will pay Umbrella a total fee of R8 652 000 for
hosting the gala dinners and boat cruises.
MJM
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On 1 April 20.19 Umbrella incurred the following costs in respect of this contract:
R
Legal fees for setting up the contract 658 225

Software costs (to administer the contract)* 250 000
Upfront payment for 150 delegates
(Accommodation, travel, catering and entertainment) 1 200 000
Total 2 108 225
* Similar software is amortised over the period of three years to a Rnil residual value.
Umbrella will recover the above costs, with the exception of the legal fees, from League. All of the
above costs are incurred by Umbrella to ensure that they can meet their future obligations in terms of
the contract.
The first boat cruise and gala dinner took place in November 20.19 and 75 delegates from
Umbrella FM were present during the cruise.
Ms Umoya, the financial accountant responsible for the preparation of the financial statements of
Umbrella, processed the following entries for the year ended 31 March 20.20 in respect of the above
contract:
Dr Cr
R R
31 March 20.20
Legal fees (P/L) 658 225
Suspense account (SFP) 250 000
Gala dinner fees (P/L) 1 200 000
Bank 2 108 225
Recognition of the actual expenses incurred for the boat cruise and gala
dinner contract
Khosi Ltd
On 1 December 20.19, Umbrella entered into a joint arrangement with Holding Ltd (Holding), a
hardware manufacturing company wherein they formed a separate entity, Khosi Ltd (Khosi) in
accordance with the South African Companies Act, 2008. Khosi Ltd was established to cater for the
growing need for software required to remain competitive in the industry. The arrangement has the
following features:
• Khosi operates its own bank account, has rights to all its assets and is liable for all its liabilities.
• Khosi keeps its own accounting records, separate to that of the parties.
• Khosi primarily supplies software to the parties, i.e., Umbrella and Holding, and can only sell the
residual to outside clients after the needs of the parties have been met.
• The parties have agreed that all revenue and expenses are allocated based on the relative voting
rights of each party to this arrangement.
Ms Umoya has accounted for this joint arrangement as a joint operation. According to her, there is no
clear indication that the joint arrangement’s legal form confers separation between the parties and the
separate vehicle.
MJM
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REQUIRED
Marks
(a) Discuss how Umbrella Ltd Group should account for the revenue from the contract 11
with Salt and Pepper Ltd, i.e., step 4 – 5 of the revenue recognition model, in
accordance with IFRS 15 Revenue from Contracts with Customers, for the year ended
31 March 20.20.
You may assume that the advertising contract with Salt and Pepper meets all the
requirements to be recognised as a contract in accordance with IFRS 15
Revenue from Contracts with Customers.
(b) Prepare a memorandum to Ms. Umoya, wherein you
i. Critically analyse the accounting treatment of the contract costs incurred for the 20
boat cruise in the financial statements of Umbrella Ltd for the year ended
31 March 20.20.
Your answer must discuss concerns over the accounting treatment and provide
the correct journal entries that should have been processed in respect of these
contract costs in terms of IFRS 15 Revenue from Contracts with Customers.
ii. Critically analyse the accounting treatment of the joint arrangement between 7
Umbrella Ltd and Holding Ltd in the financial statements of Umbrella Ltd. Your
answer must focus on the classification of the joint arrangement in terms of
IFRS 11 Joint Arrangements
Communication skills: logical flow and format 1
Please note:
MJM
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(a) Discuss how Umbrella Ltd should account for the revenue from the contract with
Salt and Pepper Ltd, i.e., steps 4 – 5 of the revenue recognition model in accordance
with IFRS 15 Revenue from Contracts with Customers, for the year ended 31 March
20.20.
Step 4
Allocation of the transaction price to performance obligations
Umbrella Ltd should allocate the transaction price to each performance obligation identified
in the contract on a relative stand-alone price basis. (1)
Airing of the adverts is the only performance obligation identified in the contract between
Umbrella Ltd and Salt and Pepper and the stand-alone selling price is the same as the
transaction price, i.e., R17 100 000 (1 425 000 x 12). (1)
Step 5
Recognition of revenue
Umbrella Ltd shall recognise revenue when (or as) it satisfies a performance obligation by
airing Salt and Pepper’s advertisement (IFRS 15.31). (1)
At contract inception (1 June 20.19), Umbrella Ltd shall determine whether the performance
obligation (airing the advertisement) is satisfied over time or at a point in time (IFRS 15.32). (1)
The performance obligation, i.e., airing the ad, is satisfied over time, because Salt and Pepper
simultaneously receives and consumes the benefits as Umbrella Ltd performs the obligation
(airing of advertisement) (IFRS 15.35(a)). (1)
Umbrella Ltd should recognise the revenue from the airing of adverts over time by measuring
the progress towards complete satisfaction of the performance obligation (IFRS 15.39).
(1)
Umbrella Ltd should apply the single method of measuring the progress of airing of the ads
consistently. At the end of each reporting period, Umbrella Ltd should remeasure its progress
towards complete satisfaction of airing of the adverts (IFRS 15.40). (2)
Umbrella Ltd can reasonably measure its progress towards complete satisfaction of the
performance obligation (airing of the adverts) using the output method, i.e., the number of ads
that must be aired every month. As on 31 March 20.20 a total of 1 350 (150 x 9) ads had been
aired. The total ads expected to be aired by end of the contract is 1 800 (150 x 12) ads. (2)
The total revenue that should be recognised by Umbrella Ltd for the year ended
31 March 20.20 is R12 825 000 (1 350/1 800 x R17 100 000). (2)
Total (12)
Maximum (11)
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(b) Prepare a memorandum to Ms Umoya, wherein you:
i. Critically analyse the accounting treatment of the contract costs for the boat cruise
and gala dinner in the financial statements of Umbrella Ltd for the year ended
31 March 20.20.
Your answer must discuss concerns over the accounting treatment and provide the
correct journal entries that should have been processed in respect of these contract
costs in terms of IFRS 15 Revenue from Contracts with Customers.
ii. Critically analyse the accounting treatment of the joint arrangement between
Umbrella Ltd and Holding Ltd in the financial statements of Umbrella Ltd. Your
answer must focus on classification of the joint arrangement in terms of IFRS 11
Joint Arrangements.
MEMORANDUM
TO: Group Financial Accountant

