Nov 2019 Q3 a.
IFRS 15: Revenue from Contracts with Customers specifies how and when an IFRS reporter will recognise revenue as well as requiring such entities to provide users of financial statements with more informative, relevant disclosures. The standard provides a single, principles based five-step model to be applied to all contracts with customers. Mankranso Ltd, a hotel had the following transactions during the year:
Required:
In each scenario below, calculate the amount of revenue to be recognised in the financial statements of Mankranso Ltd for year ended 31 March 2019. Justify the correct accounting treatment for each transaction.
Assume Mankranso Ltd has decided to adopt IFRS 15 for year ended 31 March 2019.
i) On 31 March 2019, Mankranso Ltd signed a contract to supply 50,000 units of food packs at an agreed price of GH¢10 per unit. On the same day, 30,000 units were delivered at that date, with the remainder delivered on 1 June 2019. It was agreed that the customer would have extended credit terms of 12 months from the date of delivery. Mankranso Ltd’s cost of capital is 10%. (3 marks)
View Solution
The contract to supply is not sufficient to recognise revenue. It is necessary that control of the goods have actually transferred to the customer. This is the case for 30,000 units.
The deferred payment does not prevent revenue from being recognised, but the consideration needs to be measured at the fair value, on the transaction date, of the amount receivable. The fair value needs to reflect a discount allowing for the time value of money, as a result of the extended credit period. The discount rate will be 10%, Mankranso’s cost of capital. Hence revenue will be recognised as follows: 30,000 units * GH¢10 * 1/1.10 = GH¢272,727.
The discount will be recognised as finance income as time passes, on a time-apportioned basis. As the sale took place on 31 March 2019, no time has yet passed to trigger the recognition of finance income.
Journal: GH¢ GH¢
Dr trade receivables 272,727
Cr Revenue 272,727
(recognition of revenue and trade receivables at fair value of consideration receivable)
Initial revenue recognition : 2 marks
Treatment of initial recognition : 1 mark
ii) During the year ended 31 March 2019, Mankranso Ltd received payment in advance for the supply of 2,000 hotel room-nights to customers at GH¢100 per room per night. Only 400 of these had been occupied by 31 March 2019. The amounts paid by the customers are non-refundable unless the company fails to provide the agreed accommodation. (3 marks)
View Solution
Again, the same principles apply. Revenue is recognised when control of the goods or services are transferred to the customer.
Here, cash was received in advance. Nevertheless, revenue is only recognised when the service is delivered to the customer. Any excess cash retained is recognised as deferred income, a liability. If the cash is non-refundable, this does not change the timing of recognition of revenue. However, if the customer’s right to the service expires, and the customer has no right to a refund, the revenue should then be recognised.
Total cash received in year ended 31 March 2019: 2000 * GH¢100 = GH¢200,000
Total room nights provided 400
Revenue recognised = 400 * GH¢100 = GH¢40,000
Deferred revenue = 200,000 – 40,000 = 160,000
Journal: GH¢ 000 GH¢ 000
Dr Cash 200
Cr Revenue 40
Cr Deferred revenue 160
(recognition of revenue, deferred revenue and cash received)
Initial revenue recognition : 1 mark
Deferred revenue : 1 mark
Journal entries : 1 mark