CertIFR Module-2 [PDF]

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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