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Module 2: Presentation, Revenue And Profit
What you will learn? Presentation of financial statements – IAS 1 Accounting
policies,
changes
in
accounting
estimates, and errors – IAS 8 Revenue from contracts with customers – IFRS 15
IAS 1: Presentation of financial statements General features of financial statements Fair presentation FS present fairly financial position, performance and cash flow of an entity
Offsetting Assets and liabilities and income and expenses should not be offset
Going concern
Accrual basis
Materiality and aggregation
FS should be prepared on going concern basis
FS other than cash flow information should be prepared on accrual basis
Each material class of similar items should be presented separately
Frequency of reporting
Comparative information
Consistency of presentation
A complete set of FS should be prepared at least annually
Comparative information should be presented for the preceding period
Consistent presentation and classification should be retained
IAS 1: Presentation of financial statements Content of financial statements
Statement of Financial Position (SOFP)
Statement of Profit or Loss and Other Comprehensive Income (SPLOCI)
Financial Statements
Statement of Cash Flows (SOCF) see details in module 6
Statement of Changes in Equity (SOCIE)
Notes to the Financial Statements
IAS 1: Presentation of financial statements Statement of Financial Position Assets and liabilities should be presented: current items and non-current items
Current items
Information should be disclosed
expected to be realized in normal operating cycle
Classes of property, plant and equipment
held for purpose of trading
Classifications of inventory
expected to be realized within 1 year
Types of provision
unrestricted cash or cash equivalent
Details of classes of share capital
a liability has to be settled within 1 year
A description of reserves within equity
IAS 1: Presentation of financial statements Statement of Profit or Loss and Other Comprehensive Income SPLOCI may be presented as one statement or two seperate statements Profit or loss includes
Other comprehensive income includes
Items of income
Revaluation surplus arising on PPE
Items of expenses
Remeasurement of defined pension schemes Cash flow hedges Change in fair value of financial instruments Exchange differences arising on translation of foreign subsidiary
IAS 1: Presentation of financial statements Statement of Profit or Loss and Other Comprehensive Income 2019 $’000
2018 $’000
Revenue
43,000
26,000
Cost of sales
(28,000)
(18,000)
Gross profit
15,000
8,000
Other income
2,000
Distribution costs
(2,000)
(800)
Administrative expenses
(4,000)
(2,200)
(500)
(300)
Profit before tax
10,500
4,700
Income tax expense
(1,400)
(900)
9,100
3,800
Finance costs
Profit for the year Other comprehensive income Gain on property revaluation Investment in equity instrument Toal comprehensive income for the year
2,000 200 9,300
5,800
IAS 1: Presentation of financial statements Statement of Profit or Loss and Other Comprehensive Income Expenses in profit or loss may be analysed using: “nature of expense” or “function of expense” Nature of expense
Function of expense
Revenue
X
Revenue
Other income
X
Cost of sales
(X)
Change in inventories
(X)
Gross profit
X
Raw materials used
(X)
Other income
X
Employee benefit expense
(X)
Distribution costs
(X)
Depreciation expense
(X)
Administrative expenses
(X)
Other expense
(X)
Other expenses
(X)
X
Profit before tax
X
Profit before tax
X
IAS 1: Presentation of financial statements Statement of Profit or Loss and Other Comprehensive Income
Items in Other Comprehensive Income
Items can be reclassified
OCI may be reclassified to profit or loss
Share of OCI of associate may be reclassified to profit or loss
Items cannot be reclassified
OCI will not be reclassified subsequently to profit or loss
Share of OCI of associate will not be reclassified to profit or loss
IAS 1: Presentation of financial statements Statement of Profit or Loss and Other Comprehensive Income
Disclosure requirement
Revenue
Share of profit or loss of associates/joint ventures
Gains/losses on derecognition of financial assets
Gains/losses on reclassification of financial assets
Finance costs
Tax expense
Impairment losses (and reversals)
Single amount for discontinued operations
IAS 1: Presentation of financial statements Statement of changes in equity (SOCIE)
SOCIE includes
Total comprehensive income for the period
The effects of changes in accounting policies and corrections of errors recognised in accordance with IAS 8 A reconciliation between the carrying amount at the beginning and end of the period
IAS 1: Presentation of financial statements Statement of changes in equity (SOCIE) Share capital $ 100,000
Share premium $ 250,000
Retained Earnings $ 567,000
Revaluatio n surplus $ 210,000
1,127,800
Changes in accounting policy
-
-
(20,400)
-
(20,400)
Restated balance at 1 January 20X8
100,000
250,000
547,400
210,000
1,107,400
Dividends Total comprehensive income
-
-
(40,000) 76,500
42,000
(40,000) 118,500
Balance 31 December 20X8 Issue of shares Dividends
100,000
250,000
583,900
252,000
1,185,900
20,000 -
60,000
(45,000)
-
80,000 (45,000)
Total comprehensive income
-
82,300
(26,000)
56,300
Balance 31 December 20X9
