ABDULLAH AZMY

FR REVISION
WEBINAR
 STRATEGY

■Popular Mistakes

■Topic Discussion

■Exam Technique & Practice

PASS RATES
Question # Area Marks

Section A (Q1-Q15) OTQs (15 Qs x 2marks) 30 Marks

Section B (Q16-Q30) OT Case (15 Qs x 2marks) 30 Marks

Section C

Q31 Single Entity/Group Accounts 20 Marks

Q32 Interpretation of Financial Statements 20 Marks

 5 DAY PLAN

Question # Area Area

Day 1 IFRS IFRS

Day 2 IFRS Single Entity FS

Day 3 IFRS Group Accounting

Day 4 Group Accounting Group Accounting

Day 5 Interpretation of FS
 STUDENT MISTAKES

• Many candidates failed to gain marks by not paying attention to or not following
the requirements of the question.

• Poor time management. (3 hrs mins -) 1.8min per mark)

• Advised to structure and present their answer in a way that assists the marking
process. 1 point = 1 paragraph

• There is little reference to the scenario

 TODAYS AGENDA

• Topic

• IAS 2 Inventory

• IFRS 15 Revenue

• Exam focused Question Practice

IAS 2 Inventories
■ Initial measurement
■ Inventories are initially measured at cost.

■ The cost of an item of inventory, according to IAS 2 Inventories, includes purchase

costs, conversion costs, and any other costs required to get it to its current
condition and location.

- Purchase costs include the purchase price (less discounts and rebates), import
duties, irrecoverable taxes, transport and handling costs and any other directly
attributable costs.

-Conversion costs include all direct costs of conversion (materials, labour, expenses,
etc.), and a proportion of the fixed and variable production overheads. The allocation
of fixed production overheads must be based on the normal level of activity.

-Abnormal wastage, storage costs, administration costs and selling costs must be
excluded from the valuation and charged as expenses in the period in which they are
incurred.
Valuation

IAS 2 allows three methods of arriving at the cost of inventories:

-  actual unit cost 


-  first-in, first-out (FIFO) 


-  weighted average cost (AVCO). 


Actual unit cost must be used where items of inventory are not ordinarily
interchangeable.
Subsequent measurement
■ Inventories may be sold below cost if they are damaged, if there is a decline in
demand, or if the market is increasingly competitive. It may also be that items or work
in progress are overstated if there has been a rise in the costs required to complete the
asset and make the sale.

■ As such, IAS 2 requires inventories to be written down to the lower of cost and net
realisable value (NRV) on a line-by-line basis.

■ Net realisable value is the estimated proceeds from selling the inventory less
completion and selling costs.

■ The NRV of inventory held to satisfy a sales contract is normally evidenced by that
contract. However, in other cases, NRV must be estimated. Sales of inventory after the
reporting date provide strong evidence about its NRV as at the reporting date.

■ When measuring NRV, the standard permits similar items to be grouped together,
assuming they are sold in the same market.

■ Raw materials are not written down below cost if the finished good they will form a
part of will be sold at a profit. However, a decline in raw material prices would suggest
that their NRV has fallen below purchase cost. In such cases, the replacement cost of
the raw materials provides evidence of their NRV.
Example 1
An entity has the following items of inventory.

(a)  Raw materials costing $12,000 bought for processing and assembly for a
profitable special order. Since buying these items, the cost price of the raw
materials has fallen to $10,000. 


(b)  Equipment constructed for a customer for an agreed price of $18,000. This has
recently been completed at a cost of $16,800. It has now been discovered that, in
order to meet certain regulations, conversion with an extra cost of $4,200 will be
required. The customer has accepted partial responsibility and agreed to meet half
the extra cost. 


Required:

In accordance with IAS 2 Inventories, at what amount should the above items be
valued?
IAS 2 SEP/DEC 2020
IAS 2 SEP/DEC 2021
IFRS 15 REVENUE
Abdullah Azmy
Revenue

■ Revenue is income arising in the course of an entity's normal trading or

operating activities.

■ ‘Revenue’ presented in the statement of profit or loss should not include

■ proceeds from the sale of non-current assets

■ sales tax or other similar taxes

■ Other amounts collected on behalf of others. For example, in an agency

relationship, the agent would only recognise commission.
5 step process
IFRS 15 Revenue from Contracts with Customers (para IN7) says that an entity
recognises revenue by applying the following five steps:

1  'Identify the contract

2  Identify the separate performance obligations within a contract

3  Determine the transaction price

4  Allocate the transaction price to the performance obligations in the contract

5  Recognise revenue when (or as) a performance obligation is satisfied.'

Illustration

On 1 December 20X1, Wade receives an order from a customer for a computer as

well as 12 months' of technical support. Wade delivers the computer (and transfers
its legal title) to the customer on the same day.

