Revenue Recognition – Page 2

FR – L2 – Q15 – Financial Reporting Standards

Calculate revenue, costs, and financial statement balances for four construction contracts using cost proportion method.

Question

On 31 March 20X9, Annabel Ltd had four construction contracts in progress. Details are set out below.

	Contract A	Contract B	Contract C	Contract D
	GH¢000	GH¢000	GH¢000	GH¢000
Contract price	1,850	750	960	800
Costs to date	1,490	590	405	120
Estimated future costs		25	600	480
Revenue taken in earlier years	990	100
Cost of sales recognised in earlier years	800	100
Progress billings to date	1,850	690	650	100
Cash received to date	1,850	600	600	100

Contract A was completed during the year.
Contract C commenced on 1 May 20X8.
Contract D commenced on 1 January 20X9. It is not considered possible on 31 March 20X9 to assess the outcome of Contract D with any certainty.
Annabel Ltd recognises revenue based on the proportion of costs incurred to date to expected total costs.

Required:
Show the amounts that would be recognised and presented for each contract in the financial statements of Annabel Ltd for the year ended 31 March 20X9 and show the total balances in those financial statements. Work to the nearest GH¢000.

Answer

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Tags: Construction Contracts, Contract Assets, Contract Liabilities, Financial Statements, IFRS 15, Progress Billings, Revenue Recognition
Level: Level 2

Topic: Financial Reporting Standards and Their Applications

FR – L2 – Q14 – Financial Reporting Standards and Their Applications

Discuss accounting for a repurchase agreement and consignment arrangement for Accra Healthcare Manufacturing Limited per IFRS standards.

Question

The following transactions took place at Accra Healthcare Manufacturing Limited in the year ended 31 March 20X9.

(1) On 1 January Accra Healthcare Manufacturing Limited sold goods to a bank for GH₵18m cash and agreed to repurchase the personally identifiable information repurchase the goods for GH₵20m cash on 31 December 20X9.

(2) On 31 March Accra Healthcare Manufacturing Limited consigned several motorised mobility aids to independent medical salespeople for sale to third parties. The sales price to the dealer is Accra Healthcare Manufacturing Limited’s list price at the date of sale to third parties. If a mobility aid is unsold after six months, the medical rep has a right to return it to Accra Healthcare Manufacturing Limited.

Required
Discuss how the above transactions should be accounted for in the financial statements of Accra Healthcare Manufacturing Limited for the year ended 31 March 20X9.

Answer

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Tags: Consignment Arrangements, Financing Transactions, IFRS 15, Repurchase Agreements, Revenue Recognition
Level: Level 2

Topic: Financial Reporting Standards and Their Applications

FR – L2 – Q13 – Revenue Recognition

Explain how performance obligations are identified under IFRS 15 for a contract to supply goods and services.

Question

13 Davies Ltd

Davies Ltd manufactures and sells machines and has a 31 December year-end.

Customers are required to pay a deposit of 10% on order. The remaining 90% is paid on delivery.

Machines are delivered to customers by a third party. Within one week after delivery, Davies Ltd’s employees install the machines on customers’ premises. The installation required is not complex and is capable of being performed by several alternative service providers. Installation costs 1% of the transaction price.

A fee for a three year servicing contract amounting to 6% of the transaction price, are included in the final invoice.

Required

(a) Explain how performance obligations are identified when deciding how to account for a contract to supply goods and services in accordance with IFRS 15.

(b) Identify and explain the performance obligations that should be identified in the above contract.

Construct journals for the year end to 31 December to account for a sale of a single machine with a selling price of GH¢1,000,000 in each of the following circumstances.

(d) Circumstance 2: A customer orders the machine on 30 November. It is delivered on 20 December and installed on 10 January.

(e) Circumstance 3: A customer orders the machine on 30 November. It is delivered on 20 December and installed on 30 December.

