ACCA DipIFR question papers and answers on IFRS 15 from June 2015

Part (a) was answered well by a majority of candidates. Most had clearly studied IFRS 15, were able to identify the ‘five-step’ approach to revenue recognition and make a sensible assessment of its likely impact. However a significant minority of candidates appeared unaware of the requirements of IFRS 15 and attempted to answer the question based on IAS 18 – its predecessor. Where this occurred, attempts were made by the marking team to award partial credit.

most candidates were able to correctly quote relevant sections from IFRS 15 – Revenue regarding the recognition of revenue. However a significant number of candidates were unable to correctly compute the refund liability that should have been provided for. Common errors here included applying IAS 37 - Provisions, Contingent Assets and Contingent Liabilities rather than IFRS 15. This often led to the incorrect conclusion that the refund liability was contingent and should be disclosed, rather than recognised. Even where the need to compute a refund liability was recognised, many candidates incorrectly used 22% rather than 8%, on the (incorrect) basis that the estimate made on 15th October 2016 was a non-adjusting event after the reporting date. It was pleasing to note, though, that most candidates were able to gain some marks in this part by correctly applying the requirements of IAS 21 – Foreign Currency Transactions – to this scenario.

IFRS® 15 – Revenue from Contracts with Customers – was issued in September 2015 and applies to accounting periods beginning on or after 1 January 2018. IFRS 15 replaces IAS 11 – Construction Contracts – and IAS 18 – Revenue. IFRS 15 contains principles which underpin the timing of the recognition of revenue from contracts with customers and the measurement of that revenue.

Required:

Explain the principles underpinning the TIMING of revenue recognition and the MEASUREMENT of that revenue which are outlined in IFRS 15. You should provide examples of revenue transactions to support your explanations of these key principles. (12 marks)

Delta prepares financial statements to 30 September each year. Notes 1 and 2 provide information on revenue transactions relevant to the year ended 30 September 20X7.

Note 1 – Sale of product with right of return

On 1 April 20X7 Delta sold a product to a customer for $121,000. This amount is payable on 30 June 20X9. The manufacturing cost of the product for Delta was $80,000. The customer had a right to return the product for a full refund at any time up to and including 30 June 20X7. At 1 April 20X7, Delta had no reliable evidence regarding the likelihood of the return of the product by the customer. The product was not returned by the customer before 30 June 20X7 and so the right of return for the customer expired. On both 1 April 20X7 and 30 June 20X7, the cash selling price of the product was $100,000. A relevant annual rate to use in any discounting calculations is 10%. (7 marks)

Note 2 – Sale with a volume discount incentive
On 1 January 20X6 Delta began an arrangement to sell goods to a third party – entity B. The price of the goods was set at $100 per unit for all sales in the two-year period ending 31 December 20X7. However, if sales of the product to entity B exceed 60,000 units in the two-year period ending 31 December 20X7, then the selling price of all units is retrospectively set at $90 per item.

Sales of the goods to entity B in the nine-month period ending on 30 September 20X6 totalled 20,000 units and this volume of sales per month was not expected to change before 31 December 20X7.

However, in the year ended 30 September 20X7, total sales of the goods to entity B were 35,000 and based on current orders from entity B, the estimate was revised. The directors of Delta estimated that the total sales of the goods to entity B in the two-year period ending 31 December 20X7 would be more than 60,000 units. (6 marks)

Required:

Explain and show how the transactions in notes 1 and 2 would be reported in the financial statements of Delta for the year ended 30 September 20X7.

Note: The mark allocation is shown against the two transactions in the separate notes above.

The timing of the recognition of revenue under IFRS 15 – Revenue from Contracts with Customers – depends on the type of performance obligation the entity has under the contract with the customer. A performance obligation is a distinct promise to transfer goods or services to the customer (sense of the point only required).

IFRS 15 requires that revenue should be recognised when (or as) a particular performance obligation is satisfied.

In many cases (e.g. the sale of goods in the ordinary course of business), performance obligations are satisfied at a point in time. In such cases, the revenue is recognised at the point control of the goods is transferred to the customer.

In some cases (e.g. a contract to construct an asset for use by a customer), performance obligations are satisfied over a period of time. In such cases, the proportion of the total revenue recognised is the proportion of the performance obligation which has been satisfied by the reporting date.

The measurement of revenue is based on the transaction price. The transaction price is the amount of consideration to which an entity expects to be entitled in exchange for transferring the promised goods and services to the customer.

In many cases, where the consideration for the transaction is fixed and payable immediately after the revenue has been recognised (e.g. most sales of goods), the transaction price is the invoiced amount less any sales taxes collected on behalf of third parties.

Where the due date for payment of the invoiced price is ‘significantly different’ (certainly more than 12 months) from the date of recognition of the revenue, then the time value of money should be taken into account when measuring the transaction price. This means that the revenue recognised on the sale of goods with deferred payment terms would be split into a ‘sale of goods’ component and a financing component.

Where the total consideration due from the customer contains variable elements (e.g. the possibility that the customer obtains a discount for bulk purchases depending on the total purchases in a period), then the transaction price should be based on the best estimate of the total amount receivable from the customer as a result of the contract.

This question required candidates to:

1. a)  Explain the principles of timing and measurement of revenue that are outlined in IFRS 15 –

   Revenue from Contracts with Customers.

2. b)  Apply the principles discussed in part (a) to the recognition and measurement (in the

   financial statements of Delta) of:

• 􏰀  The sale of a product with right of return (note 1).

• 􏰀  The sale of a product with a volume discount incentive (note 2).

