Question Tag: IFRS 15

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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.

Revenue Recognition Principles under IFRS 15:

  • IFRS 15 requires revenue to be recognised as each performance obligation is satisfied. An entity satisfies a performance obligation by transferring control of a promised good or service to the customer, which could occur over time or at a point in time.
  • In this contract, Marshall undertakes to transfer control of the goods in two years. Hence, the performance obligation has not been satisfied, and revenue cannot be recognised until the goods are delivered and control is transferred.

Advance Payment and Financing Component:

  • The customer made an advance payment of GH¢500,000 for goods to be delivered in two years. This represents a liability (revenue received in advance) and has a significant financing component.
  • The significant financing component must be accounted for separately. The advance payment effectively contains an implicit interest element since the customer could have alternatively paid GH¢650,000 after two years.

Calculation of the Financing Component:

  1. Finance Cost for 2020:
    • The interest rate is 10%.
    • Finance cost = GH¢500,000 x 10% = GH¢50,000.
    • This finance cost should be recognised in the statement of profit or loss for the year ended 31 December 2020.
    • The liability in the statement of financial position at the end of 2020 will be GH¢550,000 (GH¢500,000 + GH¢50,000).
  2. Finance Cost for 2021:
    • In 2021, interest is applied to the balance carried forward from 2020.
    • Finance cost = GH¢550,000 x 10% = GH¢55,000.
    • This finance cost should be recognised in the statement of profit or loss for the year ended 31 December 2021.
    • The liability in the statement of financial position at the end of 2021 will be GH¢605,000 (GH¢550,000 + GH¢55,000).

Summary:

For the year ending 31 December 2020:

  • Liability (deferred revenue): GH¢550,000
  • Finance cost: GH¢50,000

For the year ending 31 December 2021:

  • Liability (deferred revenue): GH¢605,000
  • Finance cost: GH¢55,000

Revenue recognition principle:  1 mark
Finance cost for 2020:  1 mark
Finance cost for 2021:  1 mark
Supporting calculations:  1 mark

Total: 4 marks

  • 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.

i) Accounting for ordinary shares (equity financial asset):

  • The shares were purchased for speculative reasons; hence they should be classified as equity investment (equity financial asset) at fair value through profit or loss.
  • They should be initially measured at their fair value: GH¢120,000 (GH¢1.20 x 100,000 shares). The transaction cost of GH¢1,250 should be expensed to the statement of profit or loss.
  • At 31 December 2020, the shares should be remeasured at their fair value of GH¢132,000 in the statement of financial position, and the fair value movement (gain) of GH¢12,000 (GH¢132,000 – GH¢120,000) should be reported in the statement of profit or loss.
  • The dividend received of GH¢15,000 should be reported in the statement of profit or loss as investment income.

| Classification: | 0.5 mark |
| Initial measurement: | 1 mark |
| Subsequent measurement: | 1 mark |
| Treatment of dividends: | 0.5 marks|

ii) Accounting for redeemable preference shares (financial liability at amortised cost):

  • The bond is classified as a financial liability at amortised cost, and there is no intention to trade in the liability.
  • The preference shares should be initially measured at their fair value of GH¢304,335 (calculated in Working 1 below).
  • At 31 December 2020, the shares should be remeasured at their amortised cost of GH¢321,482 (calculated in Working 2 below).
  • Effective interest of GH¢24,347 (calculated in Working 2) should be reported in the statement of profit or loss.

Workings:

Working 1: Initial fair value calculation GH¢’000
Nominal value 360,000
Discount 14% (50,400)
Issue costs (5,265)
Net proceeds (initial fair value) 304,335

| Working 2: Amortised cost calculation | |

Year Opening balance (GH¢) Effective interest (8%) (GH¢) Coupon paid (2%) (GH¢) Closing balance (GH¢)
2020 304,335 24,347 (7,200) 321,482

| Classification: | 0.5 mark |
| Initial measurement: | 0.5 mark |
| Subsequent measurement (statement of financial position): | 0.5 mark |
| Statement of profit or loss treatment: | 0.5 mark |
| Working 1: | 1 mark |
| Working 2: | 1 mark |

Total: 7 marks

  • 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).