Answer

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Tags: Accounting Standards, Financial Reporting, IFRS 15, Performance Obligations, Revenue Recognition
Level: Level 2

Topic: Financial Reporting Standards and Their Applications

FR – L2 – Q12 – Revenue Recognition

State IFRS 15's core principle for revenue recognition and list the five steps to apply it.

Question

12 SALE OF GOODS AND LEISURE FACILITIES
“Revenue is income arising in the course of an entity’s ordinary activities.”
IFRS 15 sets out principles to be applied in order to report useful information to users of financial statements about the nature, amount, timing and uncertainty of revenue and cash flows arising from a contract with a customer.

Required
(a) State the core principle described by IFRS 15 in the recognition of revenue and list the five steps to be followed in applying this core principle.

(b) Zest Ltd runs a health club which provides sports and leisure facilities. It charges a fixed annual subscription, payable in advance, which entitles members to use most of the facilities (e.g. gym, swimming pool). Additional fees are payable for specific activities (e.g. sauna, squash courts) as used.
Explain in detail how Zest Ltd should recognise revenue from membership subscriptions and additional activities.

Answer

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Tags: Accounting Standards, Financial Reporting, Health Club, IFRS 15, Performance Obligations, Revenue Recognition
Level: Level 2

Topic: Financial Reporting Standards and Their Applications

PSAF – L2 – Q8.4 – Revenue Recognition Standards

Discuss revenue recognition criteria under IPSAS 47 and contrast with IPSAS 9 and IPSAS 23.

Question

Discuss the criteria for recognising revenue under IPSAS 47: Revenue and contrast these criteria with the criteria for revenue recognition under IPSAS 9 AND IPSAS 23.

Answer

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Tags: Binding Arrangements, Financial instruments, IPSAS 23, IPSAS 47, IPSAS 9, Non-Binding Arrangements, Revenue Recognition
Level: Level 2

Topic: International Public Sector Accounting Standards

PSAF – L2 – Q8.3 – Revenue from Exchange Transactions

Explain accounting treatment of tuition fees for Wisdom Academy for 2023 per IPSAS 9.

Question

The academic year of Wisdom Academy starts from September each year but has a financial year from January 1 to December 31, consistent with the fiscal year of the Government of Ghana. With respect to the 2023/2024 academic year, a total of 6,000 students were on the roll of students, each expected to pay tuition fees of GHc8,000 for the academic year, divided into two equal parts for each semester. All students are expected to pay 25% of the first semester tuition fees at the start of September each year and pay the remaining 25% before the end of first semester examinations which starts in the first week of December. Similar arrangements pertain to the second semester which starts in February of the following year and ends in May. As at 31st December 2023, 20% of the total students’ population had paid their entire fees for the academic year, 60% of the students had paid full fees for the first semester only, the remaining 20% of the students had managed to pay only 90% of the tuition fees for the first semester but were allowed to write the end of semester examinations.

Required:

Explain the accounting treatment of tuition fees in the financial statements of Wisdom Academy for the year ended 31st December 2023 being guided by IPSAS 9: Revenue from exchange transactions.

Answer

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Tags: Accrual accounting, Deferred Income, Exchange Transactions, IPSAS 9, Receivables, Revenue Recognition, Tuition Fees
Level: Level 2

Topic: International Public Sector Accounting Standards

FA – L1 – Q42 – Accruals and prepayments

Calculate amounts for profit or loss for a hotel's expenses and revenue for the year ended 30 April 20X9.

Question

A hotel makes up its accounts to 30 April annually. The proprietor, Mrs Amponsah, informs you that she has paid the following amounts during the year to 30 April 20X9:

Item	GH₵(000)
Wholesaler	3,945
Butcher	4,261
Building supplies (repairs)	814
Electricity	935
Gas	566
Wages	1,150

She also informs you that she has received GH₵37,550,000 in cash from guests, of which GH₵4,300,000 relates to deposits paid in advance for holidays to be taken after 1 May 20X9.
You discover on further investigation that invoices for April 20X9 from the butcher and wholesaler, amounting to GH₵431,000 and GH₵292,000, were received on 15 May. The electricity bill for the quarter ended 31 May 20X9 totals GH₵220,000, and the chambermaids are paid a week in arrears at GH₵42,000 per week. Gas cylinders are purchased in advance at GH₵17,000 each, and two remain unused at 30 April.