FROM: CTA Student
DATE: 20 April 20.20
SUBJECT: Finalisation of outstanding matters relating to the Umbrella Ltd
Attached please find my comments regarding the outstanding matters.
i. The accounting treatment of the contract costs incurred for the boat cruises in the
financial statements of Umbrella Ltd for the year ended 31 March 20.20
The costs incurred should be classified between costs to obtain the contract and costs to
fulfil the contract, as the accounting treatment differs. (1)
The only cost to obtain the contract was the legal fees; all other costs are to fulfil the
contract. (1)
Cost to obtain contract (legal fees)
• Legal fees are correctly classified as an expense in the financial statements of

Umbrella Ltd. (1)
• These costs are not incremental costs of obtaining the contract, as they would not
have been avoided if the contract had not been obtained. (1)
• These costs are also not recoverable from the customer in the future. (1)
Cost to fulfil the contract
Cost incurred that fall within the scope of another Standard will be accounted for in terms
of that standard. (1)
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Software costs
• Software costs are incorrectly accounted in the financial statements of

Umbrella Ltd. (1)
• These relate to the costs of fulfilling the contract that are within the scope of other
Standards and should be accounted for in terms of IAS 38 Intangible Assets. (1)
• Software costs should initially be capitalised on 1 April 20.19 and subsequently

amortised over the useful life of three years, applicable to software of a similar (2)
nature.
Upfront payment for 150 delegates
The costs were incorrectly expensed in the financial statements of Umbrella Ltd. (1)
The costs incurred for the upfront payment do not fall within the scope of another
Standard. (1)
Therefore, the costs will be recognised as an asset in terms of IFRS 15 if the following
conditions are met:
• The costs relate directly to the contract.

• The costs enhance the resource of the entity that will be used to satisfy the
performance obligation, and
• The costs are expected to be recovered.
The conditions are met as the upfront payment relate specifically to the boat cruise and
dinner, the radio personalities must be present during the boat cruise to meet the
performance obligation and the costs will be recovered from League Ltd. (3)
The upfront payment will be capitalised on 1 April 20.19 as a contract cost asset and
amortised on a systematic basis that is consistent with the transfer of the service to
League Ltd. (2)
As the first boat cruise took place during the current financial year (November 20.19),
and half of the delegates (75/150) was present, half of the contract cost asset will be
amortised (expensed) during the current financial year. (1)
The following journal entries should have been processed instead:

Dr Cr
31 March 20.20 R R
Legal fees (P/L) 658 225 (1)

Intangible asset: Software (SFP) 250 000 (1)
Contract cost: Gala dinner fees (SFP) 1 200 000 (1)
Bank (SFP) 2 108 225
Recognition of the actual costs incurred for the boat cruise
and gala dinner contract
Amortisation (P/L) 683 000 (1)
Contract cost: Accumulated amortisation (SFP)
(1 200 000/2) 600 000 (1)
Intangible asset: Software: Accumulated amortisation
(SFP) (250 000/3) 83 333 (1)
Amortisation of the contract costs and intangible asset ___
Total (24)
Maximum (20)
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EXAM TECHNIQUE
Costs incurred to obtain the contract
To determine if costs incurred to obtain a contract are incremental, it should be asked if

they would be avoided if the contract had not been obtained. If yes, the contract costs
incurred to obtain to contract should be capitalised in terms of IFRS 15. If no, the costs
should be expensed.
Costs incurred to fulfil the contract
Cost incurred to fulfil the contract that fall within the scope of another Standard will be
accounted for in terms of that standard.
ii. The accounting treatment of the joint arrangement between Umbrella Ltd and
Holding Ltd in the financial statements of Umbrella Ltd
It is incorrect to account for the joint arrangement in the financial statements of

Umbrella Ltd as a joint operation. (1)
The joint arrangement is carried through a separate vehicle, i.e., Khosi Ltd, whose legal
form does confer separation between Khosi Ltd and both Umbrella Ltd and Holding Ltd.
(1)
Khosi Ltd is a separate entity and formed in accordance with the South African
Companies Act, 2008. (1)
Khosi Ltd operates its own bank account and keeps its own accounting records,
separate to that of the parties. (1)
Umbrella Ltd and Holding Ltd do not have rights to assets and obligations for the
liabilities. Khosi Ltd has rights to all its assets and is liable for all its liabilities. (1)
The fact that Khosi Ltd primarily supplies software to the parties, i.e., Umbrella Ltd and
Holding Ltd, and can only sell the residual to outside clients after the needs for the
parties have been met, is not an indication that the parties have rights to Khosi Ltd’s
assets and obligation to its liabilities. (1)
Umbrella Ltd and Holding Ltd will have rights to the net assets of Khosi Ltd. (1)
Khosi Ltd should be classified as a joint venture in the financial statements of

