Question Tag: Revenue Recognition

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  • 5 Marks

FR – Nov 2024 – L2 – Q5d – Revenue Recognition under IFRS 15

Analyzing distinct performance obligations in a software contract under IFRS 15.

Togbah LTD (Togbah), a software developer, enters into a contract with a customer to transfer the following:

  • Software licence
  • Installation service (includes changing the web screen for each user)
  • Software updates
  • Technical support for two years

Togbah sells the above separately. The installation service is routinely performed by other entities and does not significantly modify the software. The software remains functional without the updates and the technical support.

Required:
Explain whether the goods or services promised to the customer are distinct in terms of IFRS 15: Revenue from Contracts with Customers

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  • 5 Marks

FR – Nov 2024 – L2 – Q5c – Revenue Recognition under IFRS 15

Assessing whether goods and services in a contract are distinct under IFRS 15.

Togbah LTD (Togbah), a software developer, enters into a contract with a customer to transfer the following:

  • Software licence,
  • Installation service (includes changing the web screen for each user),
  • Software updates, and
  • Technical support for two years.

Togbah sells the above separately. The installation service is routinely performed by other entities and does not significantly modify the software. The software remains functional without the updates and the technical support.

Required:
Explain whether the goods or services promised to the customer are distinct in terms of IFRS 15: Revenue from Contracts with Customers.

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  • 20 Marks

CR – May 2015 – L3 – Q2 – Financial Instruments (IFRS 9, IAS 32, IAS 39)

Advise Alilerimba Limited on accounting for convertible bonds, revenue from handsets, and IAS 32 provisions.

The following transactions relate to Alilerimba Limited:

  1. Convertible Bonds
    • On July 1, 2011, Alilerimba Limited issued 400,000 convertible bonds with a 3-year tenure and a total fair value of N4 million, which is also the par value.
    • The bonds carried an interest rate of 16% per annum, payable annually in arrears, while similar bonds without the conversion option carried an interest rate of 19% per annum on the same date.
    • The company incurred 10% issue costs. If the investors did not convert to shares, the bonds would have been redeemed at par.
    • At maturity (June 30, 2014), all bonds were converted into 1 million ordinary shares with a nominal value of N4 per share. No conversions were allowed before maturity.
    • The directors are uncertain how to account for the bonds up to the date of conversion. They were informed that the effective interest rate, considering issue costs, was 24%.
  2. Revenue Recognition for Handsets
    • Alilerimba purchases handsets at N120,000 each and sells them to customers at N90,000, provided the customers also purchase prepaid credit cards.
    • Prepaid credit cards are sold for N12,600 each and expire after six months. The average unused credit per card at expiry is N1,800.
    • Selling costs for the handsets are estimated at N600 per unit.
    • Alilerimba also sells handsets to dealers for N50,000 each, invoicing them for this amount. Dealers are allowed to return the handsets until a service contract is signed by a customer. When a service contract is signed, the handset is given to the customer free of charge.
    • Dealers receive a commission of N168,000 per customer connection. Net of the handset cost (N90,000), Alilerimba pays N78,000 to dealers for each customer connection.
    • Handsets cannot be sold separately by dealers, and the service contract has a 12-month duration. Dealers do not sell prepaid phones, and Alilerimba earns monthly revenue from the service contracts.
    • The Chief Operating Officer, a non-accountant, has requested an explanation of the accounting principles and practices to apply for handset purchases and revenue recognition.
  3. Preference Shares
    • Alilerimba Limited issued 8% preference shares with a redemption feature that entitles holders to receive cash.

Required:

Advise the directors of Alilerimba Limited on:
(a) The accounting treatment for the convertible bonds. (12 Marks)
(b) The accounting principles and practices to apply for the purchase of handsets and recognition of revenue from customers and dealers. (6 Marks)
(c) The provisions of IAS 32 regarding the presentation in financial statements of financial instruments entitling holders to receive cash with a redemption feature. (2 Marks)

(Total: 20 Marks)

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  • 9 Marks

CR – May 2017 – L3 – Q7a – Revenue Recognition (IFRS 15)

Itemize and discuss the five-step model for revenue recognition under IFRS 15.