Required
(a) Calculate the amounts to be included in the statement of profit or loss for each of the above items for the year ended 30 April 20X9.

(b) Calculate the relevant statement of financial position amounts at 30 April 20X9.

Answer

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Tags: accrual basis, Accruals, cash basis, Expenses, Financial Statements, hotel operations, Prepayments, Profit or Loss, Revenue Recognition
Level: Level 1

Topic: Accruals and prepayments

AAA – L3 – Q38 – Evaluation and review

Plan audit of Belmont Pharmaceuticals for 31 Dec 20X8, addressing drug development, legal claim, and voucher revenue issues.

Question

Belmont Pharmaceuticals, a public limited liability company, is a pharmaceutical company which concentrates on medical research and the production of new medicines and remedies designed to improve the quality of life, for all ages. You are an audit manager who is planning the audit of Belmont Pharmaceuticals for the year ended 31 December 20X8. Profit before tax for the year ended 31 December 20X8 is C3.46m.
In the course of planning discussions with the finance director of Belmont Pharmaceuticals, he raised the following issues that have affected the financial statements of Belmont Pharmaceuticals for the year:
(a) During the year ended 31 December 20X8, Belmont Pharmaceuticals spent C8m on researching the relationship between two chemicals. As a result of the research, Belmont Pharmaceuticals identified a new drug that discourages the growth of carcinogenic cells in the body. It stimulates the production of antibodies in the white blood cells of the body’s immune system. Substantial progress has been made in the development of the drug and it is hoped that a drug for a cancer antidote may be possible in the foreseeable future. During the year C15 million has been spent on the project to develop this drug, codenamed project ‘Horizon’. The directors of Belmont Pharmaceuticals have capitalised the costs of C15 million as an intangible non-current asset.
(b) On 30 November 20X7, Belmont Pharmaceuticals received notification from its lawyers of a claim from users of a new type of asthma tablet. At 31 December 20X7, neither the likelihood of the success of the claim nor the amount were known and as a result, no provision was made in the financial statements for the year ended 31 December 20X7. As at 31 December 20X8, the case is still in progress, but the lawyers now advise Belmont Pharmaceuticals that the amount of the claim is an estimated C20 million and that the claimants are very likely to be successful in court.
(c) This year, just prior to the year end, Belmont Pharmaceuticals launched a DIY ‘Check the health of your blood’ voucher, marketing it as ‘a perfect choice…the gift of ensuring life longevity’. Belmont Pharmaceuticals will launch the product on a ‘2 for the price of 1’ basis and launch will be timed for Valentine’s Day on 14 February 20X5. Previous schemes on health schemes vouchers have proved immensely popular previously. The directors will issue C5 million vouchers and they expect an 80% take. Accordingly, the directors have included C4 million in revenue in the year to be December 20X8.

Required
For each of the above issues:
(i) Comment on the matters you should consider; and
(ii) State the audit evidence that you should expect to find, in undertaking planning of the audit working papers and financial statements of Belmont Pharmaceuticals.

Answer

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Tags: Audit Evidence, Intangible assets, Provisions, Revenue Recognition, Subsequent events
Level: Level 3

Topic: Evaluation and review

AAA – L3 – Q32 – Planning

Discuss considerations for developing the audit strategy for an initial audit engagement of a newly listed e-commerce company.