Constructing the building is a single performance obligation in accordance with IFRS 15: Revenue from Contracts with Customers.

The bonus is a variable consideration. It is excluded from the transaction price because it is not highly probable that a significant reversal in the amount of cumulative revenue recognised will not occur. The construction of the building should be accounted for as an obligation settled over time. Barikisu Ltd should recognise revenue based on progress towards satisfaction of the construction of the building.

  • 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).

Computation of goodwill

  • 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.

Under IFRS 15, the determination of whether an entity is acting as a principal or an agent is based on who controls the goods or services before they are transferred to the customer.

  1. Principal vs Agent Assessment:
    • Principal: An entity is a principal if it controls the goods or services before they are transferred to the customer. As a principal, Odjani would recognize revenue at the gross amount received from the customer.
    • Agent: An entity is an agent if it arranges for another party to provide the goods or services to the customer. The agent would recognize revenue as the net amount (i.e., the difference between what it receives from the customer and what it pays to the supplier).
  2. Odjani’s Role:
    • Odjani negotiates and purchases tickets in advance and assumes the risk of payment whether or not the tickets are resold. This indicates that Odjani controls the tickets before transferring them to customers.
    • Additionally, Odjani has the discretion to set the selling price for the tickets, which further suggests that Odjani is acting as the principal in the arrangement.
    • Although the airline fulfills the service obligations (i.e., providing the flight), Odjani’s control over the tickets and pricing means it is acting as a principal.
  3. Revenue Recognition:
    • Since Odjani is acting as a principal, it should recognize the gross amount received from customers as revenue.
    • The costs associated with purchasing the tickets from the airlines would be recognized as expenses, separate from the revenue recognized.
  • 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.

i) Revenue from the Sale of Food Packs (Deferred Payment):

  • Step 1: Identify the contract: A contract exists as Mankranso Ltd agreed to deliver 50,000 food packs at a price of GH¢10 per unit.
  • Step 2: Identify performance obligations: Delivery of 50,000 food packs, with 30,000 delivered by 31 March 2019 and the remaining 20,000 to be delivered on 1 June 2019.
  • Step 3: Determine the transaction price: The price is GH¢10 per unit.
  • Step 4: Allocate the transaction price: The 30,000 units delivered by 31 March 2019 represent a performance obligation fulfilled, and thus revenue should be recognized for those units. However, because the customer has 12 months to pay, the transaction price must reflect the time value of money.
  • Step 5: Recognize revenue: Mankranso Ltd must discount the price of 30,000 units to reflect the deferred payment. The effective revenue to be recognized for 30,000 units is:Revenue recognized=30,000×GH¢10×11.10=GH¢272,727\text{Revenue recognized} = 30,000 \times GH¢10 \times \frac{1}{1.10} = GH¢272,727

Thus, revenue of GH¢272,727 is recognized for the year ended 31 March 2019.

ii) Revenue from Advance Payment for Room-Nights:

  • Step 1: Identify the contract: A contract exists for the supply of 2,000 hotel room-nights at GH¢100 per night.
  • Step 2: Identify performance obligations: The obligation is to provide the hotel rooms. As of 31 March 2019, 400 room-nights have been provided.
  • Step 3: Determine the transaction price: GH¢100 per room-night.
  • Step 4: Allocate the transaction price: The transaction price is allocated based on room-nights provided. For the 400 room-nights provided by 31 March 2019, revenue can be recognized.
  • Step 5: Recognize revenue: Revenue is recognized for the 400 room-nights provided as follows:Revenue recognized=400×GH¢100=GH¢40,000\text{Revenue recognized} = 400 \times GH¢100 = GH¢40,000

The remaining GH¢160,000 (for the 1,600 unoccupied room-nights) is recognized as deferred revenue.

Thus, GH¢40,000 is recognized as revenue for the year ended 31 March 2019, and GH¢160,000 is deferred revenue.

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