FAC2601

FINANCIAL ACCOUTNING FOR COMPANIES

Presented by:
FAC 2601
FAC 2601 LECTURERS:
CONTACT DETAILS:
Andre Eysele: (012) 429 4343 eysela@unisa.ac.za
Fazana Aboo: (012) 429 4973 aboof@unisa.ac.za
Frank Montgomery: (012) 429 6991 montgf@unisa.ac.za
Chris Mkefa: (012) 429 4843 cmkefa@unisa.ac.za

PLEASE CONTACT US AT THE ABOVE DETAILS

Topics to be presented:

LU 9: REVENUE – IFRS 15
LEARNING UNIT 9– REVENUE IFRS 15
REVENUE FROM CONTRACTS WITH CUSTOMERS:
The core principle of IFRS 15 is that the entity should recognise revenue to depict the transfer of
promised goods or services to customers in an amount that reflects the consideration to which the
entity expects to be entitled to in exchange for those goods or services.
HOW DO WE DO THE ABOVE? BY KNOWING THE:
1)DEFINITIONS: IMPORTANT
2)FIVE STEPS FOR REVENUE RECOGNITION:
• Identify the contract: (Single; Combined; Contract Modification)
• Id the performance obligations in the contract: (Distinct G&S; or a series of)
• Determine the Transaction Price: (Var consideration; TvM; Non Cash; Cons. Pay)
• Allocate the Trx Price to the performance obligations: (Allocation Basis)
• Recognise revenue when the entity satisfy a performance obligation: (Control; PeriodOFT)
LEARNING UNIT 9– REVENUE IFRS 15
REVENUE FROM CONTRACTS WITH CUSTOMERS:
1)STEP 1: ID THE CONTRACTS WITH A CUSTOMER:
All of the following criteria must be met:
•Contract must be approved – by both parties;
•Entity can identify each party’s rights regarding G&S;
•Entity can identify the payment terms;
•Contract has commercial substance;
•It is probable that the entity will collect the consideration.
If not all is present: – IMPORTANT
Study the following paragraphs:
•Combination of contracts; (Single commercial objective; dependent; single obligation)
•Contract modifications; (Change in scope and/ or price – Must be approved)
LEARNING UNIT 9– REVENUE IFRS 15
REVENUE FROM CONTRACTS WITH CUSTOMERS:
2) STEP 2: ID THE SEPARATE PERFORMANCE OBLIGATIONS IN THE
CONTRACT:
•A goods or services that is distinct:
•A series of distinct goods or services
That are substantially the same and that
Have the same pattern of transfer to the
Customer.
EXAMPLES ARE IMPORTANT
Non-Distinct goods or services:
Examples are important
The customer can benefit
from the goods or services on
its own or together with
other resources that are
readily available to the
customer. (AND)
The entity’s promise to
transfer the good or service
to the customer is separately
identifiable from other
promises in the contract.
LEARNING UNIT 9– REVENUE IFRS 15
REVENUE FROM CONTRACTS WITH CUSTOMERS:
3) STEP 3: Determine the Transaction Price:
•Consideration promised in a contract may include: (Fixed, variable amounts or
both);
•The nature, timing and amount of the consideration promised by a customer affect
the estimate of the transaction price.
The entity needs to consider: (All Examples are equally important)
•Variable consideration; (Discounts; rebates; Refunds; credits etc.) – Example
•Time value of money; ( Financing Component) (Examples)
•Non-Cash consideration; (Measured at FV) (Example) or (Stand-Alone SP) or
•Consideration payable to the customer: Diagram.
LEARNING UNIT 9– REVENUE IFRS 15
REVENUE FROM CONTRACTS WITH CUSTOMERS:
4) STEP 4: Allocate the TP to the performance obligations:
•Allocating the transaction price: Based on Stand-alone SP* (Example)
•Allocating a discount: Sum of STA-SP* > Transaction Price (Example)
•Allocating variable consideration: (Entire or part of a contract): If variable
consideration promised in a contract relates to the entire contract, then the
variable consideration is allocated to all performance obligations in a contract
based on the stand-alone selling prices of the promised goods or services
in the contract.
LEARNING UNIT 9– REVENUE IFRS 15
REVENUE FROM CONTRACTS WITH CUSTOMERS:
5) RECOGNISE REVENUE WHEN THE ENTITY SATISFIES A
PERFORMANCE OBLIGATION:
•By transferring a promised goods or services to a customer. An asset is
transferred when (or as) the customer obtains control of that asset.
•For each performance obligation: Entity satisfy the performance
obligation:
•Over time or; (revenue over time measure progress) – (Output vrs
The Customers has:
Input) (Example) 1)Present obligation to pay;
•At a point in time: 2)Accepted the asset;
3)Risk and rewards of ownership;
4)Physical possession of asset;
5)Legal title to the asset.
LEARNING UNIT 9– REVENUE IFRS 15
REVENUE FROM CONTRACTS WITH CUSTOMERS:
CONTRACT COSTS: An entity can incur costs in order to obtain a contract and/or to fulfil a
contract. Please study the accounting treatment:
1)Costs to obtain a contract: Capitalised as an asset (costs incremental) (Marketing, legal
etc). Will recover these costs.
2)Cost to fulfil a contract: Capitalised (Directly related to a contract; Generate or enhance
resources of the entity; costs are to be recovered.) (Direct material; labour; directly related)
3)Amortisation and impairment: If the entity recognises an asset for contract costs, the asset
is amortised on a systematic basis, consistent with the pattern of transfer to the customer of the
goods or services to which the asset relates.
Study Example 10.12 – Contract Costs
LEARNING UNIT 9– REVENUE IFRS 15
REVENUE FROM CONTRACTS WITH CUSTOMERS:
PRESENTATION: IFRS 15 PROVIDES GUIDANCE ON THE PRESENTATION OF THE
FOLLOWING REVENUE RELATED ITEMS:
1)Trade Receivables:
2)Contract assets:
3)Contract liabilities:
STUDY EXAMPLE ON THE – PRESENTATION IMPORTANT
DISCLOSURE: To understand the nature, amount, timing and uncertainty of revenue and cash flows
arising from contracts with customers. Must disclose: Qualitative and Quantitative information about:
•Contracts with customers;
•Significant judgements, and changes in the judgements;
•Assets recognised from the costs to obtain or fulfil a contract.
LEARNING UNIT 9– REVENUE IFRS 15