Umbrella Ltd. (1)
Total (8)
Maximum (7)
Communication skills: logical flow and format (1)
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QUESTION 6 40 marks
Happy Residents Ltd (Happy Residents) is a rapidly growing South African company that provides
multiple services to residential and golf estates and operates across the country. The headquarters
of the company is based in Johannesburg.
You have been appointed as the new accountant for the company from 5 January 20 21. You have
since reviewed the draft annual financial statements compiled by the previous accountant and
found some concerning disclosures, which you have noted as points of discussion with
Mr. Aboobaker, the CFO of Happy Residents.
Extract of the notes to the annual financial statements of Happy Residents Ltd for the year
ended 31December 20 20:
1. ACCOUNTING POLICIES
1.2 REVENUE
Revenue comprise the sale of plants and plant accessories and rendering ancillary services.
Revenue is recognised when all the following conditions have been satisfied:
• the company has transferred to the buyer the significant risks and rewards of ownership of
the goods;
• the company retains neither continuing managerial involvement to the degree usually
associated with ownership nor effective control over the goods sold;
• the amount of revenue can be measured reliably;
• it is probable that the economic benefits associated with the transaction will flow to the
company; and
• the costs incurred or to be incurred in respect of the transaction can be measured reliably.
Revenue is measured at the fair value of the consideration received or receivable and represents
the amounts receivable for goods provided in the normal course of business, net of trade discounts,
volume rebates and value-added tax.
4. REVENUE
Note 20.20 20.19

R R
Sale of goods
Plants and plant accessory sales 1 17 900 000 xx
Services provided
Cleaning services 2.1 7 150 000 xx
Garden services and garbage removal services 2.2 7 920 000 xx
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13. FINANCIAL ASSSETS

20.20 20.19
R R
Investment in joint venture 20 000 000 xx
The following was further identified during inspection of the revenue file.
1. During the current year ended 31 December 20 20 Happy Residents incurred sales of
R17 900 000 for plants and plant products. Payment of the transaction price is due immediately
at the point the customer purchases the plants and plant products.
On 1 January 20.20, Happy Residents introduced a customer loyalty program that rewards
customers with one customer loyalty point for every R620 spent on any plant and plant
accessory purchases from Happy Residents. Each loyalty point is redeemable for a discount
on future plant purchases. The estimated stand-alone price of one point is R32.
Happy Residents expects that 79% of points will be redeemed cumulatively, while 65% of the
79% have already been redeemed by customers at 31 December 20 20. Happy Residents
still expects that 79% of loyalty points will be redeemed cumulatively. The loyalty points only
expire after two years.
2. On 30 June 20.20, Happy Residents enters into the following non-cancellable contracts with
customers valid until 30 June 20.22. These contacts are not measured at a point in time.
Happy Residents has 1 100 such contracts in place for each of these services.
2.1 Cleaning services are to be provided on a weekly basis as a minimum per annum to
the customers for which Happy Residents earns R250 per hour. The contract is subject
to IFRS15.121(b) application.
2.2 Garden services and garbage removal services are to be provided as and when needed
with a maximum of four visits per month over the next two years. The customer pays a
fixed price of R1 200 per month for both, (garden and garbage removal) services.
Investment in joint venture
During your inspection of the investment file, you noticed that there is no contract or agreement
on file with regards to the 'investment in joint venture' disclosed in the group annual financial
statements of Happy Residents. As the new accountant this is concerning to you as you would
like to verify that the investment is classified and disclosed correctly in the group annual financial
statements of Happy Residents for the year ended 31 December 20.20. As a chartered accountant
it is your duty to ensure that the financials are correct and prepared appropriately.
A discussion with Mr. Aboobaker revealed that a contractual agreement was entered between
Happy Residents and a security company that is not part of the group, SecureBuddy Ltd
(SecureBuddy). The joint arrangement was entered into three years ago on 1 January 20.18 with
the arrangement that a separate legal entity, SecureRes Ltd (SecureRes) would be incorporated.
No termination date was indicated in this arrangement. Mr. Aboobaker also mentioned that voting
rights are based on the profit-sharing of 50:50 ratio. The purpose of the arrangement is to provide
security services to Happy Residents client’s estates through the separate entity, SecureRes. This
involves sourcing appropriately trained security guards, security equipment and related costs.
Mr. Aboobaker then handed you the following documents:
• Invoices for assets purchased in SecureRes’ name. He indicated that was paid for by both
Happy Residents and SecureBuddy of which the costs were split equally; and
• The minutes of directors’ meetings for the past three years.
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Mr. Aboobaker ended the discussion indicating that he will email you an electronic copy of the
contractual agreement. Mr. Aboobaker did forward the contract to you afterwards.
REQUIRED
Marks
Prepare a memo to the Chief Financial Officer wherein you address the following matters:
(a) Critically discuss the appropriate and relevant accounting policy for revenue for Happy 4
Residents Ltd for the year ended 31 December 20.20 in terms of
IFRS 15.119.
(b) Discuss, if the revenue amount recognised by Happy Residents Ltd for the year ended 7
31 December 20.20 is correct, as well as the correct disclosure of information for
the different contracts with customers regarding the transaction price allocated to the
remaining performance obligations at 31 December 20.20. Consider the
requirements in paragraphs 120–122 of IFRS 15. Limit your calculations to amounts
to be disclosed per service contract.
i. Cleaning service contracts. 1

