Sanchez, Mark Laurence S.

BSA 2106
Accounting 203

Assessments for Review:

1. Differentiate Income and Revenue.

Income as per its definition is increases in economic benefits during the
period in the form of increases in assets, or decreases in liabilities, that result in
increases in equity, excluding those relating to investments by the business
owner while Revenue pertains to the income arises in the course of the ordinary
activities of a business such as sales and service fees.

2. Explain the recognition revenue from contracts with customers.

Recognition revenue from contracts with customers was promulgated by
the International Accounting Standards Board (IASB) in order to provide one
comprehensive revenue recognition model for all contracts with customers to
improve comparability within and across industries and across capital markets.

Five Step Model

The core principle of International Financial Reporting Standard (IFRS) is that
revenue is recognized when the goods or services are transferred to the customer,
at the transaction price. Revenue is recognized in accordance with that core
principle by applying a 5-step model:

Step 1: Identify contract(s) with customer

A contract creates an enforceable rights and obligations. It can be written, oral, or
implied by a customary business practice.

Contract Criteria:
1. Approval of contract in writing, orally or in accordance with customary business
practice
2. Identification of rights and obligations of the parties and payment terms.
3. Contract has commercial substance and the collection of consideration is
probable.

Contract Criteria (Exception to Separate contract)

1. If the contracts are treated as a single package.
2. Consideration in one contract depends upon the good or service of another
contract.
3. Goods or services in the contract relate to a single performance obligation.

Step 2: Identify the performance obligation in the contract

Performance obligations are promises in a contract to transfer goods or services,
including those a customer can resell or provide to its customer.
Distinct Good or Service Criteria:
1. The customer can benefit from the good or service.
2. The entity’s promise to transfer the good or service to the customer is separately
identifiable from other promises in the contract.

Distinct Good or Service:

1. Sale of finished goods produced by a manufacturer.
2. Sale of merchandise inventory by a retailer.
3. Constructing, manufacturing or developing assets on behalf of customers, as in
long term construction contracts.
4. Granting license or franchise.
5. Performing a contractually agreed upon task for a customer, as in bookkeeping
service or payroll processing service.

Step 3: Determine the transaction price.

Transaction price refers to the amount of the consideration a company is entitled
to receive in exchange for transferring goods or services to customers. Determining the
transaction price is straightforward when the contract price is fixed while it becomes
more complex when it is not fixed.

Factors that Affect Transaction Price:

1. Variable consideration.
2. Time value of money.
3. Non-cash consideration.
4. Consideration payable to a customer.

Step 4: Allocate the transaction price to the performance obligations in the

contract.
Transaction price should be allocated to distinct performance obligations based
on relative standalone selling price. This may be the standalone selling price of a good
or service when sold separately to a customer in similar circumstances and to similar
customers.

If not directly observable, it must be estimated using these methods:

1. Adjusted Market Assessment Approach
2. Expected Cost Plus Margin Approach
3. Residual Approach

Step 5: Recognize revenue when or as the entity satisfies a performance

obligation.
Recognize revenue when the promised goods or services are transferred to the
customer and the customer obtains control. This can be overtime or at a point in time.
Moreover, based on the new introduced concept, revenue is recognized overtime when
the asset being created has no alternative use to the company and the company has an
enforceable right to payment for performance completed to date.

3. Identify examples of common transactions with contracts with customers.

The examples of common transactions with contracts with customers are the
folowing:

1.). Warranties
If a customer has the will to purchase a warranty separately from the product he
purchased, it constitutes a distinct service and is accounted for as a separate
performance obligation. This would apply to a warranty which provides the customer
with a service in addition to the assurance that the product complies within agreed upon
specifications.

2). Principal Versus Agent

An entity must establish in any transaction whether it is acting as a principal
agent.
a) Principal
It is a principal if it controls the promised good or service before it is transferred
to the customer.
b). Agent
It is acting as agent if its performance obligation is to arrange for the provision of
goods and services by another party.

3). Repurchase Agreements

An entity sells the assets and has the option to repurchase it. Repurchase
agreements generally come in three forms:

a). An entity has an obligation to repurchase the asset.

b). An entity has the right to repurchase the asset.
c). An entity must repurchase the asset if requested to do so by the customer.

4). Consignment Arrangement: Consignment

It is a method of marketing goods in which the entity called “consignor” transfers
physical possession of certain goods to a dealer or distributor called the “consignee”
that sells the goods on behalf of the consignor. The consignor shall not recognize
revenue upon delivery of the goods to the consignee until the goods are sold by the
consignee.

