Question

Scenario 1: Hockeyzine Inc. (4.5 marks) Every August, Hockeyzine Inc. publishes a fantasy hockey league magazine which is sent to various magazine retailers in Canada for sale. The standard sales contract allows these retailers to return any unsold magazines at the end of November each year. At the end of November, the retailers are responsible for submitting a report indicating how many magazines were sold. At this time, they will return the unsold goods and remit a cheque for payment to Hockeyzine for $3.50 per magazine sold. Hockeyzine records revenue on the magazines when they are shipped to the retailers in August at which point the magazines are removed from Hockeyzine’s inventory records. The company applies ASPE. Scenario 2: Cozy Cabin Co. (6.0 marks) Cozy Cabin Co. (“Cozy”) manufactures and sells prefabricated ski chalets to ski resorts across Canada. Slippery Slopes (“Slopes”) placed an order for 50 ski chalets to take advantage of a volume discount. Slopes is currently in the process of preparing one of their mountains to allow for construction of the ski chalets. They do not have storage space on site to store the chalets while they prepare the mountain; therefore, they requested that Cozy store the chalets and provide them a delivery schedule. Slopes provided Cozy with insurance coverage for the chalets and acknowledged that they were taking legal title of the chalets immediately. Cozy stores the chalets in a separate part of the warehouse and specifically identifies them as belonging to Slopes. The chalets are customized and cannot be sold to other customers. Cozy invoiced Slopes once the chalets were complete and ready for shipment and required payment within the customary 30-day term. Cozy recognized revenue on this transaction once the invoicing process was complete. The company reports under IFRS. Required: Start this question on a new page. Show all analysis to get full marks. a) Clearly state if you think the company’s current revenue recognition policy is appropriate or not appropriate. Support your answer by referencing to relevant handbook principles and applying case facts. b) If you believe the company’s current policy is not appropriate, state what changes the company should make to their policy.

Answer 1

1: Hockeyzine Inc :

One of the important criteria for recognition of revenue is when transfer of risk and reward of ownership.

In the current case since distributior have right to return the goods, this is the case of consignment sales and in consignment sales the ownership of goods does not pass untill the sales happens from distributor to end user and that is the point in time when revenue recognition should happen as per canada ASPE.

In view of this current policy of revenue recognition at the time of deliver of magazine is not correct and revenue shoudl be recognised when dealer reports the sales to end user.

2. Cozy Cabin :

One of the criteria as per IFRS is peformance obligation relating to transfer of control.

Transfer of conrol will said to arise when the customer has ability to use asset at his discretion & obtains all benefits of ownership.

The goods are customised and they are being specific goods once manufactured. As agreed between the parties the legal title of goods also gets passed upon to buyer. The actual lifting of the goods will be carrying out as per wish of customer.

Hence there is no outstanding peforemance obligation relating to transfer of control & hence the Cozy Cabin's revenue recognition policy is in line of IFRS principles that they recognise the revenue immidiately after manufacturing once goods are specified and kept on specific area.