The customer paid $420 upfront. If sold individually, the selling price of the
computer is $300 and the selling price of the technical support is $120.

Required:
Apply the 5 stages of revenue recognition, per IFRS 15, to determine how
much revenue Wade should recognise in the year ended

31 December 20X1.
 Illustration - Cont
■ Step 1 – Identify the contract

– There is an agreement between Wade and its customer for the provision of goods and services.

■ Step 2 – Identify the separate performance obligations within a contract

– There are two performance obligations (promises) within the contract:

■ The supply of a computer

■ The supply of technical support.

■ Step 3 – Determine the transaction price

– The total transaction price is $420.

■ Step 4 – Allocate the transaction price to the performance obligations in the contract

– Based on standalone selling prices, $300 should be allocated to the sale of the computer and $120
should be allocated to the technical support.

■ Step 5 – Recognise revenue when (or as) a performance obligation is satisfied

– Control over the computer has been passed to the customer so the full revenue of $300 allocated to
the supply of the computer should be recognised on 1 December 20X1.
– The technical support is provided over time, so the revenue allocated to this should be recognised
over time. In the year ended 31 December 20X1, revenue of $10 (1/12 × $120) should be recognised
from the provision of technical support.
Step 1: Identify the contract 

■ IFRS 15 says that a contract is an agreement between two parties that creates
rights and obligations. A contract does not need to be written.

■ An entity can only account for revenue from a contract if it meets the following
criteria:

– the parties have approved the contract and each party’s rights can be
identified
– payment terms can be identified
– the contract has commercial substance
– it is probable that the entity will be paid.
Step 1 - Illustration

■ Aluna has a year end of 31 December 20X1.

■ On 30 September 20X1, Aluna signed a contract with a customer to provide

them with an asset on 31 December 20X1. Control over the asset passed to the
customer on 31 December 20X1. The customer will pay

$1 million on 30 June 20X2.

■ By 31 December 20X1, as a result of changes in the economic climate, Aluna

did not believe it was probable that it would collect the consideration that it was
entitled to. Therefore, the contract cannot be accounted for and no revenue
should be recognised.
Step 2: Identifying the separate performance
obligations within a contract 


■ Performance obligations are promises to transfer distinct goods or services to

a customer.

■ Some contracts contain more than one performance obligation. For example:

– An entity may enter into a contract with a customer to sell a car, which
includes one year’s free servicing and maintenance.
– An entity might enter into a contract with a customer to provide 5 lectures, as
well as to provide a textbook on the first day of the course.
■ The distinct performance obligations within a contract must be identified. If
goods or services are regularly sold separately then the supply of each is likely
to form a distinct performance obligation if included within the same contract.
Step 2 Cont - Principals and agents 


■ An entity must decide the nature of each performance obligation. IFRS 15 (para
B34) says this might be:

– 'to provide the specified goods or service itself (i.e. it is the principal), or
– to arrange for another party to provide the goods or service (i.e. it is an
agent)'.
■ An entity is the principal if it controls the good or service before it is transferred
to the buyer.

■ If an entity is an agent, revenue is recognised based on the fee it is entitled to.

Step 2 Cont - Principals and agents 


■ Assume a Company operates a website that enables customers to purchase

goods from various suppliers. The customers pay the Company in advance, and
orders are nonrefundable. The suppliers deliver the goods directly to the customer,
and the Company receives a 10% commission. Should the Company report Total
Revenues equal to 100% of the sales amount (gross) or Total Revenues equal to
10% of the sales amount (net)? Revenues are reported gross if the Company is
acting as a Principal and net if the Company is acting as an Agent.

■ In this example, the Company is an Agent because it isn’t primarily responsible for
fulfilling the contract, doesn’t take any inventory risk or credit risk, doesn’t have
discretion in setting the price, and receives compensation in the form of a
commission. Because the Company is acting as an Agent, it should report only the
amount of commission as its revenue.
Step 2 Cont - Warranties


■ Most of the time, a warranty is assurance that a product will function as

intended. If this is the case, then the warranty will be accounted for in
accordance with lAS 37 Provisions, Contingent Liabilities and Contingent
Assets.