ii. Garden services and garbage removal service contracts. 1
(c) Prepare the correcting journal which should be processed to correctly reflect the revenue 10
recognised for plants and plant accessory sales for the year ended
31 December 20.20. Also show the correct figures that will be disclosed on the revenue
note. Ignore any tax implications.
(d) With reference to the investment in a joint venture:
Formulate audit procedures that needs to be performed in order to obtain sufficient 6

and appropriate audit evidence for the year ending 31 December 20.20 regarding the:
• validity of the agreement between Happy Residents Ltd a SecureBuddy Ltd; and
• classification of the investment in SecureRes Ltd as a joint venture in terms of
the requirements o f IFRS 11 Joint Arrangements as disclosed in the group annual
financial statements of Happy Residents Ltd.
Please note:
• General procedures are not required.
• Audit procedures regarding Companies Act requirements are not required.
• Your answer must comply with International Standards on Auditing (ISA).
Communication skills: format, presentation and layout

2
Please note:
• Round all amounts to the nearest rand.
MJM
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MEMO
To: Chief Financial Officer

From: New Accountant
Date: 18 May 20.21
Attached please find my input as requested. Should you have any questions, please let me know.
(a) Based on your knowledge of IFRS 15, the accounting policy for revenue appears
outdated. Discuss the appropriate and relevant accounting policy for revenue for Happy
Residents Ltd for the year ended 31 December 20.20 in terms of IFRS 15.119.
HAPPY RESIDENTS LTD
NOTES TO THE ANNUAL FINANCIAL STATEMENTS FOR THE YEAR ENDED

31 DECEMBER 20.20
1. ACCOUNTING POLICIES – Revenue
Revenue is recognised to the extent that it is probable that economic benefit will flow to the
company and the amount of revenue can be reliably measured. Revenue is measured based on
the consideration to which the company expects to be entitled in a contract with a customer and
excludes amounts collected on behalf of third parties. The company recognises revenue when
it transfers control of a product or service to a customer (IFRS15.119(a)). (2)
The company generates revenue primarily from the sale of plants and plant accessories, and
rendering of cleaning, gardening and garbage removal services (IFRS15.119(c)). (1)
The company measures and recognises revenue from the sales of plants and plant accessories
when the control over the product is transferred to the customer. Control transfers to the
customers at the date of delivery or collection (IFRS15.31), which is at a point in time
(IFRS15.125). (1)
Payment of the transaction price is due immediately at the point the customer purchases the
goods (IFRS15.119(b)). (1)
Revenue is measured based on the consideration specified in a contract with the customer.
Contractual payment terms differ per type of service contract and revenue stream
(IFRS15.119(b)). (1)
Total (6)
Maximum (4)
MJM
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(b) Discuss, if the revenue amount recognised by Happy Residents Ltd for the year ended
31 December 20.20 is correct, as well as the correct disclosure of information for the
different contracts with customers regarding the transaction price allocated to the
remaining performance obligations at 31 December 20.20. Consider the requirements in
paragraphs 120–122 of IFRS 15. Limit your calculations to amounts to be disclosed per
service contract.
i. Cleaning service contracts.

ii. Garden services and garbage removal services contracts.
i. Cleaning service contracts.
Happy Residents earns a fixed amount for each hour of service provided. (1)
Therefore, Happy Residents has the right to invoice the customer for the amount that
corresponds directly with the value of the entity’s performance completed to date in
accordance with paragraph B16 of IFRS 15. (2)
The amount to be invoiced per customer p.a. is a minimum is R13 000 (R250 x 52 weeks)
however for the current year this amounts to approximately R6 500 (R13 000/2)
(30 June 20.20 to 31 December 20.20). Total sales in this regard is correctly disclosed in the
revenue note as R7 150 000 (R6 500 x 1 100 contracts). (3)
Since Happy residents applies the practical expedient in IFRS15.121(b), no additional

disclosure is necessary. (1)
(7)U
ii. Garden and garbage removal services (G&G)
In terms of IFRS 15.120(a) Happy residence should disclose the transaction price of the
remaining performance obligation, which is the portion that is not yet recognised as revenue,
at the end of the reporting period. (2)
Included in the disclosure should be an indication of when the Happy Residents Ltd expects
to fulfil the obligation and recognise the amount as revenue. (1)
Happy Residents measures the level of completion of the performance obligation over time
and not at a point in time. (1)
Therefore, in terms of IFRS15.120(b)(i) Happy Residents Ltd should disclose the remaining
performance obligation (unsatisfied portion) in a table indicating appropriate time frames of
when the amounts are expected to be recognised as revenue. (1)
The disclosure should be as follows: (2)