Megida hopes to obtain contracts from both the private and public sectors following the new government economic initiatives. The company’s revenue had always been accounted for in line with IAS 18, as the company had adopted IFRS. Some directors of Megida understand that with the introduction of IFRS 15: Revenue from Contracts, the way revenue from contracts is recognized may change. In particular, one of them who attended an IFRS training organized by the Institute of Chartered Accountants of Nigeria (ICAN) heard about IFRS 15 and its five-step model for revenue recognition but did not understand.

Required:
Itemize and briefly discuss the FIVE-step model approach to revenue recognition under IFRS 15. (9 Marks)

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  • 6 Marks

AT – Nov 2014 – L3 – SB – Q2c – Corporate Tax Compliance and Reporting

Determine whether Maidogo Limited’s revenue recognition change is a policy change and calculate adjusted revenue for NIXAQ.

Maidogo Limited sells NIXAQ, a product manufactured by it, from several retail outlets. In previous years, the company has undertaken responsibility for fitting the product in customers’ premises. Customers pay for the product at the time they are ordered. The average length of time it takes from ordering to its fitting is 14 days. In previous years, Maidogo Limited had not recognised a sale in its books until the product had been successfully fitted because the rectification costs of any fitting error would be expensive.

With effect from 1 April, 2013, Maidogo Limited changed its method of trading by sub-contracting the fitting to approved contractors. Under this policy, the sub-contractors are paid by Maidogo Limited and they (the sub-contractors) are liable for any errors made in the fitting. Consequently, Maidogo Limited is proposing to recognise sales when customers order and pay for the goods rather than when they have been fitted.

Details of the relevant sales figures are:

  • Sales made in retail outlets for the year to 31 March, 2014: N69,000,000
  • Sales value of NIXAQ fitted in the 14 days to 14 April, 2013: N3,600,000
  • Sales value of NIXAQ fitted in the 14 days to 14 April, 2014: N4,800,000

Note:
The sales value of NIXAQ in the 14 days to 14 April, 2013 is not included in the annual sales figure of N69 million, but those for the 14 days to 14 April, 2014 are included.

Required:

  1. Discuss whether the above represents a change in accounting policy.
  2. Calculate the amount to include in revenue for NIXAQ for the year to 31 March, 2014.

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  • 6 Marks

CR – Nov 2014 – L3 – SB – Q2c – Revenue Recognition (IFRS 15)

Assess revenue recognition change for NIXAQ sales under IFRS 15 and calculate total revenue for the year.

Maidogo Limited sells NIXAQ, a product manufactured by it, from several retail outlets. In previous years, the company has undertaken responsibility for fitting the product in customers’ premises. Customers pay for the product at the time they are ordered. The average length of time it takes from ordering to its fitting is 14 days. In previous years, Maidogo Limited had not recognised a sale in its books until the product had been successfully fitted because the rectification costs of any fitting error would be expensive.
With effect from 1 April, 2013, Maidogo Limited changed its method of trading by sub-contracting the fitting to approved contractors. Under this policy, the sub-contractors are paid by Maidogo Limited, and they (the sub-contractors) are liable for any errors made in the fitting. Consequently, Maidogo Limited is proposing to recognise sales when customers order and pay for the goods rather than when they have been fitted. Details of the relevant sales figures are:

Sales Figures Amount (N’000)
Sales made in retail outlets for the year to 31 March 2014 69,000
Sales value of NIXAQ fitted in the 14 days to 14 April 2013 3,600
Sales value of NIXAQ fitted in the 14 days to 14 April 2014 4,800

Note: The sales value of NIXAQ in the 14 days to 14 April 2013 are not included in the annual sales figure of N69million, but those for 14 April 2014 are included.

Required:
Discuss whether or not the above represents a change of accounting policy, and calculate the amount that you would include in the revenue for NIXAQ in the year to 31 March 2014. (6 Marks)

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  • 7 Marks

CR – Nov 2014 – L3 – SB – Q2a – Revenue Recognition (IFRS 15)

Discuss revenue recognition principles for different scenarios and calculate the revenue for NIXAQ sales.