■ If the customer has the option to purchase the warranty separately, then it
should be treated as a distinct performance obligation. This means that a
portion of the transaction price must be allocated to it (see step 4).
Step 3: Determining the transaction price 


■ IFRS 15 defines the transaction price as the amount of consideration the entity
expects in exchange for satisfying a performance obligation. Sales tax is
excluded.

■ When determining the transaction price, the following must be considered:

– variable consideration
– significant financing components
– non-cash consideration
– consideration payable to a customer.
– Sale or Return Basis
Step 3 Cont - Variable consideration 


■ If a contract includes variable consideration(example, bonus based on delivery

of the contract) then an entity must estimate the amount it will be entitled to.

■ IFRS 15 says that this estimate 'can only be included in the transaction price if it
is highly probable that a significant reversal in the amount of cumulative revenue
recognised will not occur when the uncertainty is resolved' (IFRS 15, para 56).

Sale or Return Basis

■ Note that if a product is sold with a right to return it (example, two weeks return
policy) then the consideration is variable. The entity must estimate the variable
consideration and decide whether or not to include it in the transaction price.

■ The refund liability should equal the consideration received (or receivable) that
the entity does not expect to be entitled to.
Step 3 Cont - Financing 


■ In determining the transaction price, an entity must consider if the timing of

payments provides the customer or the entity with a financing benefit.

■ IFRS 15 provides the following indications of a significant financing component:

– the difference between the amount of promised consideration and the cash
selling price of the promised goods or services
– the length of time between the transfer of the promised goods or services to
the customer and the payment date.
■ If there is a financing component, then the consideration receivable needs to be
discounted to present value using the rate at which the customer borrows
money.
Step 3 Cont- Non-cash consideration 


■ Any non-cash consideration is measured at fair value.

■ Customers do not always pay using cash or credit. The customer may pay using
shares in their entity or using other assets.
Step 3 Cont - Consideration payable to a
customer 


■ If consideration is paid to a customer in exchange for a distinct good or service,

then it should be accounted for as a purchase transaction.

■ Assuming that the consideration paid to a customer is not in exchange for a

distinct good or service, an entity should account for it as a reduction of the
transaction price.
Step 4: Allocate the transaction price 


■ The total transaction price should be allocated to each performance obligation

in proportion to stand-alone selling prices.

■ The best evidence of a stand-alone selling price is the observable price when
the good or service is sold separately.

■ If a stand-alone selling price is not directly observable then it must be

estimated. Observable inputs should be maximised whenever possible.

■ If a customer is offered a discount for purchasing a bundle of goods and

services, then the discount should be allocated across all performance
obligations within the contract in proportion to their stand-alone selling prices
(unless observable evidence suggests that this would be inaccurate).
Step 5: Recognise revenue 


■ Revenue is recognised when (or as) the entity satisfies a performance obligation
by transferring a promised good or service to a customer.

■ An entity must determine at contract inception whether it satisfies the

performance obligation over time or satisfies the performance obligation at a
point in time.
Step 5 Cont – At a point in time
■ If a performance obligation is not satisfied over time then it is satisfied at a point
in time. The entity must determine the point in time at which a customer obtains
control of a promised asset.

■ An entity controls an asset if it can direct its use and obtain most of its
remaining benefits. Control also includes the ability to prevent other entities from
obtaining benefits from an asset.

■ IFRS 15 (para 38) provides the following indicators of the transfer of control:

– 'The entity has a present right to payment for the asset

– The customer has legal title to the asset
– The entity has transferred physical possession of the asset
– The customer has the significant risks and rewards of ownership of the asset
– The customer has accepted the asset'.
Specific Scenarios

■ Consignment Inventory

■ Sale and Repurchase agreements

Consignment inventory

■ This can raise the issue of consignment inventory, where one party legally owns
the inventory but another party keeps the inventory on its premises. The key
issue relates to which party has the majority of indicators of control. 


■ Consignment Inventory is inventory which is

■ Legally owned by one party

■ Is held by another party

Example
 Example
■ On 1 January 20X6 Gillingham, a manufacturer, entered into an agreement to provide Canterbury, a
retailer, with machines for resale.

■ The terms of the agreement were as follows.

■ Canterbury pays a fixed rental per month for each machine that it holds.

■ Canterbury pays the cost of insuring and maintaining the machines.

■ Canterbury can display the machines in its showrooms and use them as demonstration models.