5). Bill and Hold Arrangement

A contract under which an entity bills a customer for a product but the entity
retains the possession of the product. Listed below are the following criteria that must
be met for the recognition of the bill and hold arrangement:

a). The customer requested for the arrangement.

b). The product must be “identified separately as belonging to the customer.”
c). The product “must be ready for physical transfer to the customer anytime.”
d). The entity cannot have the ability to use the product or to direct it to another
customer.

4. Discuss the Accounting for Government Grants and the necessary

disclosures.

Government Grants and Disclosure of Government Assistance

The treatment of government grants is covered by International Accounting
Standards (IAS) Accounting for Government Grants and Disclosure of Government
Assistance. IAS 20 does not cover the following:

1). Accounting on government grants in financial statements reflecting the effects of

changing prices.
2). Government assistance given in the form of “tax breaks”.
3). Government acting as part-owner of the entity.
4). Grants covered by International Accounting Standard 41 Agriculture

On the other hand, government assistance pertains to any action done by the
government which is designed to provide economic benefit specific to an entity or range
of entities qualifying under certain criteria.

Likewise, as per the definition of government grants, it pertains to the assistance in

government in form of transfers of resources to an entity in return for past or future
compliance with certain conditions relating to the operating activities of the entity
provided that government grans should not recognized until it has a reasonable
assurance that:

a). The entity will comply with any conditions attached to the grant.
b). The entity will actually receive the grant.

Presentation of Grants related to Assets

There are two choices for how government grants related to assets should be
shown in the statement of financial position:

1). Set-up grants as deferred income

2). Deduct the grant in arriving at the carrying amount of an asset

Presentation of Grants related to Income

Choice in method of disclosure:

1). Present as a separate credit or under a general heading
2). Deduct from the related expense

Repayment of Government Grants

 1. Repayment of Grant related to income:
-It must be apply first against any unamortized deferred income set up in respect
of the grant.

Repayment of Grant related to Asset:

-It increase the carrying amount of the asset or reduce the deferred
income balance by the amount repayable.

Government Assistance
1). Some forms of government assistance cannot reasonably have a value
placed on them
2). There are transactions with the government which cannot be distinguished
from the entity’s normal trading transactions.

Disclosure required of the following:

1). Accounting policy adopted, including method of presentation
2). Nature and extent of government grants recognized and other forms of
assistance received.
3). Unfulfilled conditions and other contingencies attached to recognize
government assistance.

SIC 10 – GOVERNMENT ASSISTANCE

No Specific Relation to Operating Activities.
Examples of such assistance are transfers of resources by governments to
entities which:
1). Operate in a particular industry
2). Continue operating in recently privatized industries.
3). Start or continue to run their business in underdeveloped areas.

5. Define and give examples of Inventories.

Inventory refers to all the items, goods, merchandise, and materials held by a
business for selling in the market to earn a profit. Inventories are assets which are
held for sale in the ordinary course of business, assets in the process of production
for such sale, and assets in the form of materials or supplies to be consumed in the
production process or in the rendering of services.

Inventories can include any of the following:

1). Goods purchased and held for resale (goods, land, buildings)
2). Finished goods produced (like T-shirt made out of fabric and cotton)
3). Work in progress being produced (processing and assembling spare parts of a
certain smartphone consists of case, circuit board, chips, and battery)
4). Materials and supplies awaiting use in the production process (raw materials
such as cotton, silk, fabric to be use in making and producing shirts)

6. Discuss the different costing of Inventories.

 The different costs of inventories are the cost of purchase, cost of conversion
and other costs incurred in bringing the inventories to their present location and
condition. The cost of purchase is comprises of purchase price which include the
import duties and other taxes plus transport, handling any other cost directly
attributable to the acquisition of finished goods, services and more. While cost of
conversion is the total of direct labor and factory overhead costs. This is consisting
of two parts the cost directly related to the units of production and the fixed and
variable production overheads. And the other costs which is said to be not included
in cost of inventories, instead it should be recognized as an expense in the period it
was incurred.

7. Define biological assets and its two categories.

Biological assets are assets that are living such as trees, animals, and
cannabis. According to the International Accounting Standards, biological assets
are any living plants or animals owned by business, and they are typically
measured at fair value less the selling costs. And its two main categories are the
Bearer and consumable. When we say bearer, animals and/or plants bear
produce for harvest. And the consumable refers to the plants or animals
themselves are harvested.

8. Explain the recognition and proper valuation for biological assets and
agricultural produce.
Under the IAS 41/IAS2, an entity shall recognize a biological asset or
agricultural produce when (A) the entity controls the asset as a result of a past
event, (B) it is probable that future economic benefits associated with the asset
will flow to the entity, and (C) the fair value or cost of the asset can be measured
reliably.