REVENUE FROM CONTRACTS WITH CUSTOMERS:

EXAMPLES 1:

1)Time value of money:

On 1 March 20.18 Lipton Ltd a Tea / Coffee manufacturer sells a coffee machine for R150 000
to a customer on credit, on the condition that the amount must be paid for on the 28 February
20.20. The financing component is significant. Lipton Ltd incremental borrowing rate is 9% per
annum. The customer’s credit risk is 15% per annum.

Required:

Prepare the journal entries for the above transaction in the books of Lipton Ltd for the years
ending 2019 and 2020.
LEARNING UNIT 9– REVENUE IFRS 15

REVENUE FROM CONTRACTS WITH CUSTOMERS:

Solution 1: Time value of Money:

Financing component exist – taking customer credit risk into consideration at 15%:

FV = 150 000; n = 2 years; i = 15; PV = 113 421

Revenue 113 421

Finance Income over the 2 years: (150 000 – 113 421) 36 578

Total Selling Price: 150 000

Journals:

1 March 2018: Dr Cr

Dr: Trade Receivable (SFP) (FV) 113 421

Cr: Revenue (P/L) 113 421

Recognise revenue on the date that control is transferred

LEARNING UNIT 9– REVENUE IFRS 15

REVENUE FROM CONTRACTS WITH CUSTOMERS:

Solution 1: Time value of Money:

Journals:

28 Feb 2019: Dr Cr

Dr: Trade Receivable (SFP) (FV) 17 013

Cr: Finance Income (P/L) 17 013

Solution: 1 P1/P2 Ent 1 P1/1P2 Ent; AMRT Ent = 17 013

Recognise finance income accrued on amount outstanding from the date that right to
consideration was recognised.
LEARNING UNIT 9– REVENUE IFRS 15

REVENUE FROM CONTRACTS WITH CUSTOMERS:

Solution 1: Time value of Money:

Journals:

28 Feb 2020: Dr Cr

Dr: Trade Receivable (SFP) (FV) 19 565

Cr: Finance Income (P/L) 19 565

Solution: 2 P1/P2 Ent 2 P1/1P2 Ent; AMRT Ent = 19 565

Recognise finance income accrued on amount outstanding from the date that right to
consideration was recognised.

Dr: Bank (SFP) 150 000

Cr: Trade Receivables (SFP) 150 000

Recognise the consideration received in cash on the settlement date.

LEARNING UNIT 9– REVENUE IFRS 15

REVENUE FROM CONTRACTS WITH CUSTOMERS:

EXAMPLE 2: Allocation of the transaction price:

Bugatti Ltd enters into an agreement with Mike for the sale of their latest SUV 200 CRDi along
with a four-year service plan for a total of R900 000. Any client may also acquire a SUV 200
Bugatti CRDi without a service plan from Bugatti Ltd at a stand-alone selling price of R860 000.
Bugatti Ltd regularly sells a 4 year service plan to their customers at a stand-alone selling price
of R60 000. The sale took place on the 1 March 2018 and the entity has a February year end.
Bugatti Ltd maintain a GP % of 25%. Service intervals at the end of each financial year.

