Question

You are The Chief Finance Officer for your company, Blue Label Inc. and a Fellow of the local accountancy body, The Association Certified Chartered Accountants (ACCA).   You have just received an invitation from ACCA requesting you to be one of the presenters at a workshop organized by the institute to fulfill its mandate of enhancing professional competence in its members amid many new standards that have evolved in the recent past. Your specific role will be to talk about the evolution of IFRS 15 Revenue from Contracts with Customers. The workshop organizer has asked you to send your presentation beforehand for review by a relevant official.

Required:

Write briefing notes to the organizer that explain the following in relation to IFRS 15 Revenue from Contracts with Customers :

1. The five step revenue recognition criteria (using simple illustrations as far as possible)

2. Recognition and measurement requirements for:

(i) sale and repurchase arrangements;

(ii) consignment inventory and

(iii) Bill and hold arrangements (use simple illustrations as far as possible).

Be concise and clear ,give practical example were possible

Answer 1

International Financial Reporting Standard (IFRS 15)

Revenue from Contracts with Customers was introduced by the International Accounting Standards (IAS) to provide one comprehensive revenue recognition model for all contracts with customers to improve comparability within and across industries.

The 5 steps of revenue recognition criteria are as follows.

Step 1: Identify the contract with a customer.

It is necessary an agreement reached between two parties or more creating obligations and rights that can be enforced when necessary.

For example - Approval, Payement terms collectibilty of consideration from boththe parties.

Step 2: Identify the performance obligations in the contract.

For a good or service to be considered distinct it must meet two criteria:

• The customer can benefit from the good or service either on its own or together with other resources that are readily available
• The organization’s promise to transfer the good or service is separately identifiable from other promises in the contract

Example- constructing, manufacturing, or developing an asset on behalf of the customer

Step 3: Determine the transaction price

When determining the price, there are a few things to consider and their effects:

Example - Sales Tax

• Variable Consideration – Estimated amount received after rebates, discounts, refunds, etc.
• Financing Component – Time value of money consideration if there is a financing component.
• Non-Cash Considerations – Items provided should be measured at fair value of what is received.
• Amounts Payable to Customer – In the contract, if anything is owed to the customer, the transaction price should be reduced by that amount.

Step 4: Allocate the transaction price to the performance obligation

The revenue recognition standard states that if a contract has more than one performance obligation, an organization should allocate the transaction price to each separate performance obligation in an amount that depicts the amount of consideration to which the organization expects to be entitled in exchange for satisfying each separate performance obligation.

Step 5: Recognize Revenue When or As Performance Obligations Are Satisfied

Revenue should be recognized as performance when a performance obligation is satisfied by transferring of the good or service.

2. 1)Revenue recognition in case of sale /repuchase arrangement is where the company agrees to buy /sell same sold product later on at a higher price .This is a financing arrangement . In this case the inflows would not be recognised as revenue.

2)Consignment Arrangement- Here the revenue cannot be recognised till the asset has been transferred . It is approved only when the consigner approves the possession of the goods.

3)Bill and hold Arrangement- This means the seller has alrady billed in his books of accounts but the sale is yet to happen and the seller still has possesssion of goods which is fraudulent activity. For revenue recognition the transaction should happen and the sale of goods should happen to buyer within stipulated time as per contract.

For example- A (Seller) and B (Buyer ) goes in to a agreement .As per the contract A is supposed to ship B the goods before 6th of April but A doesnt ship those goods and records in his books the sale of goods.