120,000
621,200
226,000
1,277,200
Balance at 1 January 20X8
310,000
Total $
IAS 1: Presentation of financial statements Notes to the financial statements
SOCIE should
Present information about the basis of basic of preparation and accounting policies Disclose information required by IFRS Standards that is not disclosed elsewhere Provide other relevant information not presented elsewhere
IAS 8: Accounting Policies, Changes in Accounting Estimates and Errors Definition of accounting policy
principles bases Accounting Policies
conventions
Preparing and presenting
financial rules practices
statements
IAS 8: Accounting Policies, Changes in Accounting Estimates and Errors Selection of accounting policies
Existence of relevant IFRS Standard or Interpretation
Use that standard or interpretation
Use management’s judgement Absence of relevant IFRS Standard or Interpretation
referred to
Standards dealing with similar issues
Definitions, recognition criteria, measurement in framework
IAS 8: Accounting Policies, Changes in Accounting Estimates and Errors Changes in accounting policies
Adopting an accounting policy for a new Types of
type of transaction or event not dealt
events which
with previously by the entity
do not constitute
changes in accounting policy
Adopting a new accounting policy for a transaction or event which has not occurred in the past or which was not material
IAS 8: Accounting Policies, Changes in Accounting Estimates and Errors Changes in accounting policies Accounting policies should be applied consistently
Required by a new Standard or Interpretation Accounting practicable
policies only change if
Provide more relevant and reliable information
impracticable
Apply retrospectively Retrospective applied to the earliest period that is practicable
IAS 8: Accounting Policies, Changes in Accounting Estimates and Errors Definition of accounting estimates
An approximation of the amount to be debited or credited on items for which no precise means of measurement are available
Accounting Estimates
Based on specialized knowledge and judgement derived from experience and training Used in financial statements to determine amounts cannot measured with precision and certainly
IAS 8: Accounting Policies, Changes in Accounting Estimates and Errors Accounting estimates
Accounting estimates
Methods of depreciation Residual values
Changes in accounting estimates
An adjustment resulting from reassessing the expected future benefits/obligations associated
Amounts of provisions Apply prospectively
IAS 8: Accounting Policies, Changes in Accounting Estimates and Errors Errors
Mathematical mistakes
Mistakes in applying accounting policies
Correct errors retrospectively
Oversights and misinterpretation
Restate the comparative amounts
Errors
Fraud
IAS 8: Accounting Policies, Changes in Accounting Estimates and Errors Example A company has always valued inventory on a FIFO basis. In 20X9 it decided to switch to the weighted average method of valuation. Gross profit in the 20X8 financial statements was calculated as follows $’000
Revenue
869
Cost of sales Opening inventory
135
Purchasing
246
Closing inventory
(174)
Gross profit
(207) 662
It is necessary to recalculate the amounts for 20X7, so that opening inventory for 20X8 is valued on a weighted average basis.
IAS 8: Accounting Policies, Changes in Accounting Estimates and Errors Example
Opening inventory for 20X8 based on WA method = $122,000 Closing inventory = $143,000 $’000
Revenue
869
Cost of sales Opening inventory
122
Purchasing
246
Closing inventory
(143)
Gross profit
(225) 644
Gross profit for 20X8 decrease $18,000 reduce net profit and RE Adjustment to opening RE in 20X9 = $18,000
IFRS 15: Revenue from Contracts with Customers Five-step model Model for recognising and measuring revenue
STEP 1
Identify the contract
STEP 2
Identify the performance obligations
STEP 3
Determine the transaction price
STEP 4
Allocate the transaction price to each performance obligation
STEP 5
Recognise revenue
IFRS 15: Revenue from Contracts with Customers Five-step model STEP 1 Identify the contract Approved by all parties Rights can be identified
Features of a “contract”
Payment terms can be identified
Commercial substance
Consideration is probable
IFRS 15: Revenue from Contracts with Customers Five-step model STEP 2 Identify the performance obligations Performance obligation
Distinct goods/services
Customer can benefit from the good or service
Entity's promise to transfer the good or service is separately identifiable
Series of distinct goods/services
A performanc e obligation that is satisfied over time
A single method of measuring
IFRS 15: Revenue from Contracts with Customers Five-step model STEP 2 Identify the performance obligations Example Steadman Construction Co is contracted to build an office for a customer. It will design the building, purchase materials, prepare the site, construct the property, install wiring and air conditioning and finish the property. Although each element of the construction process is capable of being distinct, in the context of the contract, the company provides a
significant service in integrating the input processes to produce a property. Therefore there is a single performance obligation, being the construction of the property.