REQUIRED:

Discuss and Journalise the above transactions in the books of Bugatti Ltd for the years ending
February 20.19 and 20.20:
LEARNING UNIT 9– REVENUE IFRS 15

REVENUE FROM CONTRACTS WITH CUSTOMERS:

EXAMPLE 2: Allocation of the transaction price:

Solution:

Discussion: Performance Obligation:

•Bugatti Ltd is required to deliver a motor vehicle and a service plan to Mike, this represents a
single contract with Mike. It is a single contract as it was negotiated as a package with a single
commercial objective.
•Firstly: In order to identify the performance obligations in the contract, the entity first has to
determine if the goods and services are distinct.
•Theory: Distinct goods and service if the following apply:
LEARNING UNIT 9– REVENUE IFRS 15

REVENUE FROM CONTRACTS WITH CUSTOMERS:

EXAMPLE 2: Allocation of the transaction price:

Solution:

Discussion: Performance Obligation:

•Theory: Distinct goods and service if the following apply:
Bugatti’s promise to
Mike can benefit from transfer the motor and
the good or service either the service plan to Mike is
on its own or together AND
separately identifiable
with other resources that from other promises in
are readily available. the contract.
1) The motor and service plan is regularly sold separately by Bugatti Ltd and Mike can benefit
from the motor vehicle and the service plan on its own or with other resources readily available
to him.
LEARNING UNIT 9– REVENUE IFRS 15

REVENUE FROM CONTRACTS WITH CUSTOMERS:

EXAMPLE 2: Allocation of the transaction price:
•Theory: Distinct goods and service if the following apply:

Mike can benefit from Bugatti’s promise to

the good or service either transfer the motor and
on its own or together the service plan to Mike is
AND
with other resources that separately identifiable
are readily available. from other promises in
the contract.

2) The motor vehicle and service plan are separately identifiable in the contract with Mike. Both
are not highly interrelated or dependant on each other (each can be sold separately). Therefore
the delivery of the Bugatti SUV and the service plan are both distinct and are two performance
obligations within the contract with their customer Mike.
LEARNING UNIT 9– REVENUE IFRS 15

REVENUE FROM CONTRACTS WITH CUSTOMERS:

EXAMPLE 2: Allocation of the transaction price:

Two performance obligations exist, which are accounted for separately for revenue purposes.
The total consideration of R900,000 is allocated to the 2 separate performance obligations
based on the best estimate of the stand-alone selling prices.

Calculation:

Stand-Alone SP Ratio % Allocation of TP

Bugatti 200 SUV CRDi 860 000 *93.47% 841 230
Four Year Service Plan 60 000 6.52% 58 770
Total 920 000 100 900 000
*860’/920 and ^900 x 93.47%

Revenue is recognised for these two performance obligations when the performance
obligations are satisfied.
LEARNING UNIT 9– REVENUE IFRS 15

REVENUE FROM CONTRACTS WITH CUSTOMERS:

EXAMPLE 2: Allocation of the transaction price:

JOURNALS: 1 March 20.18 Dr Cr

Dr: Bank (SFP) 900 000

Cr: Revenue (Motor vehicle) (P/L) 841 230

Cr: Contract liability / Income received in advance (SFP) 58 770

Recognising the sale of the motor vehicle on date of sale including service plan liability

Dr: Cost of sales (P/L) 675 000

Cr: Inventory (SFP) (900 * 75%) 675 000

Accounting for inventory on selling of Bugatti SUV

LEARNING UNIT 9– REVENUE IFRS 15

REVENUE FROM CONTRACTS WITH CUSTOMERS:

EXAMPLE 2: Allocation of the transaction price:

JOURNALS: 28 Feb 20.19 & 28 Feb 20.20 Dr Cr

Dr: Contract Liability / Income received in advance (SFP) 14 692

Cr: Revenue (P/L) (Service-plan) (58 770/4) 14 692

Recognising revenue when performance obligation is satisfied

Dr: Service plan (Expense) 11 019

Cr: Bank (14 692 x 75%) 11 019

Accounting for the expense to satisfy the performance obligation (Accrual Principle)
 FAC 2601 – EXAM TIPS

EXAMINATION TIPS:

1)Read the Required first;

2)Draft formats of statements;

3)Practice a lot of questions;

4)Time Management;

5)Other relevant