■ When a machine is sold to a customer, Canterbury pays Gillingham the factory price at the time the
machine was originally delivered.

■ All machines remaining unsold six months after their original delivery must be purchased by
Canterbury at the factory price at the time of delivery.

■ Gillingham can require Canterbury to return the machines at any time within the si month period. In
practice, this right has never been exercised.

■ Canterbury can return unsold machines to Gillingham at any time during the si month period, without
penalty. In practice, this has never happened. 

At 31 December 20X6 the agreement is still in force and Canterbury holds several machines which
were delivered less than six months earlier.

■ How should these machines be treated in the accounts of Canterbury for the year ended 31
December 20X6?

x­
x­
Example Cont
■ Solution
■ The key issue is whether Canterbury has purchased the machines from Gillingham or whether they
are merely on loan.

■ It is necessary to determine whether Canterbury has the benefits of holding the machines and is
exposed to the risks inherent in those benefits.

■ Gillingham can demand the return of the machines and Canterbury is able to return them without
paying a penalty. This suggests that Canterbury does not have the automatic right to retain or to
use them.

■ Canterbury pays a rental charge for the machines, despite the fact that it may eventually purchase
them outright. This suggests a financing arrangement as the rental could be seen as loan interest on
the purchase price. Canterbury also incurs the costs normally associated with holding inventories.

■ The purchase price is the price at the date the machines were first delivered. This suggests that the
sale actually takes place at the delivery date. Canterbury has to purchase any inventory still held six
months after delivery. Therefore the company is exposed to slow payment and obsolescence risks.
Because Canterbury can return the inventory before that time, this exposure is limited.

■ It appears that both parties experience the risks and benefits. However, although the agreement
provides for the return of the machines, in practice this has never happened.

■ Conclusion: The machines are assets of Canterbury and should be included in its statement of
financial position. Therefore Gillingham can recognise revenue when the machines are despatched
to Canterbury.
Sale & Repurchase agreements

■ A repurchase agreement is where an entity sells an asset but retains a right to repurchase
the asset. This is often not recognised as a sale, but as a secured loan against the asset.
Indications that this should not be recognised as a sale may include:

■ Sale is below fair value 


■ Option to repurchase is below the expected fair value 


■ Entity continues to use the asset 


■ Entity continues to hold the majority of risks and rewards associated with ownership of
the asset 


■ Sale is to a bank or financing company 


 Example
Xavier sells its head office, which cost $10 million, to Yorrick, a bank, for $10 million on 1
January. Xavier has the option to repurchase the property on 31 December, four years later, at
$12 million. Xavier will continue to use the property as normal throughout the period and so is
responsible for the maintenance and insurance. The head office was valued at transfer on 1
January at $18 million and is expected to rise in value throughout the fou year period.

Giving reasons, show how Xavier should record the above during the first year following transfer.

Solution
Yorrick faces the risk of falling property prices. 


Xavier continues to insure and maintain the property. 


Xavier will benefit from a rising property price. 


Xavier has the benefit of use of the property. 


Xavier should continue to recognise the head office as an asset in the statement of financial
position. This is a secured loan with effective interest of $2 million ($12 million – $10 million) over
the fou year period.
r­
r­
Step 5 Cont – Over time

■ IFRS 15 (para 35) states that an entity satisfies a performance obligation over
time if one of the following criteria is met:

(a)  'the customer simultaneously receives and consumes the benefits provided
by the entity’s performance as the entity performs

(b)  the entity’s performance creates or enhances an asset (for example, work in
progress) that the customer controls as the asset is created or enhanced, or

(c)  the entity’s performance does not create an asset with an alternative use to
the entity and the entity has an enforceable right to payment for performance
completed to date'.

■ If a performance obligation is satisfied over time, then revenue is recognised

over time based on progress towards the satisfaction of that performance
obligation.
Step 5 Cont – Over time (Measuring
Progress)
■ Methods of measuring progress towards satisfaction of a performance
obligation include:

– output methods (such as surveys of performance, or time elapsed)

– input methods (such as costs incurred as a proportion of total expected
costs).

■ If progress cannot be reliably measured then revenue can only be recognised up

to the recoverable costs incurred.
Example

On 1 January 20X1, Evans enters into a contract with a customer to provide

monthly payroll services. Evans charges $120,000 per year.

