Question

Jac Flyhigh is Chair of the Board of Exeed Company. The company has been experiencing growth placing a strain on finances and increasing levels of risk. Despite having put in place a budget that predicted a profit of $1m, expenditure has blown out over the year and the company is potentially going to record a loss of $360,000. In order to be able to report a profit to shareholders the Chief Financial Officer is proposing that the company recognise additional revenue of $658,000 ($205,000 and $453,00) after taking in consideration what is outlined in a and b below.   

a. the company recognise all of an amount of revenue of $205,000 received as sponsorship from a company called Mainrite Ltd. The contract with Mainrite specifies that Exeed will incur expenditure to acknowledge, through signage and promotional materials at company activities and events, the Mainrite contribution. At end of financial year services to the value of $125,000 have been delivered on this contract.

b. the company recognises a gain on the sale of an asset (under contract) of $453,000 even though the sale had not been completed by the end of the financial year. He states that recognising the gain now is relevant since the contract is in place.   

The CFO states that recognising the extra revenue now is relevant and convinces Jac Flyhigh to sign a director’s declaration indicating that the financial statements ‘are true and fair’.

1. In relation to accounting standard AASB15, is the CFO correct in recognising the amount of $205,000 as revenue in the current period and why?

2. Does a conflict exist between relevance and faithful representation in situation b and why?

3. What does it mean to say that the financial statements are ‘true and fair’?   

4. What final profit or loss figure would you think should be recognised and why?  

5. Reflect on what you would have done to ensure good corporate governance in relation to the director’s declaration in this case if you were Jac Flyhigh.

Answer 1