Question

You are a manager in the audit department of Yao Asaglo & Co, a firm of Chartered Certified Accountants, and you have just been assigned to the audit of TechNova Limited, a new audit client of your firm, with a financial year ended 31 May 2015. TechNova Limited has just been listed on the Accra Stock Exchange (ASE). It is an e-commerce facility and has grown rapidly in the last few years.
TechNova Limited was formed ten years ago by Ms. Esi Mensah, a graduate in e-commerce from Kofi University. The company designs, develops software for e-commerce with high security features which have won industry awards. In the last two years, the company invested AC₵400m in creating new software to appeal to a large number of multi-national companies, and sales are now made in over 10 countries. The software is developed in this country, but the manufacture of the security features, for obvious reasons, takes place overseas.
The software is largely sold through retail outlets, but approximately 30% of TechNova Limited’s revenue is generated through sales made on the company’s website.
In some countries, TechNova Limited’s products are distributed under a franchise agreement which gives the franchise holder the exclusive right to sell the products in that country. The cost of each franchise to the distributor depends on the estimated sales in the country to which it relates, and the franchise lasts for an average of five years. The revenue which TechNova Limited receives from the sale of a franchise is deferred over the period of the franchise. At 31 May 2015, the total amount of deferred revenue recognised in TechNova Limited’s statement of financial position is AC₵72 million.
As part of a five-year strategic plan, TechNova Limited obtained an ASE listing in December 2014. The listing and related share issue raised a significant amount of finance, and many shares are held by institutional investors. Esi Mensah retains a 20% equity shareholding, and a further 10% of the company’s shares are held by her family members.
Despite being listed, the company does not have an internal audit function, and there is only one non-executive director on the board.

(a) Comment on the matters that you should consider specific to initial audit engagement when developing the audit strategy for TechNova Limited. (b) Evaluate the audit risks to be considered in planning the audit of TechNova Limited.

Answer

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Tags: Audit risks, Corporate Governance, E-commerce, Foreign Exchange, Franchise Revenue, Listed Company, Revenue Recognition
Level: Level 3

Topic: Planning

AAA – L3 – Q29 – Internal Controls

Describe internal controls and financial statement risks for Heritage Art Gallery and Museum's identified risks.

Question

The Heritage Art Gallery and Museum (HAGM) is in the centre of a city that is popular with tourists. About 65% of its revenue comes from admission fees and annual memberships, and about 30% of its revenue comes from sponsorship of special exhibitions by companies. Most of the remaining revenue comes from a small café and gift shop in the art gallery and museum.
Admission fees come from sales of tickets to daily visitors and from annual membership subscriptions from ‘Friends of HAGM’ who are entitled to free entry to the art gallery and museum at any time.
Day tickets can be purchased by credit card in advance, by a telephone ‘hotline’ or at HAGM’s website on the Internet. Alternatively, day tickets can be bought with cash or credit card at the ‘door’ on the day of the visit. Reduced prices are available for children, students and individuals aged over 65, and there are also special reduced-price ‘family tickets’ for two adults and two children.
Sponsorship arrangements are agreed up to 18 months in advance. Some corporate sponsors, particularly transport companies (bus companies and railway companies) sell advertising to HAGM.
The management of HAGM have identified the following applicable risks that need careful attention. They believe that these risks should be managed actively.

There is a failure to attract more visitors because of the poor condition of many of the paintings in the art gallery and of the items in the museum. Paintings must be restored regularly because their condition deteriorates. HAGM has just one specialist restorer, who is unable to keep up with the required volume of work. The management of HAGM recognise that investment in new items and the restoration of existing items is inadequate, but blame the lack of revenue for the problem.
Some corporate sponsorship agreements may not be invoiced due to poor communication between the sponsors, HAGM’s sponsorship managers and the accounts department of HAGM.
Some sponsorship agreements are not invoiced at their correct amount. This happens often when a sponsor is also a company that provides advertising for HAGM. Normal practice is for these sponsors to deduct their advertising charges from the amount they pay to HAGM in sponsorship. However, the accounts department in HAGM are not given the details of these set-off arrangements.
Some of the cash received from day visitors at the door may be stolen (or lost, or used by management for business expenses) and does not reach HAGM’s cashier.
The on-line booking system for buying tickets in advance on the HAGM website is not always available because the website is ‘down’.
Required:
(a) Describe appropriate internal controls to manage each of the applicable risks
(b) Explain the financial statement risks that arise from each of these applicable risks

