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.

Question

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:

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

Answer

1. Change in Accounting Policy:

The proposal to recognize sales when customers order and pay for goods rather than when the goods are fitted represents a change in revenue recognition policy, as it alters the timing of revenue recognition.

Previous Policy:
Sales were recognized only after fitting, as this was the point when all risks and rewards had transferred, and the rectification risk was borne by Maidogo Limited.
New Policy:
Sales are recognized upon payment and ordering because fitting is now outsourced to sub-contractors, who assume the rectification liability. This represents a shift in how and when revenue is recognized under accounting standards.

Impact:
This change qualifies as a change in accounting policy under International Financial Reporting Standards (IFRS), requiring retrospective application and adjustment of prior period figures for comparability unless impracticable.

2. Revenue Calculation for the Year Ended 31 March 2014:

Revenue to include in the year should exclude the sales value of NIXAQ in the 14 days to 14 April, 2014 that would not have been recognized under the previous policy.

Steps:

Total reported revenue = N69,000,000
Less: Sales value of NIXAQ fitted in 14 days to 14 April, 2014 = N4,800,000
(This amount is included in the reported sales figure but would not have been recognized under the old policy.)
Add: Sales value of NIXAQ fitted in 14 days to 14 April, 2013 = N3,600,000
(This amount would have been recognized under the old policy but is not included in the reported sales figure.)

Adjusted Revenue Calculation:
$A d j u s t e d R e v e n u e = N 69, 000, 000 - N 4, 800, 000 + N 3, 600, 000$

$A d j u s t e d R e v e n u e = N 67, 800, 000$

3. Conclusion:

The change represents a change in accounting policy for revenue recognition and should be disclosed in the financial statements, with prior period adjustments if applicable. The adjusted revenue for the year ended 31 March 2014 is N67,800,000.

Tags: Change in Accounting Policy, Financial Reporting, NIXAQ Sales, Revenue Recognition
Level: Level 3

Topic: Corporate Tax Compliance and Reporting
Series: NOV 2014

Uploader: Dotse