IFRS 15: Revenue from Contracts with Customers Five-step model STEP 3 Determine the transaction price
TRANSACTION PRICE The amount of
Elements for considering the transaction price
Significant financing components
consideration an entity expects to be entitled to in exchange for transfering the promised goods/services
Variable consideration Non-cash consideration Consideration payable to a customer
IFRS 15: Revenue from Contracts with Customers Five-step model STEP 3 Determine the transaction price Example Taplop Co supplies laptop computer to businesses. 1/7/20X8: entered contract with Trill Co – Trill Co purchases latop $500/unit If Trill Co purchase more than 500 laptops/year, price reduces to $450/unit Taplop year end on 30/6. a, At 30/9/20X8, Trill Co bought 70 laptops. Taplop Co estimates Trill Co purchase would not exceed 500 in the year to 30/6/20X9, and Trill Co would not be entitled to the volume discount. b, During quarter ended 31/12/20X8, Trill Co purchased an additional 250
laptops. Taplop estimates Trill Co purchases would exceed the threshold for the volume discount in the year to 30/6/20X9.
IFRS 15: Revenue from Contracts with Customers Five-step model STEP 3 Determine the transaction price Example a, Recognized revenue in Taplop Co in quarter ended 30/9/20X8
Taplop recognized revenue of 70 x $500 = $35,000 b, Recognize revenue in Taplop Co in quarter ended 31/12/20X8
Taplop should recognize revenue of $109,000 Calculation: $112,500 (250 laptops x $450) less change in transaction price of $3,500 (70 laptops x $50 price reduction) for the the reduction of price in the laptop sold in the quarter ended 30/9/20X8.
IFRS 15: Revenue from Contracts with Customers Five-step model STEP 4 Allocate the transaction price
Allocate base on stand-alone price
Stand-alone price of each performance obligation
IFRS 15: Revenue from Contracts with Customers Five-step model STEP 5 Recognise revenue
Entity has a present right to payment for the asset
Customer has legal title to asset
Revenue at a point in time
Entity has transferred physical possession of the asset Customer has significant risks and rewards related to ownership of the asset Customer has accepted the asset
IFRS 15: Revenue from Contracts with Customers Five-step model STEP 5 Recognise revenue
Customer simultaneously receives and consumes all the benefits provided
Revenue overtime
If any of 3 criterias are met
The entity’s work creates or enhances an asset controlled by the customer
Entity's performance does not create an asset with an alternative use & has an enforceable right to payment for performance completed to date
IFRS 15: Revenue from Contracts with Customers Five-step model Example Lingard Co sells a cable TV system to Monica under the following terms on January 20X5:
Monica has to pay a monthly fee of $80 for 12 months. Monica receives a cable TV set top box and access to all the TV channels. The contract does not contain any other conditions and, once signed, the receipt of the consideration is unconditional.
Lingard Co sells the set top box by itself for $250 and charges monthly access to the TV service without the set top box for $65 a month. What amount of revenue should Lingard Co recognise in the year ended 31 March 20X5?
IFRS 15: Revenue from Contracts with Customers Five-step model Example
STEP 1 Identify the contract
A contract is in place between Lingard Co and Monica for a 12 month period
STEP 2 Identify the performance obligation
Lingard Co has two separate performance obligations: Deliver a set top box Deliver cable TV access for 12 months
STEP 3 Determine the transaction price
12 x $80 = $960
IFRS 15: Revenue from Contracts with Customers Five-step model Example STEP 4 Allocate transaction price to performance obligations
Box Monthly access to TV Total
Standalone price $250 $780 (= $65 x 12) $1,030
%Total
Revenue
24.3%
$233
75.7%
$727 $960
Box - performance obligation is already transfered on 1.1.X5 – Total TV revenue is recognised Monthly access to TV – performance obligation satisfied overtime so on 31.03.X5 recognised revenue is $181 (=$727/4)
STEP 5 Recognise revenue
Cash ($80 x 3) Receivable Revenue ($233 + $181)
Debit $240 $174
Credit
$414
IFRS 15: Revenue from Contracts with Customers Five-step model Practice question EF Co provides a wireless router and 12 months’ superfast broadband package to a customer for $220 payable in advance. A customer buying the router separately would pay $30 and a customer buying the broadband package separately would pay $20 per month. a, How much of the transaction price is allocated to the performance obligation to provide the router, the broadband package? b, When is the transaction price allocated to the broadband package recognised?