(a) Labalaba Plc operations involve selling cars to the public through a chain of retail car showrooms. It buys most of its new vehicles directly from the manufacturer on the following terms:

  • Pay the manufacturer for the cars on the date they are sold to customers or six months after they are delivered to its showroom, whichever is earlier.
  • The price paid will be 80% of the retail price as set by the manufacturer at the date that the goods are delivered.
  • Pay the manufacturer 1.5% per month (of the cost to Labalaba) as a “display charge” until the goods are paid for.
  • May return the cars to the manufacturer at any time up to the date the cars are due to be paid for and incur the freight cost of any such returns. Labalaba Plc has never taken advantage of this right of return.
  • The manufacturer can recall the cars or request them to be transferred to another dealer at any time up to the time they are paid for by Labalaba.

Required:
Advise the management of Labalaba Plc as to which party bears the risks and rewards in the above arrangement and show whether there is a sale and how the transactions should be treated by each party. (7 Marks)

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  • 8 Marks

CR – May 2023 – L3 – Q5a – Emerging Trends in Corporate Reporting

Discuss four financial reporting issues companies should consider due to COVID-19.

Most regulatory authorities in Nigeria, such as the Securities and Exchange Commission (SEC), Central Bank of Nigeria (CBN), and Federal Inland and State Internal Revenue Services, issued conditional relief for meeting reporting deadlines for filing annual and other returns required by law during the pandemic.

However, companies still need to monitor further reporting updates and evaluate the current and potential effects that COVID-19 could have on their financial reporting.

Required:

Discuss FOUR financial reporting issues that should be considered by companies as a consequence of COVID-19. (8 Marks)

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  • 10 Marks

CR – May 2023 – L3 – Q4a – Revenue Recognition (IFRS 15)

Discuss the criteria for a contract to fall under IFRS 15 for revenue recognition.

There has been significant divergence in practice over the recognition of revenue, mainly because International Financial Reporting Standards (IFRSs) contain limited guidance in certain areas. The International Accounting Standards Board (IASB), as a result of its joint project with the US Financial Accounting Standards Board (FASB), has issued IFRS 15 – Revenue from Contracts with Customers.

IFRS 15 sets out a five-step model, which applies to revenue earned from a contract with a customer with limited exceptions, regardless of the type of revenue transaction or the industry. Step one in the five-step model requires the identification of the contract with the customer and is critical for the purpose of applying the standard. The remaining four steps in the standard’s revenue recognition model are irrelevant if the contract does not fall within the scope of IFRS 15.

Required:

Discuss the criteria which must be met for a contract with a customer to fall within the scope of IFRS 15. (10 Marks)

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  • 15 Marks

CR – Nov 2021 – L3 – Q5 – Revenue Recognition (IFRS 15)

Analyze the impact of early revenue recognition, responsibilities of accountants, and risks of improper disclosure in financial reporting.

Accountants in business who are responsible for the preparation of financial information must ensure that the information they prepare is technically correct, completely disclosed without any omission, and also report the substance of the transaction. However, accountants are usually faced with the danger of influence from senior managers to present figures that inflate profit or assets or understate liabilities. This always puts accountants in a difficult position. This is the situation that the Chief Accountant of Fola PLC found himself.

Fola PLC has December 31 as its year-end, and the managing director (MD) feared that the forecast of 2020 profitability goals would not be reached. Therefore, when Fola PLC received a large order on December 30, the MD immediately directed that the Chief Accountant should record it as revenue for the period. This order represents about 13% of Fola PLC’s revenue. However, the inventory control department did not separate the goods for shipment until January 1, 2021. Separated goods are usually not included in the inventory because they have been sold. Physical inventory taking under the periodic inventory system was conducted on December 31, as it is customary for the company’s external auditors to be in attendance. The Chief Accountant was confused and not willing to be involved in any unethical act.

Required:

a. Appraise the effects and implications of treating the order as revenue on 2020 and 2021 profitability.
(5 Marks)

b. In such circumstances, what should be the responsibilities of the Chief Accountant?
(5 Marks)

c. Analyze the dangers of inappropriate disclosure of information in the financial statements.
(5 Marks)

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  • 15 Marks

FR – Nov 2018 – L2 – SC – Q5 – Revenue from Contracts with Customers (IFRS 15)

Prepare the statement of profit or loss and financial position extracts based on the percentage of completion for a building contract over two years.

