Question

In: Accounting

Poodle plc The following issues remain outstanding in the preparation of the financial statements for Poodle...

Poodle plc


The following issues remain outstanding in the preparation of the financial statements for Poodle plc for the year ended 31 December 2019:


I. Poodle plc is in the process of completing a major factory refit for one of its clients. The factory fitting contract has a fixed priced of £150,000. At 31 December 2019 a surveyor certified the project as being 60% complete and costs incurred to that date totalled £55,000.
The client paid a deposit of £50,000 when the contract was signed, with the remaining amount being due when the work is complete. Costs to complete the work have been reliably estimated at £55,000. Revenue and profit relating to service contracts are recognised by Poodle plc based on surveys of work performed.
Factory signs are also sold by Poodle plc on behalf of a third party company, Pug Ltd. If a client orders a factory sign, Poodle plc orders the sign direct from Pug Ltd, then
collects the money from the client and passes on 80% of its value onto Pug Ltd.
During the year ended 31 December 2019 Poodle plc made sales totalling
£1,400,000 on behalf of Pug ltd. [14 marks]


II. On 31 December 2019 Poodle plc decided to sell some specialist fitting machinery that was no longer required and the asset was put up for sale. The machinery was taken out of service and advertised nationally at a price of £51,000. The asset was originally acquired on 1 April 2007 and was estimated to have a useful life of 20 years.
The asset was revalued on 31 March 2015 to £84,000. Its carrying amount at this time was £74,000. There was no change to its estimated remaining useful life and no transfers had been made between retained earnings and the revaluation reserve. The asset’s fair value on 31 December 2019 was estimated at £50,000 and the costs to sell at £1,500.
[21 marks]


Required:
Explain the required IFRS financial reporting treatment for the issues described above, preparing all relevant calculations and discussing the impact on the financial statements of Poodle plc for the year ended 31 December 2019.

Solutions

Expert Solution

Asper IFRS 15 when Performance obligations satisfied over time the entity recognies the revenue as follows

Output Method Input Method
Recognise revenue on the basis of direct measurements of the value to the customer of the goods or services transferred to date relative to the remaining goods or services promised under the contract. Recognise revenue on the basis of the entity’s efforts or inputsto the satisfaction of a performance obligation
For Example:Surveys of performance completed to date, appraisalsof results achieve For Example: Resources consumed labour hours expended, costs incurred, time elapsed or machine hours used

. Output methods:

Output method is selected if it would faithfully depict the entity's performance towards complete satisfaction of the performance obligation. It may not be useful in depicting the entity's performance if it would fail to measure some of the goods or services for which control has transferred to the customer. For example, output methods based on units produced or units delivered would not faithfully depict an entity's performance in satisfying a performance obligation if, at the end of the reporting period, the entity's performance has produced work in progress or finished goods controlled by the customer that are not included in the measurement of the output. As a practical expedient – if a company has a right to consideration from a customer in an amount which corresponds directly with the value billed to the customer of the entity’s performance completed to date, then company may recognise revenue for the amount to which the entity has a right to invoice. For eg.: a service contract in which entity bills a fixed amount for each hour of service provided, etc

Input methods

If the entity's efforts or inputs are expended evenly throughout the performance period, it may be appropriate for the entity to recognise revenue on a straight-line basis.While applying input method, a careful consideration should be given for events that do not depict a direct relationship between entity’s inputs and transfer of control of goods or services. For example, when cost-based input method is used, an adjustment may be required in the following cases –

(a) When any cost incurred does not contribute to an entity’s progress in satisfying performance obligation – any excess costs incurred owing to entity’s inefficiencies that were not reflected in the price of the contract must be ignored for measuring progress of work. For eg: cost of wasted materials, labour or other resources, etc

.(b) When cost incurred is not proportionate to entity’s progress in satisfying its performance obligation. In such cases, the best reflection is to adjust the input method to recognise revenue only to the extent of costs incurred. Such recognition of revenue to the extent of costs incurred is appropriate, if at contract inception, all the following conditions exist:

(i) The goods do not represent a distinct performance obligation;

(ii)Customer is expected to obtain control of the goods significantly before receiving the services;

(iii) Cost of such goods is significant relative to the total expected costs to complete the performance obligation; and

iv) The entity procures the goods from a third party and does not significantly involve in designing / manufacturing the goods (even if the entity is a principal in the arrangement between the entity and end customer).

An entity shall apply a single method of measuring progress for each performance obligation satisfied over time, and the entity shall apply that method consistently to similar performance obligations and in similar circumstances. At the end of each reporting period, an entity shall remeasure its progress towards complete satisfaction of a performance obligation satisfied over time.

Analysis:

As per the provision stated above it can be concluded that the entity uses the output methof torecognise the revenue

therfore based on the surveyor certification the project is completed @60% till date

therefoe the revenue to be recognised is £150,000 * 60% = £90,000

Profit to be recognised = revenue to be recognised - cost incurred till date = £90,000 - £55,000= £35,000

Principal vs agent consideration

Some contracts result in an entity’s customer receiving goods or services from another entity that is not a direct party to the contract with the customer. The standard states that when other parties are involved in providing goods or services to an entity’s customer, the entity must determine whether its performance obligation is to provide the good or service itself (i.e., the entity is a principal) or to arrange for another party to provide the good or service (i.e., the entity is an agent). The determination of whether the entity is acting as a principal or an agent affects the amount of revenue the entity recognises. That is,

•when the entity is the principal in the arrangement, the revenue recognised is the gross amount to which the entity expects to be entitled.

•when the entity is acting as an agent, the revenue recognised is the net amount i.e. the amount, entity is entitled to retain in return for its services under the contract. The entity’s fee or commission may be the net amount of consideration that the entity retains after paying the other party the consideration received in exchange for the goods or services to be provided by that party

Analysis:

So therefore in the given case pug ltd is principal and it should recognise the revenue on a gross basis the revenue to be recognised is = £1,400,000 and expenses as commission of £1,400,000 * 20% = £2,80,000

Poodle plc recognises the revuenue of £1,400,000 * 20% = £2,80,000

In order to determine the princpal vs agent relationship please refer to the Indicators that an entity is a principal or agent stated in IFRS 15


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