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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  • 5 Marks

CR – Mar 2024 – L3 – Q2c – IFRS 15: Revenue from Contracts with Customers

This question requires determining whether Odjani Plc should recognize revenue as a principal or agent in the sale of airline tickets, based on IFRS 15.

Odjani Plc (Odjani) negotiates with major local and international airlines to purchase tickets at reduced rates compared with the price of tickets sold directly by the airlines to the public. Odjani agrees to buy a specific number of tickets and must pay for those tickets regardless of whether it is able to resell them. The reduced rate paid by Odjani for each ticket purchased is negotiated and agreed in advance. Odjani determines the prices at which the airline tickets will be sold to its customers. Odjani sells the tickets and collects the consideration from customers when the tickets are purchased. The entity also assists the customers in resolving complaints with the service provided by the airlines. However, each airline is responsible for fulfilling obligations associated with the ticket, including remedies to a customer for dissatisfaction with the service.

Required:
In line with IFRS 15: Revenue from Contracts with Customers, explain whether Odjani is a principal or agent and indicate how it would determine the amount of revenue to recognize from the ticket sales.

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  • 4 Marks

CR – Nov 2023 – L3 – Q2c – IFRS 15: Revenue from Contracts with Customers

Revenue recognition for a data provider offering real-time and historical data access based on IFRS 15 for the year ended 31 May 2023.

Accra Investors Help (AIH), a large stock market data provider in Ghana, provides stock market data to investors across major markets in Africa.

On 1 June 2022, the data provider sold a client access to its real-time database for three (3) years at an invoiced price of GH¢3.6 million. The client has the right of access to AIH’s database any time, 24 hours each day, to obtain the real-time data about stock prices around the African markets. On the same date, AIH sold to another client for GH¢800,000 access to 30 years of historical data for the next two (2) years. The client has the right to access the data, containing historical information from 1992-2021 (24 hours each day) and is also free to download the data and retain it after the two-year access to AIH’s system has elapsed.

Required:
Advise on how much revenue AIH would recognize for the year ended 31 May 2023 on each of the two contracts. (4 marks)

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  • 5 Marks

CR – Aug 2022 – L3 – Q3b – IFRS 15: Revenue from contracts with customers

This question focuses on the recognition of revenue from advance payments in line with IFRS 15 and explains the treatment for advance payment financing.

Tieku Technologies (Tieku) imports customized equipment from Europe and China for onward delivery in Ghana. It is the policy of Tieku that customers make payment for their supplies one year before delivery. Tieku does not offer discounts for advance payments. The advance payment allows Tieku to manage its import levels and to communicate delivery of supply to its customers. On 1 April 2021, Tieku received GH¢5 million from a customer to supply a customized equipment, and on 31 March 2022, Tieku delivered the equipment. Tieku’s incremental borrowing rate on 1 April 2021 was 10%.

Required:

In line with IFRS 15: Revenue from Contracts with Customers, provide an explanation (with calculations and entries, if necessary) as to how the above scenario would be treated by Tieku during the year ended 31 March 2022. (5 marks)

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  • 6 Marks

CR – Nov 2019 – L3 – Q3a – IFRS 15 – Revenue from Contracts with Customers

IFRS 15 to recognize revenue for contracts with customers involving deferred payments and prepayments.

a) IFRS 15: Revenue from Contracts with Customers specifies how and when an IFRS reporter will recognise revenue as well as requiring such entities to provide users of financial statements with more informative, relevant disclosures. The standard provides a single, principles-based five-step model to be applied to all contracts with customers.

Mankranso Ltd, a hotel, had the following transactions during the year:

i) On 31 March 2019, Mankranso Ltd signed a contract to supply 50,000 units of food packs at an agreed price of GH¢10 per unit. On the same day, 30,000 units were delivered at that date, with the remainder delivered on 1 June 2019. It was agreed that the customer would have extended credit terms of 12 months from the date of delivery. Mankranso Ltd’s cost of capital is 10%.
(3 marks)

ii) During the year ended 31 March 2019, Mankranso Ltd received payment in advance for the supply of 2,000 hotel room-nights to customers at GH¢100 per room per night. Only 400 of these had been occupied by 31 March 2019. The amounts paid by the customers are non-refundable unless the company fails to provide the agreed accommodation.
(3 marks)

Required:
In each scenario above, calculate the amount of revenue to be recognised in the financial statements of Mankranso Ltd for the year ended 31 March 2019. Justify the correct accounting treatment for each transaction.

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  • 10 Marks

CR – July 2023 – L3 – Q3b – Regulatory framework and ethics

Identify ethical issues in financial statement adjustments and recommend actions for the new Finance Director to address these breaches.

b) Axim Manufacturing plc has just employed Mr. Kennedy Owusu as the Finance Director of the company. The previous Finance Director, Mr. Ebenezer Anokye, completed the financial statements for the year ended 31 December 2021 before he left. The Auditors of the company are also done with the audit of the financial statement for the year, expressing an unmodified opinion on the accounts. Mr. Ebenezer Anokye is loved by the General staff, Management members and the Board of Directors for his ability in making the organisation profitable over the years, and “guaranteeing” increased end-of-year bonus payments to staff, as a consequence.

Mr. Kennedy Owusu wanted to familiarise himself with the operations of the company, and therefore decided to go through the financial statements for the previous year. He is dismayed to find several errors in the financial statements. The previous Finance Director, Mr. Ebenezer Anokye, passed several adjusting entries in January, 2022 to reflect in the 2021 financial statements. In one of such instances, Mr. Ebenezer Anokye recognised revenue on a large order received on December 28, 2021 but shipped on January 3, 2022. The narration or explanation given to this adjusting entry is, “omission of previous year sales, now recorded”.

Also, purchase of inventory in October 2021, which was fully sold by the end of the year had been recognised in January 2022. Finally, depreciation expense had been reduced by GH¢230,000. All these adjustments were designed to increase profit after tax or earnings per share, culminating in increased bonus payment to Management and the General staff.

Required:

i) Identify the ethical issues involved in the adjustments made by Mr. Ebenezer Anokye.

(5 marks)

ii) Recommend the possible actions that Mr. Kennedy Owusu, the new Finance Director, should take to resolve the ethical breaches and to reverse the wrong accounting treatments. (5 marks)

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  • 8 Marks

PSAF – May 2016 – L2 – Q4c – Public sector financing initiatives

This question explores the objectives and guiding principles of Public Private Partnership (PPP) agreements in Ghana.

i) State ONE objective of a public private partnership agreement?

ii) Explain THREE factors that the Government would consider before entering into a public private partnership agreement?

iii) Explain the following terms used as guiding principles in IPSAS 13 and 32 – Accounting for Public Private Partnership:

  • Service Concession Arrangement
  • Lease
  • Recognition of Revenue
  • Economic Life of an Asset

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  • 6 Marks

PSAF – May 2018 – L2 – Q1d – Accounting policies for cash and accrual-based accounting systems

Contrast cash basis and accrual basis of accounting in terms of revenue recognition, expenditure recognition, non-financial asset disclosure, and depreciation.

There are two main bases of accounting in the public sector, and these are cash basis and accrual basis. These two bases differ in many respects, though there are some similarities.

Required:
Contrast cash basis and accrual basis of accounting in the public sector in terms of:
i) Recognition of revenue
ii) Recognition of expenditure
iii) Disclosure of non-financial assets
iv) Notion of depreciation

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