Akawo Limited is a building contracting firm based in Abuja. ABC Limited awarded a contract to Akawo Limited to construct a residential building in Lagos. The agreed contract price is N80 million, and the completion date is December 31, 2017.

The following are details of transactions on the contract up to March 31, 2016:

  • Contract commenced on July 1, 2015
  • Contract costs incurred by March 31, 2016, include:
    • Architects and surveyor’s fees: N1,000,000
    • Materials: N6,200,000
    • Direct labor costs: N7,000,000
    • Overheads (40% of direct labor costs): N2,800,000
    • Estimated cost to completion (excluding depreciation): N29,600,000
    • Plant and machinery used exclusively on the contract: N7,200,000 (Depreciation based on period of use)
    • Material on-site as at March 31, 2016: N600,000

The value of the plant at the end of the contract would be N1.2m and the basis of depreciation
is period of usage. Material on site as at March 31, 2016 is N600,000.

Progress payment made by ABC Limited to Akawo Limited amounted to N25.6m as at March
31, 2016.

The following information is also relevant to the contract as at March, 31 2017:

Cost incurred since the commencement of the contract to date-N40.8m.
Estimated cost to completion (excluding depreciation) N13.2m

ABC Limited paid additional N32.4m to Akawo Limited on March, 31 2017 Akawo Limited
uses percentage of completion to determine profit on a contract.

Required:
Prepare in relation to the building contract, the statement of profit or loss extracts for the years ended March 31, 2016, and 2017, and the statement of financial position extracts as at the year ended on those dates.

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  • 1 Marks

FA – May 2018 – L1 – SA – Q8 – Bases of Accounting: Accrual vs. Cash

Identifies the requirement for revenue recognition under the cash basis of accounting.

The cash basis of accounting requires the recognition of revenue only when they are:
A. Due
B. Earned
C. Paid
D. Received
E. Budgeted

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  • 1 Marks

FA – Nov 2023 – L1 – SA – Q10 – Bases of Accounting: Accrual and Cash

Identify the correct description of the cash basis of accounting.

Which of the following statements correctly describes cash basis of accounting?

  • A. Revenue is recognised in the period when it is earned, regardless of when the cash is received
  • B. Expenses are recognised in the period when they are incurred, regardless of when they are paid
  • C. Revenue is recognised in the period when the cash is received, regardless of when it is earned
  • D. Expenses are recognised in the period when they are earned, regardless of when they are incurred
  • E. Both revenue and expenses are recognised in the period when they are occurred, regardless of cash transactions

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  • 7 Marks

FR – Mar 2023 – L2 – Q2a – Financial Reporting Standards and Their Applications

Explain the revenue recognition and financial reporting treatment under IFRS 15 for a sale with a return right and significant financing component.

On 1 January 2022, Anto Ltd sold heavy-duty machines costing GH¢4.5 million to Nkwaso Ltd for GH¢7.5 million, receivable in full on 1 April 2023. Nkwaso Ltd obtained control of the machines at the contract inception. The terms of the contract allowed the customer to return the machines within three (3) months. The machines are new, and Anto Ltd has no relevant historical evidence of product returns or other available market evidence.

Based on their individual credit profiles at the transaction date, Anto Ltd and Nkwaso Ltd would have been charged borrowing rates of 15% and 20%, respectively.

Required:

In line with IFRS 15: Revenue from Contract with Customers, explain the correct financial reporting treatment of the above for the year ended 31 March 2022.

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  • 20 Marks

AA – Nov 2018 – L2 – Q3a, b & c – Audit and Assurance Risk Environment

Identifies audit risks at International Training Center and outlines appropriate auditor responses.

International Training Center (ITC) is a large company limited by shares that operates a network of teaching centers in countries across West Africa. The Company was incorporated under the requirements of the Companies Act, 1963 (Act 179), on 19 January 1990 and domiciled in Ghana. Students who register with the Center pay 30% during initial registration and the remaining 70% over the course period. You are the senior Associate of Add Consult. ITC is a new client, and you are currently planning the audit with the audit manager to audit the company for the year ended 31 December 2017.