20.21 20.22 Total
R’000 R’000 R’000
Revenue expected to be recognised on the G&G
service contracts as of 31 December 20.20 15 840 7 920 23 760
[C1] [C2]
[C1] R15 840 000 = R1 200 ×1 100 contracts x 12 months. (1)
[C2] R7 920 000 = R1 200 × 1 100 contracts x 6 months. (2)
Total revenue in this regard is correctly disclosed in the revenue note as R7 920 000. (1)
(11)
MJM
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COMMENTS
Once an entity applies the practical expedient in IFRS15.121(b), no additional disclosure

is necessary. Please refer to the par. 120 and 121 to understand when an entity can
apply a practical expedient. Also refer to illustrative example 42.
(c) Prepare the correcting journal which should be processed to reflect correct the revenue
recognised for plants and plant accessory sales for the year ended
31 December 20.20. Ignore any tax implications.
Dr Cr
R R
Revenue: plants and plant accessories (P/L)
(17 900 000 - 17 198 758 [C1]) 701 242 (6)
Revenue: loyalty points (P/L) [C1] 455 807 (2)
Journal adjustment to correct revenue line item
Correct figures to be shown on the Revenue note:
Revenue: plants and plant accessories (P/L) 17 198 758 (1)

Revenue: loyalty points (P/L) 455 807 (1)
(11)
CALCULATIONS
C1. Loyalty points
Current year plant sales 17 900 000 [1]

Loyalty point earned for every amount spent of 620 [1]
Loyalty points incurred during 20.20 (17 900 000/620) 28 870
Stand-alone selling price of loyalty points (28 870 x 32) 923 840 [1]
Cumulative expected points to be redeemed (923 840 x 79%) 729 834 [1]
Allocation of transaction price in 20.20: Revenue allocated to plant sales

(17 900 000/(17 900 000 + 729 834) x 17 900 000) 17 198 758 [1]
Revenue allocated to loyalty points (729 834/(17 900 000 + 729 834) x
17 900 000) or 17 900 000 – 17 198 758 701 242 [1]
17 900 000
Redeemed at year end (65% x 701 242) 455 807 [1]
Unredeemed revenue for loyalty points (701 242 – 455 807) 245 435
701 242
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(d) Formulate audit procedures to verify the validity of the agreement between
Happy Residents Ltd and SecureBuddy Ltd as well as to confirm the correct
classification of the investment in SecureRes Ltd as a joint venture in terms of the
requirements of IFRS 11 Joint Arrangements as disclosed in the Group annual financial
statements of Happy Residents Ltd for year ended 31 December 20.20.
1. Since the agreement supporting the investment in the joint venture disclosed is not in
the investment file, request and obtain the contract from management and inspect the
arrangement to confirm the following:
The parties related to the contract – Happy Residents and SecureBuddy;
The contract is signed by both Happy Residents and SecureBuddy (validity); (1)
The date of contract inception and termination to confirm if it is disclosed in the correct
period and valid in the annual financial statements for year ended
31 December 20.20 (cut-off, validity); (1)
The terms of the contract to confirm if the agreement is carried out through a separate
legal entity and confirm against the certificate of incorporation of SecureRes (rights
and obligations, classification). (1)
The voting rights are based on the profit-sharing ratio and that the profit-sharing ratio
is 50:50 (rights and obligations, classification, IFRS11.4). (1)
2. Confirm if joint control exists and verify that the investment is classified correctly
as a joint venture in terms of IFRS 11 by performing the following procedures:
Inspect the term of the contract between Happy Residents and SecureBuddy (the
parties) and compare to the requirements of IFRS 11 to be classified as a joint venture
(classification); (1)
Inspect the minutes of directors’ meetings of the year in which the agreement was
entered to confirm that decisions regarding the sourcing of appropriately trained
security guards, security equipment and related costing were decided unanimously by
the parties. Confirm that votes to pass a decision are based on the profit-sharing
ratio (rights and obligations, classification, (IFRS 11,7). (1)
Inspect the assets purchased documentation that was handed to you by the CFO to:
- Verify that the asset purchase transaction between the parties is in line with the
classification of the investment in the agreement as a joint venture (rights and
obligations, classification) by confirming the rights that the parties have over the
assets and obligations for the liabilities, relating to the arrangement held in
SecureRes (separate vehicle); (1)
- Confirm that Happy Residents and SecureBuddy only have rights to the net assets
of SecureRes Ltd for SecureRes Ltd to be classified as a joint venture
(classification) (1)
3. Inspect the group annual financial statements at 31 December 20.20 to confirm the
investment is correctly classified and disclosed (including in the notes ) as a joint
operation or joint venture, after assessing the terms of the agreements and the related
asset transaction (classification, presentation and disclosure). (1)
4. Recalculate the carrying amount of the investment in SecureRes Ltd that is presented
in the group annual financial statements for the year ended 31 December 20.20, by
confirming the initial cost in the agreement and adding all subsequent changes in
equity up to year end to confirm that it has been correctly calculated in terms of the
equity method per IAS 28 (Presentation and disclosure, classification, valuation).
(1)
Total (10)
Maximum (6)
MJM
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QUESTION 7 40 marks
Prop100 Ltd (Prop100) has a 31 January year end. Prop100 entered into a contract on 1 August 2019
with the Department of Higher Education to build three student residences, each worth R5 million prior
to the national lockdown due to the COVID-19 pandemic. The construction of these residences would
take place in three phases, i.e., one residence after the other. Two of these residences were completed
by the end of February 2020, before the country went into a hard lockdown.
At the beginning of the 2022 financial year, it was clear that the demand for student accommodation
had significantly decreased as some of the Higher Education institutions have moved to a fully online
or hybrid model when it comes to their course offerings. The department therefore decided not to
continue with construction of the outstanding student residence due to this change in the sector’s
learning management strategy. The decision by the Department of Higher Education was
communicated to Prop100 on 1 November 2021 and both parties agreed that the modification can be
affected to the contract. The cost of the two properties amounted to R8 million and the contract price
was reduced to R10 million due to this decision.
Due to the contract modification effected by the Department of Higher Education, Prop100 had to try
and salvage the loss that will be incurred due to building materials already purchased in advance for
the construction of the remaining residence. These building materials were bought from
Builders Club Ltd (BC) on 1 October 2021 cash at a cost of R2 500 000. The cost of these goods for
BC totalled R1 900 000. According to BC’s policy, customers have a right to return building supplies
purchased, within three months of purchase, for a full refund. As evidenced by the pattern over the
last few years, BC estimates that out of total sales only 20% will be returned by customers on an
annual basis. BC has a 31 December year end.
Prop100 also contracted the use of a waste management company Wasteful Ltd (Wasteful) on
1 August 2019, specifically for the construction of the three student residences. Prop100 had
anticipated that the construction project would run over two years and the contract with Wasteful was
structured in a way that matches this expectation. Wasteful would supply 10 skip bins that would be
placed at the construction site at the start of the contract. Removal of waste was to be performed on
a monthly basis for a monthly fee of R25 000. At the end of the two-year term, Prop100 was to make
a final payment of R300 000 to Wasteful to retain ownership of the provided bins and to receive a final
site clean-up from them.
During 2022, Prop100 has seen a rise in the demand for student accommodation and the directors
strongly believe that the Department of Higher Education made a mistake to end their contract pre-
maturely and not built the last residence. Prop100 therefore joined forces with another company
KB Properties Ltd (KB Prop) to set up a separate company, KB100 Ltd (KB100), in order to build
student accommodation across the country. Both directors of KB Prop and Prop100 agreed that the
student accommodation would adhere to COVID-19 regulations and would be top of the range in terms
of technology. Prop100 and KB Prop entered into a contractual agreement which established joint
control. All student accommodation constructed would be in the name of the new entity, KB100, and
any additional funding required to carry out the construction of the student accommodation will be
applied for by KB100. Both parties have the right to sell their interest in KB100. KB100 will be
responsible for the collection of rental payments, facilities management as well as the maintenance of
the student accommodation residences.
1. At the inception of the contract between Wasteful and Prop100, the market related interest rate,
without considering Prop100’s credit risk, was 8,5% and the market related interest rate
considering Prop100’s credit risk was 10%. Prop100’s credit risk changed over the course of the
contract and resulted in an entity specific interest rate of 12% at the end of the two years when
the contract ends.
2. Ignore income tax, value-added tax (VAT) and dividend tax.
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REQUIRED
Marks
(a) Briefly discuss, in accordance with IFRS 15 Revenue from Contracts with Customers, 4
how the contract modification between Prop100 Ltd and the Department of Higher
Education will be accounted for in the books of Prop100 Ltd for the year ended
31 January 2022. Include amounts and calculations in your discussion.
Communication skills: logical flow 1
(b) Prepare the journal entries in the accounting records of Builders Club Ltd to account 6
for the recognition of revenue relating to the products purchased by Prop100 Ltd on
1 October 2021.
(c) Prepare the journal entries, in the accounting records of Builders Club Ltd for the 4
year ended 31 December 2021, assuming that Prop100 Ltd did not return the
purchased building material at the end of the year. Do not repeat the journal entries
prepared in part (b).
(d) Prepare the journal entries in the accounting records of Builders Club Ltd for the year 6
ended 31 December 2021, assuming that Prop100 Ltd returned the purchased
building material on 15 November 2021. Do not repeat the journal entries prepared
in part (b).
(e) Discuss the final payment of R300 000 in terms of the transaction price as included 11
in IFRS 15 Revenue from Contracts with Customers, relating to the contract between
Wasteful Ltd and Prop100 Ltd. Include amounts and calculations in your discussion.
(f) Discuss, with reasons, the appropriate classification of the arrangement between
Prop100 Ltd and KB Properties Ltd in the consolidated financial statements of the 7
Prop100 Ltd Group for the financial year ended 31 January 2023 in accordance with
IFRS 11 Joint Arrangements.
Please note:

MJM
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QUESTION 7- Suggested solution
(a) Briefly discuss, in accordance with IFRS 15 Revenue from Contracts with Customers,
how the contract modification between Prop100 Ltd and the Department of Higher
Education will be accounted for in the books of Prop100 Ltd for the year ended
31 January 2022. Note that calculations are required.
Prop100 Ltd should consider whether a contract modification is a separate contract (1)
[IRS15.20], a termination of the current contract and creation of a new one
[IFRS15.21(a)] or part of the existing contract [IFRS15.21(b)].
A separate contract would be indicated only if the scope of the contract increased, and (1)
the price of the contract increased. This is not the case as the scope reduced, one less
building to construct and the contract price decreased to R10 million.
The contract between Prop100 Ltd and Department of Higher Education is a contract (2)
modification in terms of IFRS 15.21(b) and should be accounted for as part of the
existing contract and therefore form part of a single performance obligation that is
partially satisfied at the date of the contract modification.
Prop100 Ltd will therefore adjust the revenue, in a form of a reduction of the transaction (2)
price, i.e. from R15 million (R5 million x 3) to R10 million at the date of the contract
modification. Prop100 Ltd’s measure of progress towards complete satisfaction of the
performance obligation must be adjusted to 100% as the two buildings have already
been completed.
Total (6)
Maximum (4)
Communication skills: logical flow (1)
COMMENTS
Most students did not understand the required because of a lack of understanding of
contract modifications.
IFRS 15.20 discusses the requirements under which a contract modification can be
accounted as a separate contract. Also refer to illustrative examples 5-9 to obtain
further understanding.
(b) Prepare the journal entries in the accounting records of Builders Club Ltd to account for
the recognition of revenue relating to the products purchased by Prop100 Ltd on
1 October 2021.
Dr Cr
R R
J1 Bank (SFP) 2 500 000 (1)

