accounting slides

5/20/2018 Accounting Slides

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Revenue

S4 to S6

1

OperatingActivities: Recognition and Measurement Issues


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Income

Framework

increases in economic benefits during the accounting

period in the form of inflows or enhancements ofassets or decreases in liabilities that result in increases

in equity, ..

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Income vsRevenue

What is Income?

FRS Framework para 4.29

Encompasses both Revenueand Gain

Revenuearises in the course of ordinary activities Eg, sales, fees, interest, dividends, royalties, rent

What is Revenue?

FRS 18 para 7

Grossinflow of economic benefits

Arising in course of ordinary activities

Increase in Equity3


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Revenue RecognitionCriteria (RRC)

Revenue recognition principle (Statement ofFinancial Accounting Concepts (SFAC) No 5):Realised / Realisable; andEarned

What is

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Revenue? (FRS Framework para 4.29)

Recognition? (Framework paras 4.47 & 4.48) Realisation? (SFAC No. 6 para 143)

Earned? (SFAC No. 5 para 83)


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Revenue RecognitionCriteria (RRC)

Revenue recognition principle (Statement of FinancialAccounting Concepts (SFAC) No 5):

Realised / Realisableconvertingnon-cash resources and rights into $sale of assets for cash and claims to cash

Earned

the enterprise has substantially accomplishedwhat it must doto be entitled to the benefitsrepresented by the revenue

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FRS 18 Revenue

a) Sale of goods

b) Rendering of services

c) Use by others of entity assetsyielding interests,

royalties and dividends

Exclusions:

FRS 11 Construction Contracts

Para 6 6


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2 Main Issues in Revenue Recognition

and Measurement

Timing

Quantum

Revenue is recognised when it is probablethat futureeconomic benefits will flow to the entity and these

benefits can be measured reliably.

Para 9 Revenue shall be measured at the fair value of

the consideration received or receivable.

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Revenue from

Sale of Goods

FRS 18:14 Revenue from sale of goods should be recognisedwhen allthe following conditions have been satisfied:

1. Transfer of significant risks and rewards of ownership

2. No managerial involvement and effective control over thegoods sold

3. Inflow of economic benefits is probable

4. Amount of revenue can be measured reliably

5. Cost incurred or to be incurred can be measured reliably 8


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Sales Discounts/ Sales Returnsand

Allowances

Revenue should be measured at the fair value of the

consideration received or receivable (FRS 18:9)

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10

On January 6, Timberland sold $1,000 of

merchandise on credit with terms of 2/10, n/30.

Journal entry to record the sale:

Sales on Account (CreditSales)


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11

If the customer remits the appropriate amount on

January 14, what entry would Timberland make?

Journal entry to record the receipt:

Payment MadeWithin the Discount Period


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12

If the customer remits the appropriate amount onJanuary 19, what entry would Timberland make?

Journal entry to record the receipt:

Payment Made Outsidethe Discount Period


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13

On January 19, a Timberland factory stores credit card

sales were $3,000. The credit card company charges a

2% service fee.

Prepare the journal entry to record the sales:

Accounting for CreditCard Sales


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14

Sales Returns and Allowances

On July 8, Company Y returns $500 of hiking boots

originally purchased on account from Timberland.

Prepare the journal entry:


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Recording Sales RevenueGST

Without GST

Dr Cash / A/R $x

Cr Sales Revenue $x

With GST

Dr Cash / A/R $x

Cr Sales Revenue $xCr GST Payable $x

FRS 18 para 815


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FRS 18:8

Revenue includes only the gross inflows of

economic benefits received and receivable by

the entity on its ownaccount.

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Quiz

insurance agents

stockbrokers

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Q1

Scenario 1

Scenario 2

Scenario 3

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Quiz

risk and rewards vs legal title vs possession

refund

warranty

Revenue vs Expense

Revenue - recognition

Expensedoubtful debts

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Revenue from

Rendering of Services

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Revenue from

Rendering of Services

Recognition of revenue from rendering of services:

Generally, it must be realised/realisable and earned

FRS 18:20

a) Amount can be measured reliably

b) Inflow of economic benefits is probable

c) Stage of completion measured reliably

d) Costs incurred / costs to complete the transaction can

be measured reliably

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Determining Stageof Completion

FRS 18:24

(a) surveys of work performed;

(b) services performed to date as a percentage of

total services to be performed; or

(c) the proportion that costs incurred to-date bear to

the estimated total costs of the transaction.