You have been provided with the following planning notes from the audit partner following his meeting with the Finance Director.

  • ITC purchases stationery from a supplier in China, and these goods are shipped to the company’s central warehouse. The goods are usually in transit for a fortnight, and the company correctly records the goods when received. ITC does not undertake a year-end inventory count but carries out monthly continuous (perpetual) inventory counts, and any errors identified are adjusted in the inventory system for that month.
  • During the year, the directors of the Company have each been paid a significant bonus, and they have included this in wages and salaries expenses. Separate disclosure of the bonus is required by the Companies Act.
  • ITC has a policy of revaluing its land and buildings, and this year has updated the valuations of all land and buildings.
  • During the year, the company introduced a bonus-based scheme on sales for its salespersons. The bonus target was based on increasing the number of students signing up for 6-month courses by the school for individuals running accountancy examinations. This has been successful, and revenue has increased by 25%, especially in the last few months of the year. The level of receivables is considerably higher than last year, and there are concerns about the creditworthiness of some students.

Required:
a. Describe FIVE (5) audit risks, and explain the auditor’s response to each risk, in planning the audit of International Training Center. (10 marks)

b. Identify FIVE (5) audit procedures Add Consult should perform in order to place reliance on the continuous (perpetual) counts for year-end inventory. (5 marks)

c. Describe substantive procedures Add Consult should perform to confirm the directors’ bonus payments included in the financial statements. (5 marks)

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  • 4 Marks

FR – Nov 2021 – L2 – Q2b – Financial Reporting Standards and Their Applications

This question requires the recognition of revenue under IFRS 15 for a contract with advance payments and the calculation of a significant financing component.

Marshall Ltd (Marshall) is a manufacturing company that prepares Financial Statements in compliance with IFRSs and has a reporting date of 31 December. During the year to 31 December 2020, Marshall entered into a contract with a customer to manufacture and sell some goods such that the goods will be delivered (control of the goods vests with the customer) in two years. The contract has two payment options:

i) The customer can pay GH¢500,000 when the contract is signed, or

ii) GH¢650,000 in two years when the customer gains control of the goods.

Marshall’s incremental borrowing rate is 10%. The customer paid GH¢500,000 on 1 January 2020, when the contract was signed. Marshall intends to recognise revenue on this contract in the financial statements.

Required:
In accordance with IFRS 15: Revenue from Contract with Customers, explain (with supporting calculations) how Marshall should account for the above transactions for the years 2020 and 2021.

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  • 7 Marks

FR – Nov 2021 – L2 – Q2a – Financial Reporting Standards and Their Applications

This question deals with the application of IFRS 9 in financial instruments and the recognition of revenue under IFRS 15.

Manu Ltd (Manu) is a private company that prepares financial statements in compliance with International Financial Reporting Standards (IFRSs). Financial statements for the year ended 31 December 2020 are being prepared, and the following transactions occurred.

i) On 1 September 2020, Manu purchased 100,000 ordinary shares on the stock exchange for speculative reasons (making a profit) at a price of GH¢1.20 per share and paid a transaction cost of GH¢1,250. On 31 December 2020, the shares were now trading at GH¢1.32 per share on the stock exchange, and Manu received a dividend of GH¢15,000 on the shares.
(3 marks)

ii) Manu issued GH¢360,000 of redeemable 2% Preference shares at a discount of 14% on 1 January 2020. Issue costs were GH¢5,265. The shares will be redeemed on 31 December 2022 at par. Interest is paid annually in arrears, and the effective interest rate is 8%.
(4 marks)

Required:
In accordance with IFRS 9: Financial Instruments, explain how to account for the above transactions in the statement of profit or loss and statement of financial position for the year ended 31 December 2020.

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  • 6 Marks

FR – Nov 2018 – L2 – Q2c- Financial Reporting Standards and Their Applications

This question requires calculating the adjustments to opening retained earnings and profit or loss due to changes in accounting policies and estimates.

Talensi, a company reporting under IFRS, is considering making the following changes to its financial statements for the year ended 31 December 2017. Talensi presents one year of comparative information.