Revenue (P/L) (2,5mil x 80%) 2 000 000 (1)
Refund liability (SFP) (2,5mil x 20%) 500 000 (1)
Recognition of revenue on 1 Oct 2021
J2 Cost of sales (P/L) (1 900 000 x 80%) 1 520 000 (1)
Right of return asset (SFP) (1 900 000 x 20%) 380 000 (1)
Inventory (SFP) 1 900 000 (1)
Recognition of cost of sales/decrease in inventory
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Dr Cr
Alternative to journal 2 R R
J2 Cost of sales (P/L) 1 900 000 (1)

Inventory (SFP) 1 900 000 (1)
J2 Right of return asset (SFP) (1 900 000 x 20%) 380 000 (1)
Cost of sales (P/L) 380 000 (1)
Total (6)
Maximum (3)
RIGHT OF RETURN ASSET
Right of return asset represents the right to recover returned product assets, inventory
or goods to be received back from the customer. Hence it is recognised as an asset.
A right of return is not a separate performance obligation, but it affects the estimated
transaction price for transferred goods. Revenue is only recognized for those goods
that are not expected to be returned
(c) Prepare the journal entries in the accounting records of Builders Club Ltd for the year
ended 31 December 2021, assuming that Prop100 Ltd did not return the purchased
building material at the end of the year. Do not repeat the journal entries prepared in part
(b).
Dr Cr
R R
J1 Refund liability (SFP) 500 000 (1)

Revenue (P/L) (2,5mil x 20%) 500 000 (1)
Recognition of revenue due to products not returned
J2 Cost of sales (P/L) (1 900 000 x 20%) 380 000 (1)
Right of return asset (SFP) 380 000 (1)
Recognition of cost of sales due to products not returned
Total (4)
COMMENT
The following general mistakes are normally made in answering journal questions:
• Not clearly indicating the debit/credit of the journal

• Not showing journal classifications, i.e. P/L, OCI, SFP, SCE
• Not clearly showing the dates
• Not providing journal narrations
Always show short calculations on the face of the journals and reference the workings.
It is easier to mark!
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(d) Prepare the journal entries in the accounting records of Builders Club Ltd for the year
ended 31 December 2021, assuming that Prop100 Ltd returned the purchased building
material on 15 November 2021. Do not repeat the journal entries prepared in part (b).
Dr Cr
R R
J1 Revenue (P/L) 2 000 000 (1)

Refund liability (SFP) 500 000 (1)
Bank (SFP) 2 500 000 (1)
Reversal of revenue due to customer refund
J2 Inventory (SFP) 1 900 000 (1)
Cost of sales (P/L) 1 520 000 (1)
Right of return asset (SFP) 380 000 (1)
Reversal of right of return asset due to customer
refund
Total (6)
(e) Discuss the final payment of R300 000 in terms of the transaction price as included in
IFRS 15 Revenue from Contracts with Customers, relating to the contract between
Wasteful Ltd and Prop100 Ltd. Include amounts and calculations in your discussion.
In determining the transaction price (step 3 of the revenue recognition model), (1)
Wasteful Ltd should consider the existence of a significant financing component in the
contract between itself and Prop100 Ltd [IFRS15.48].
If the contract provides Prop100 Ltd with significant financing in retaining the ownership (1)
of the 10 skip bins, Wasteful Ltd must adjust the transaction price, used for revenue
recognition, with the effects of time value of money [IFRS15.60].
Wasteful Ltd would have to adjust the amount of consideration to an amount that reflects (2)
the price that Prop100 Ltd would have paid in cash for the skip bins at the time they
were transferred to the construction site [IFRS15.61]. The skip bins were delivered to
the construction site at the inception of the contract, two years before making the final
payment of R300 000.
Included in the R300 000 is R25 000 relating to the final site clean-up. Therefore, the (1)
amount to be paid to retain ownership of the bins amounted to R275 000.
Wasteful Ltd shall consider, during this assessment, the amount of R275 000 (1)
consideration payable and the current selling price (cash price) of the bins at time of
delivery (start of contract), the expected time or term of repayment and prevailing
interest rate [IFRS15.61].
The interest rate to be used when calculating the present value of R275 000 will be (2)
10% which is the rate that reflects the credit characteristics of Prop100 Ltd at the
inception of the contract [IFRS15.64].
Practical expedient is not applicable in these circumstances as the payment of the (1)
purchase price of the bins will be after one year of delivery [IFS15.63].
Wasteful Ltd shall present the effects of financing Prop100 Ltd separately from (1)
revenue, by recognising a contract debtor, as well as the interest income [IFS15.65].
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Wasteful Ltd will therefore recognise revenue at an amount of R227 273 (n=2, (2)
FV=275 000, pmt=0, i=10%) together with a corresponding debtor in their books. The
effects of the total interest income of R47 727 (275 000 – 227 273) will be reflected
separately from revenue as other income over the course of the two-year contract.
Total (12)
Maximum (11)
(f) Discuss, with reasons, the appropriate classification of the arrangement in the financial
statements of the Prop100 Ltd Group in accordance with IFRS 11 Joint Arrangements.
An entity shall determine the type of joint arrangement in which it is involved. The (1)
classification of a joint arrangement as a joint operation or a joint venture depends upon
the rights and obligations of the parties to the arrangement [IFRS11.14].
KB100 (Pty) Ltd, is carried through a separate vehicle, as the parties registered a private (2)
company to carry out the objective of acquiring and construction of student
accommodation. A joint arrangement in which the assets and liabilities relating to the
arrangement are held in a separate vehicle can be either a joint venture or a joint
operation.
As the company is a registered private company, the legal form thereof indicates that (1)
KB100 (Pty) Ltd should be considered in its own right.
KB100 (Pty) Ltd will purchase assets in its own capacity and liabilities will also be in its (2)
name. KB100 (Pty) Ltd will be responsible for the collection of rental payments, facilities
management as well as the maintenance of the student accommodation residences.
Therefore, in terms of the contract Prop100 Ltd will have rights to the net asset of (1)
KB100 (Pty) Ltd.
The arrangement between KB Properties (Pty) Ltd and Prop100 Ltd will therefore be (1)
classified as a joint venture in the consolidated financial statements of the
Prop100 Ltd Group.
Total (8)
Maximum (7)
COMMENT
If the joint arrangement had not been structured through a separate entity, then the
arrangement can only be a joint operation (IFRS 11.B16).
The terms and conditions of the contractual arrangement will always be inspected, as
these can override the legal form of the separate entity in determining who has the rights
to the underlying assets and obligations for the liabilities. Refer to the helpful table
One of the main factors to consider when deciding on the classification is the rights to
net assets or assets.
Rights to assets and liabilities = Joint Operation
Rights to Net Assets and Liabilities = Joint Venture
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COMMON MISTAKES MADE BY THE STUDENTS IN THIS TEST
• Students provided theory without applying it to the scenario in the question. No