  Answers to part (a) were somewhat disappointing. Many candidates did not appear to have read the requirements of the question carefully enough. Instead of describing the principles of timing and measurement of revenue a majority of candidates simply set out the 5 step revenue recognition model that is identified in IFRS 15 but made no real attempt to address the specific requirements of the question. Whilst some marks were gained for setting out the 5 step model (because it does contain some timing and measurement principles) a number of issues that were raised by simply stating the model did not attract marks because they were unrelated to the actual question requirements.

  Answers to part (b) – note 1 were also disappointing. Many candidates incorrectly stated that revenue could be recognised on 1 April 20X7 (the date the goods were sold to the customer) as there was no reliable estimate available at this time of the likelihood that the goods would be returned by the customer. Therefore many candidates failed to mention that Delta would recognise a ‘right to recover’ asset on 1 April 20X7. A number of candidates also failed to appreciate that given the two-year time difference between revenue recognition and date of payment the transaction included a significant financing component.

  Answers to part (b) – note 2 were on the whole rather better. Most candidates noted that the sales in the year ended 30 September 20X6 (a nine-month period from 1 January 20X6 to 30 September 

  20X6) would initially be recorded at $100 per unit. However marks were often lost by candidates due to:

  1. A failure to fully use the monthly sales made in the nine-month period to 30 September 20X6 to predict the likely level of sales in the two-year period from 1 January 20X6 to 31 December 20X7.

  2. Recording twelve months’ sales at $100 per unit in the year ended 30 September 20X6 (rather than nine months from 1 January 20X6.

  The majority of candidates correctly concluded that ultimately all the goods would be sold to entity B at a price of $90 per unit. They also correctly concluded that the revenues for the year ended 30 September 20X7 would reflect a ‘catch-up’ adjustment regarding the revenues that had been booked in the previous period at $100 per unit. However it is worth noting that:

  1. A number of candidates incorrectly concluded that there would need to be provision in the statements of Delta at 30 September 20X7 regarding the revenues initially booked at $100 per unit.

  2. A number of candidates wasted time by making lengthy references to the provisions of IAS 8 – Accounting Policies, Changes in Accounting Estimates and Errors. Appropriate application of IFRS 15 almost negates the need to refer to IAS 8 in this question.

  ACCA Past question papers Dec 2019 (11 marks)

  Question

  Delta prepares financial statements to 31 March each year.

  The following exhibits, available, provide information relevant to the question:

  On 1 March 20X5, Delta sold and delivered 200 identical items to a customer for $5,000 each. The items cost Delta $3,000 each to manufacture. The terms of sale are that the customer has the right to return the goods within two months and will receive a full refund. After the two-month period has expired, the customer can no longer return the items and payment for all items becomes immediately due. Delta has entered into transactions of this type with this customer previously and can reliably estimate that 5% of the products are likely to be returned within the two-month period. During March 20X5, the customer returned six of the items. No change was necessary to the original estimate of the total number of goods which would be returned by the customer in the two-month period from 1 March 20X5 to 30 April 20X5.

  Requirements

  Using the information in exhibits 1 and 2, explain and show how the transactions described there should be accounted for and reported in the financial statements of Delta for the year ended 31 March 20X5.

  Notes:

  • The mark allocations are indicated in each exhibit.
  • Marks will be awarded for BOTH figures AND explanations.

  Answer

  The relevant standard to apply here is IFRS 15 – Revenue from Contracts with Customers.

  In order to determine the amount and timing of the revenue to be recognised, Delta needs to identify the contract with the customer and to identify the performance obligations for Delta contained in the contract. In this case, the contract, and the performance obligation, is to supply the items to the customer (sense of the point).

  Delta then needs to determine the transaction price. Where the contract gives the customer a right of return, then the transaction price contains a variable element (principle).

  Since the variable element can be reliably measured, then it is taken into account in measuring the transaction price (principle). This means that the transaction price is $950,000 (200 x $5,000 x 95%).

  The transaction price needs to be allocated to the separate performance obligations in the contract. Where there is only one performance obligation, this is a straightforward matter (sense of the point).

  Delta then needs to recognise the revenue as the performance obligation is satisfied. Since the performance obligation is to supply the items to the customer, then the revenue is recognised in full on 1 March 20X5 when the items are delivered (sense of the point). The revenue recognised on this date is $950,000.

  On 1 March 20X5, $1 million (200 x $5,000) will be recognised as a trade receivable.

  $50,000 ($1 million – $950,000) will be recognised as a refund liability. This will be a current liability.

  The total cost of the goods sold is $600,000 (200 x $3,000). This amount will be removed from inventory on 1 March 20X5.

  Only $570,000 (200 x $3,000 x 95%) of the above amount will be recognised in cost of sales. The other $30,000 ($600,000 – $570,000) will be shown as a right of return asset under current assets.

  The return of the six items during March 20X5 does not affect the initial recognition of revenue or cost of sales since the original estimate of the total returns is still considered valid (principle).

  The sales value of the goods returned of $30,000 (6 x $5,000) will be credited to trade receivables and debited to the refund liability (principle).

  This means that the closing balance of trade receivables will be $970,000 ($1 million – $30,000) and the closing refund liability will be $20,000 ($50,000 – $30,000).

  The inventory value of the goods returned of $18,000 (6 x $3,000) will be debited to inventory and credited to the right of return asset (principle).

  The closing balance of the right of return asset will be $12,000 ($30,000 – $18,000).

  Examiners Feedback

  Answers to the second part of the question were much better. It appeared that the majority of candidates were aware of the basic requirements of IFRS 15 for a sale or return transaction. I have no particular common errors to report in this case.