  1. Changing the method of depreciation of its plant from straight-line depreciation over five years (with a nil residual value) to reducing balance at 20% per annum with effect from 1 January 2017. The plant originally cost GH¢100 million on 1 January 2015.
  2. Changing the basis of valuation of certain non-seasonal inventories from first-in, first-out (FIFO) to weighted average cost (WAC). Inventories were valued as follows under the two different methods:
    31 December 2015 31 December 2016 31 December 2017
    FIFO: GH¢64 million FIFO: GH¢66 million FIFO: GH¢71 million
    WAC: GH¢62 million WAC: GH¢63 million WAC: GH¢67 million
  3. Changing the revenue recognition basis for certain seasonal goods that were first sold in 2015 such that revenue is recognised on delivery to the customer rather than on shipment. This has arisen as a result of a change in delivery arrangements such that, with effect from 1 January 2017, risks are now borne by Talensi until delivery has been made to the customer.
    2015 2016 2017
    Revenue based on shipment date: GH¢50 million GH¢86 million GH¢90 million
    Revenue based on delivery date: GH¢46 million GH¢84 million GH¢88 million

The cost of the seasonal goods is consistently 80% of sales price.

Profit (calculated using existing policies and accounting estimates) was GH¢240 million for the year ended 31 December 2017.

Required:
Calculate the adjustment to opening retained earnings in the statement of changes in equity (including 2016 comparative figures) in the financial statements for the year ended 31 December 2017 and profit or loss for the year ended 31 December 2017.

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  • 7 Marks

CR – Nov 2021 – L3 – Q2b – IFRS 15: Revenue from Contracts with Customers

Determine how Barikisu Ltd should account for revenue and costs related to a construction contract with a customer under IFRS 15.

On 1 January 2020, Barikisu Ltd (Barikisu) entered into a contract with a customer to construct a specialised building for a consideration of GH¢2 million plus a bonus of GH¢0.4 million if the building is completed within 18 months. The estimated cost to construct the building is GH¢1.5 million. If the customer terminates the contract, Barikisu can demand payment for the cost incurred to date plus a mark-up of 30%. However, on 1 January 2020, due to factors outside of its control, such as the weather and regulatory approval, Barikisu is not sure whether the bonus will be achieved.

As at 31 December 2020, Barikisu has incurred a cost of GH¢1.0 million. They are still unsure as to whether the bonus target will be met. Therefore, Barikisu decided to measure progress towards completion based on the cost incurred. To date, Barikisu has received GH¢1 million from the customer.

Required:

Recommend to the directors of Barikisu how this transaction should be accounted for in the financial statements for the year ended 31 December 2020 in accordance with relevant International Financial Reporting Standards (IFRS).

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  • 5 Marks

CR – Mar 2024 – L3 – Q3b – IFRS 15: Revenue from Contracts with Customers

This question discusses the treatment of advance payments and significant financing components under IFRS 15 for Tieku Technologies.

On 1 December 2022, Pinto Ltd (Pinto), a public company, acquired 70% of the ordinary share capital of Manpam Inc (Manpam), a private company in Liberia. The functional currency of Pinto is the GH¢, and the functional currency of Manpam is the Liberian Dollar (LS). Pinto paid GH¢39.1 million for its investment in Manpam on 1 December 2022, when the net fair value of the identifiable assets acquired and liabilities assumed of Manpam were LS22,440 million.

Given that Manpam is a private company, Pinto decided to measure the non-controlling interests at acquisition at the proportionate share of the fair value of the identifiable net assets of Manpam. An impairment test conducted at the group level on the investment in Manpam at 31 December 2023 indicated an impairment loss on goodwill of LS357 million (attributable to Pinto). No impairment loss adjustments had been necessary at the previous year end.

Relevant exchange rates were:

  • 1 December 2022: GH¢1 = LS470
  • 31 December 2022: GH¢1 = LS478
  • 31 December 2023: GH¢1 = LS490

Required:
In accordance with IFRS, calculate the goodwill figure to be recognized in the consolidated statement of financial position of Pinto for the year ended 31 December 2023 (to the nearest GH¢0.1 million).

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