marks are awarded to theory dump.
• Students did not correctly interpret the required and resulted in the discussion of
issues irrelevant to the question.
• Students did not provide a conclusion on the question and lost marks for
conclusion.
• Students did not clearly indicate debits and credits in the journals.
• Journal classifications P/L, OCI, SFP or SCE were not shown.
• Journal narrations were not provided in some instances.
MJM

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FAC4864/102/0/2023

Tutorial Letter 102/0/2023

APPLIED FINANCIAL ACCOUNTING II

Department of Financial Governance

This tutorial letter contains important information

Personnel and contact details 3

Prescribed method of study 3

Suggested working programme 4

SAICA’s Principles of Examination Levels 4

United Nations Global Compact Principles 9

Learning unit 1 Revenue 10

Self-assessment questions and suggested solutions 31

TEST 1 ON TUTORIAL 102: 14 MARCH 2023

PERSONNEL AND CONTACT DETAILS

Please send all e-mail queries to: fac4864postgrad@unisa.ac.za

PRESCRIBED METHOD OF STUDY

2. Read the standards and interpretation(s) covered by the learning unit.

SUGGESTED WORKING PROGRAMME

SAICA’S PRINCIPLES OF EXAMINATION LEVELS

2. Demonstrate the ability to communicate skills in a rational and logical manner.

1. Issues that are at a core level

Issues are at a core level if

2. Issues that are at an awareness level

3. Issues that are excluded

The following standards are excluded from the syllabus:

• IFRS 1, First-time Adoption of International Financial Reporting Standards

Narrations to journals should be provided, except when it is stated in a question that a

• Layout and presentation

Any contravention of this regulation is considered misconduct.

THE UNITED NATIONS GLOBAL COMPACT PRINCIPLES

The United Nations Global Compact (UNGC) is underpinned on the principle of

The summary of the principles is provided on the table below.

The summary of the 10 UNGC principles

Source: Greenstone, 2014

LEARNING UNIT 1 – REVENUE

IFRS 15 establishes a single framework for the recognition and measurement of

At the end of this learning unit, you should be able to

• Identify contracts with customers within the scope of IFRS 15.

PRESCRIBED STUDY MATERIAL

1. IFRS 15 Revenue from Contracts with Customers (including the illustrative

THE REST OF LEARNING UNIT 1 IS BASED ON THE ASSUMPTION THAT YOU

SECTION A - SAICA’S PRINCIPLES OF EXAMINATION LEVELS

The principles of examination levels for IFRS 15 are as follows:

Description Paragraph Level Notes

Description Paragraph Level Notes

OVERVIEW OF THE FIVE-STEP REVENUE MODEL

Combination contracts 15.17

Contract modifications 15.18-21

Step 2 - Identify the performance obligations 15.22-30

Step 3 - Determine the transaction price 15.46-72

Step 4 – Allocate the transaction price to separate performance 15.73-86

Step 5 - Recognise revenue 15.31-45

SECTION B - QUESTIONS ON REVENUE

QUESTION 1.1 (30 marks – 45 minutes)

Technology support services

Software licenses and software customisation

• Ignore any normal income tax implications.

QUESTION 1.1 - Suggested solution

The technology support service is a contract with a customer because

A good or service is not separately identifiable (IFRS 15.29) if

(c) Incremental costs

To recognise incremental costs to obtain a contract as an asset, these costs must be