IFRS 15: Revenue from Contracts with Customers Five-step model Practice question
a, How much of the transaction price is allocated to the performance obligation to provide the router, the broadband package?
The total transaction price is allocated prorate to standalone selling price. The sum of the standalone selling prices is $270 ($30 + (12 x $20)) b, When is the transaction price allocated to the broadband package recognised?
Recognize over the 12 month period
IFRS 15: Revenue from Contracts with Customers Recognition of revenue over time
Input method
% work completion =
calculate the work completion on the basis of the entity’s inputs (labor hours, resources consumed...) Cost incurred Cost incurred + further estimated cost to complete contract
Output method
% work completion =
calculate the work completion on the basis of the value of the goods/services transfered Work certified
Total contract price
IFRS 15: Revenue from Contracts with Customers Recognition of revenue over time Revenue recognized = in the period Total contract profit
% work completion x Total contract price
Total contract price – Cost incurred – = Further estimated cost to complete contract
Total contract profit > 0 : COGS = (Cost incurred + further estimated cost) x % work completion Profit recognised = Total contract profit x % work completion
Total contract profit < 0 : loss Loss in the period = Total contract loss COGS recognised = Revenue recognised – loss in the period
IFRS 15: Revenue from Contracts with Customers Example: Contract profits Peppa Co has the following contract in progress: $m Total contract price
750
Costs incurred to date
225
Estimated costs to completion
340
Payments invoiced and received
290
IFRS 15: Revenue from Contracts with Customers Example: Contract profits Estimated profit
$m
Statement of profit or loss
$m
Total contract price
750
Revenue (40% x $750)
300
Less costs incurred to date
(225)
Less estimated costs to completion
(340)
Estimated profit
Cost of sales (40% x (225 + 340))
Profit (40% x 185)
(226)
74
Statement of financial position
$m
Costs incurred to date
225
185
Percentage complete Cost to date/total estimated costs: 225/(225+340) = 40%
Recognised profits
74
Less receivable
(290)
Contract asset
9
IFRS 15: Revenue from Contracts with Customers Example: Contract loss Peppa Co has the following contract in progress: $m Total contract price
550
Costs incurred to date
225
Estimated costs to completion
340
Payments invoiced and received
290
IFRS 15: Revenue from Contracts with Customers Example: Contract loss Estimated loss
$m
Statement of profit or loss
$m
Total contract price
550
Revenue (40% x $550)
220
Less costs incurred to date
(225)
Less estimated costs to completion
(340)
Estimated loss
Cost of sales (balancing figure)
(235)
Loss
(15)
Statement of financial position
$m
Costs incurred to date
225
Recognised loss
(15)
Less receivable
(290)
Contract liability
(80)
(15)
Percentage complete Cost to date/total estimated costs: 225/(225+340) = 40%
IFRS 15: Revenue from Contracts with Customers Example: Output method The main business of Santolina Co is building work. At the end of Sep 20X3 there is an uncompleted contract on the books, details as follows Date commenced Expected completion date
1.4.X1 23.12.X3 $m
Total contract revenue
290,000
Costs to 30.9.X3
210,450
Value of performance obligations satified to 30.9.X3
230,000
Amounts invoiced for work certified to 30.9.X3
210,000
Cash received to 30.9.X3
194,000
Estimated costs to completion at 30.9.X3
20,600
Santolina Co calculates satisfaction of performance obligations based on work certified as a percentage of contract price.
IFRS 15: Revenue from Contracts with Customers Example: Output method $ Final contract price
SOPL Revenue (work cer)
$ 230,000
290,000
Less: costs to date
(210,450)
Estimated future costs
(20,600)
Estimated final profit
58,950
The recognised profit is found as follows: Work certified Estimated x final profit Total contract price
Cost of sales ((210,450 + 20,600) x 79.31%) Gross profit SOFP Contract asset Costs to date Attributable profit
(183,247) 46,753 $ 210,450 46,753 257,203
230,000 290,000 = $58,950 x 79.31%
Amounts invoiced
Contract asset
47,203
Profit recognised = $46,753
Contract receivables (210 -194)
16,000
$58,950
x
(210,000)
IFRS 15: Revenue from Contracts with Customers Presentation of contracts with customers Contracts with customers are presented in the SOFP depending on the relationship between the entity’s performance and the customer’s payment
Contract asset
An entity’s right to consideration in exchange for goods or services that the entity has transferred to a customer when that right is conditioned on something other than the passage of time
Receivable
An entity’s right to consideration that is unconditional
Contract liability
An entity’s obligation to transfer goods or services to a customer for which the entity has received consideration from the customer