Question

You are the assistant to the Financial Director of TreesRUs Plc who primarily provide forestry and landscaping services to large organisations. The Financial Director has recently been appointed and he is considering the accounting treatment of certain transactions.

Specifically, he has noted the following transactions during December 20X9:

1. Private Hospital Donation

       TreesRUs has given a £150,000 donation towards the cost of a new private hospital in the nearby town. The hospital has extensive grounds and the donation has been given following a verbal promise by the Hospital’s Operations Director that all landscaping services and garden maintenance work will be given to TreesRUs over the next three years. However, there is no signed contract in place. TreesRUs have estimated that if they are awarded this work they could possibly achieve profits of approximately £200,000 per year.

2. Managing Director Contract

TreesRUs has signed a contract to pay its managing director £400,000 per annum for the next three years. He has agreed to work full time for the company over that period.

3. Free Lawnmowers

       TreesRUs took delivery of four ‘ride-on’ lawnmowers for free. The typical trade price of these lawnmowers would be £3,000 each. They were given these lawnmowers for “nothing” on the agreement that TreesRUs would provide gardening services to the supplier’s Headquarters over the next couple of months. Completion of this task will mean that no cash need be paid for the lawnmowers.

2. Analyse the transactions above (i), (ii), (iii) relating to TreesRUs Plc and identify whether or not any assets or liabilities exist as at 31 December 20X9.

NB: 1 mark per transaction will be awarded for stating whether an asset or liability exists and the rest of the marks will be for explaining the basis of your opinion.                                                              

        

3. Consider and explain whether your answer would change in part (b) for the Private Hospital Donation if TreesRUs had obtained a signed contract to supply landscaping services and garden maintenance work following the donation. In your answer include the impact this would have on the statement of financial position and statement of profit or loss.

Answer 1

a. i. Private Hospital Donation:

On 31st December, No Asset or Liability exists in the financial statements of TreeRUs.

Donation is made and no written contract or Legal substance exists on the promise of award of land scaping services to TreeRUs, Donation amount should be charged as expense.

Profit and Loss account is debited with the donation,

ii.Managing Director Contract:

On 31st December, No Asset or Liability exists in the financial statements of TreeRUs.

Performance obligations in this contract are full time work by managing director and payment of £400,000 by the company as transaction price over the period of three years. No information provided on satisfaction of performance obligation so far or any payment made to the Managing Director and mere signing of the contract will not create any Asset or Liability.

iii.Free Lawnmowers:

On 31st December, Liability and Asset exists in the financial statements of TreeRUs.

The statement of they were given these lawnmowers for “nothing” on the agreement that TreesRUs would provide gardening services to the supplier’s Headquarters over the next couple of months may not valid because the agreement specifies the provision of gardening services. This is a barter transaction and it calls for execution of performance obligation. Under IFRS 15.66 Revenue from Contracts with Customers requires including the fair value of non - cash consideration in the transaction price. These non- cash transactions should be valued at fair value. As typical trade price of them is £3,000 each so the total fair value ofv lawnmowers would be £12,000. As performance obligation of providing gardening services is due, The accounting entry would be

Dr. Asset(LAWNMOWERS) A/C - £12,000

Cr. Service Liability A/C - £12,000

In the coming year after satisfaction of performance obligation, the accounting entry would be

Dr. Service Liability A/C - £12,000

Cr. Service Revenue A/C - £12,000

b. Private Hospital Donation(where signed contract is obtained):

On 31st December, Deferred Asset exists in the financial statements of TreeRUs.

There is signed contract with the customer for providing services over the next three years and donation was specifically intended for obtaining the said contract. As per IFRS 15, Revenue from Contracts with customers, the performance obligation can be identified with transaction price of donation. As no revenue is recognised as performance obligation needs to be executed from next year and expenditure is already incurred in the form donation, this amount needs to be treated as deferred expenditure.  

the accounting entry would be

Dr Deferred Expenditure A/C - £150,000

Cr. Cash A/C - £150,000

Regarding impact on SOFA, Cash is reduced while deferred asset is created. No impact on Profit & Loss Account.