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Quiz

progress payments and advances vs stage of

completion

uncertain outcome

loss outcome

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Q2

Dragon Place

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Q10

iCustom

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Use of AssetFRS 18

Use of asset Generalrecognition: only if

Inflow of economic benefit isprobable; and

Amount can be measuredreliably

Interest On effective interest methodFRS 39

Royalty On an accrual basis inaccordance with thesubstance of the agreement

Dividend When the shareholders right to

receive payment is established26


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Recording Service Revenue

Without GST

Dr Cash / A/R $x

Cr Service Revenue $x

With GST

Dr Cash / A/R $x

Cr Service Revenue $xCr GST Payable $x

FRS 18 para 827


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Quiz

Unpaid interest before acquisition of interest-bearing

investment

pre-acquisition and post-acquisition

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Q7

Vienna Restaurant

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Disclosure

Accounting policy

Amount of each significant category of revenue:

i. Sale of goods

ii. Rendering of services

iii. Interest

iv. Royalties

v. Dividends

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New Standard for

Revenue Recognition & Measurement

Title: Revenue from Contracts with Customers

Jointly issued by IASB (IFRS 15) and FASB

ASC is expected to issue the new standard soon

Effective 1 January 2017

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Core Principle

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 in exchange for those goods or services


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5Steps to apply the Core Principle

Step 1: Identify the contract(s) with the customer

Step 2: Identify the separate performance obligation(s)

Step 3: Determine the transaction price

Step 4: Allocate the transaction price

Step 5: Recognise revenue when a performance obligation is

satisfied


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OtherGains/Losses

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Other Gains/Losses

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Unrealised?

No inflow of resources (because no external

transaction)

= paper gains

Realised?


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OtherGains/Losses

Fair value on Property, Plant and Equipment (FRS 16)

Land

Building

Fair value on Investment Property (FRS 40)

Mark-to-market gains/losses on Investments (FRS 39)

Investment in Trading SecuritiesInvestment in Available-For-Sale securities

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Classificationof Financial Assets:

(a) financial assets at fair value through profit or loss(FVTPL);

(b) held-to-maturity investments;

(c) loans and receivables; and

(d) available-for-sale financial assets (AFS).

FRS 39:45


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TradingSecurities

Upon initial recognition: at Fair Value (exclude

transaction costs)

At B/S date: marked to market

Unrealisedholding gains/losses: to P/L

Upon disposalRealisedgains/losses: to P/L

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TradingSecurities

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Year 2DR Cash $15m

CR Gain on disposal of TS (P/L) $5m

CR TS $10m

Year 1 - Trading Securities - $8m (cost)As at end of Year 1 - Marked-to-market - $10m

Year 2 - Trading Securities sold for $15m

End of year 1DR TS $2m

CR FV gain on TS (P/L) $2m


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Upon initial recognition: at Fair Value (includingtransaction costs)

At B/S date: marked to market

Unrealisedgains/losses: directly to Fair Value

Reserve (Equity/OCI)

Upon disposal RealisedGain/loss on disposal to P/L

Fair value reserve transferred/recycledto P/L

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Available-for-Sale Securities


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Available-for-Sale Securities

Year 1 - AFS securities - $8m (cost)

As at end of year 1marked-to-market is $10mYear 2 - AFS securities sold for $15m

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Year 2

DR Cash $15mDR Fair value reserve on AFS (Equity) $2m

CR AFS $10m

CR Gain on disposal of AFS (P/L) $7m

End of year 1

DR AFS $2m

CR Fair value reserve on AFS (Equity/OCI) $2m


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Presentationin F/S

Trading securities

Available-for-sale securities

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Q3

Myers

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Q8 and Q9

CT

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Q11

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Revenue

S4 to S6 END

OperatingActivities: Recognition and Measurement Issues

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