Answer

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Tags: Art Gallery, Cash Handling, Financial Statement Risks, Internal controls, Revenue Recognition, Sponsorship Agreements
Level: Level 3

Topic: Internal Control Systems

Tag (SQ): Revenue Recognition

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FR – L2 – Q15 – Financial Reporting Standards

Calculate revenue, costs, and financial statement balances for four construction contracts using cost proportion method.

FR – L2 – Q14 – Financial Reporting Standards and Their Applications

Discuss accounting for a repurchase agreement and consignment arrangement for Accra Healthcare Manufacturing Limited per IFRS standards.

FR – L2 – Q13 – Revenue Recognition

Explain how performance obligations are identified under IFRS 15 for a contract to supply goods and services.

FR – L2 – Q12 – Revenue Recognition

State IFRS 15's core principle for revenue recognition and list the five steps to apply it.

PSAF – L2 – Q8.4 – Revenue Recognition Standards

Discuss revenue recognition criteria under IPSAS 47 and contrast with IPSAS 9 and IPSAS 23.

PSAF – L2 – Q8.3 – Revenue from Exchange Transactions

Explain accounting treatment of tuition fees for Wisdom Academy for 2023 per IPSAS 9.

FA – L1 – Q42 – Accruals and prepayments

Calculate amounts for profit or loss for a hotel's expenses and revenue for the year ended 30 April 20X9.

AAA – L3 – Q38 – Evaluation and review

Plan audit of Belmont Pharmaceuticals for 31 Dec 20X8, addressing drug development, legal claim, and voucher revenue issues.

AAA – L3 – Q32 – Planning

Discuss considerations for developing the audit strategy for an initial audit engagement of a newly listed e-commerce company.

AAA – L3 – Q29 – Internal Controls

Describe internal controls and financial statement risks for Heritage Art Gallery and Museum's identified risks.

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FR – L2 – Q15 – Financial Reporting Standards

Calculate revenue, costs, and financial statement balances for four construction contracts using cost proportion method.

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FR – L2 – Q14 – Financial Reporting Standards and Their Applications

Discuss accounting for a repurchase agreement and consignment arrangement for Accra Healthcare Manufacturing Limited per IFRS standards.

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FR – L2 – Q13 – Revenue Recognition

Explain how performance obligations are identified under IFRS 15 for a contract to supply goods and services.

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FR – L2 – Q12 – Revenue Recognition

State IFRS 15's core principle for revenue recognition and list the five steps to apply it.

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PSAF – L2 – Q8.4 – Revenue Recognition Standards

Discuss revenue recognition criteria under IPSAS 47 and contrast with IPSAS 9 and IPSAS 23.

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PSAF – L2 – Q8.3 – Revenue from Exchange Transactions

Explain accounting treatment of tuition fees for Wisdom Academy for 2023 per IPSAS 9.

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FA – L1 – Q42 – Accruals and prepayments

Calculate amounts for profit or loss for a hotel's expenses and revenue for the year ended 30 April 20X9.

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AAA – L3 – Q38 – Evaluation and review

Plan audit of Belmont Pharmaceuticals for 31 Dec 20X8, addressing drug development, legal claim, and voucher revenue issues.

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AAA – L3 – Q32 – Planning

Discuss considerations for developing the audit strategy for an initial audit engagement of a newly listed e-commerce company.

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AAA – L3 – Q29 – Internal Controls

Describe internal controls and financial statement risks for Heritage Art Gallery and Museum's identified risks.

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