Required:
What is the accounting treatment of the above in the financial statements of
Evans for the year ended 30 June 20X1?
Step 5 Cont – Over time
For a contract with a customer where revenue is recognised over time, there are three
important rules to be aware of:

(1) If the expected outcome is a profit:

– revenue and costs should be recognised according to the progress of the contract.

(2) If the expected outcome is a loss:

– the whole loss should be recognised immediately, recording a provision as an onerous
contract.

(3) If the expected outcome or progress is unknown (often due to it being in the very early
stages of the contract):

–  Revenue should be recognised to the level of recoverable costs (usually costs spent to
date).
–  Contract costs should be recognised as an expense in the period in which they are
incurred.
In the majority of cases, this will mean that revenue and cost of sales will both be stated at
costs incurred to date, with no profit or loss recorded.
Over time – 4 Step

■ In calculating the entries to be made for a contract where the performance

obligation is satisfied over time, such as a building project for a customer, a
step approach can be helpful.

■ OT Step 1 – Calculate overall profit or loss

■ OT Step 2 – Determining the progress of a contract

■ OT Step 3 – Statement of profit or loss Figures

■ OT Step 4 – Statement of Financial Position Figures





4­
OT Step 1 – Calculate overall profit or loss 


$
Contract Price X
Less: Costs to date (X)
Less: Costs to complete (X)

Overall profit/loss X/(X)

OT Step 2 – Determining the progress of a
contract 

There are two acceptable methods of measuring progress towards satisfying a
performance obligation:

■ Input methods – based on the inputs used. A commonly used measure looks at
contract costs, such as:

(Costs to date/ Total costs) × 100% = % complete

■ Output methods – based on performance completed to date. This is commonly

done based on the value of the work completed (certified) to date, measured as:

(Work certified/Contract price) × 100% = % complete

■ If revenue is earned equally over time (such as providing a monthly service),

then revenue would be recognised on a straight line basis over that period.

Where the progress cannot be measured

■ Revenue should be recognised only to the extent of contract costs incurred that
it is probable will be recoverable.
OT Step 3 – Statement of profit or loss (if
profitable) 


■ Revenue (Total price × progress (%))


less revenue recognised in previous years X

■ Cost of sales (Total costs × progress (%))


less cost of sales recognised in previous years (X)

––

Profit X

––

■ If a contract is in the second year, it is important to remember that any revenue/COS

recognised in previous years should be deducted from the cumulative revenue/COS. This
will give the figures to be recognised in the current year.

■ For example, if a contract is worth $10 million and it is 90% satisfied by the end of year
2, that means $9 million in revenue has been earned to date. If the contract was 50%
satisfied by the end of year 1, then $4 million should be recognised in year 2. This is
because $5 million would have been recognised in year 1.
OT Step 3 – Statement of profit or loss (if loss
making) 


■ Revenue (Total price × progress (%))


less revenue recognised in previous years X

■ Cost of sales (Bal Fig) (X)

––

Total Loss on Contract X

––

■ The balancing figure is a shortcut to achieve the relevant cost of sales.

■ The cost of sales would actually be made up of the costs machine the stage of progress
(% of total costs) plus and additional amount recognised as a provision for an onerous
contract. The provision would ensure that the entire loss is recorded immediately.
OT Step 4 – Statement of financial position 

■ At the year end, there will either be a contract asset of liability, recorded in current
assets or current liabilities. This will be calculated as shown below:

Costs to date (Actual costs, not necessarily cost of sales) X

Profit/loss to date X/(X) 


Less: Amount billed to date (X)

––––

Contract asset/liability xx

■ Note that these figures are cumulative and not annual.

■ If an item of property, plant and equipment is used in the contract, the asset will be
held at carrying amount at the year end. The depreciation will be charged to the
statement of profit or loss according to the progress made towards satisfying the
contract.
Example
Example
Example
Example
Example
On 1 January 20X1, Baker enters into a contract with a customer to construct a
specialised building for consideration of $2 million plus a bonus of $0.4 million if the
building is completed within 18 months. Estimated costs to construct the building
are $1.5 million. If the contract is terminated by the customer, Baker can demand
payment for the costs incurred to date plus a mark-up of 30%. On 1 January 20X1,
as a result of factors outside of its control, such as the weather and regulatory
approval, Baker is not sure whether the bonus will be achieved.

At 31 December 20X1, Baker is still unsure whether the bonus target will be met.
Baker decides to measure progress towards completion based on costs incurred.
Costs incurred on the contract to date are $1.0 million.

Required:
How should Baker account for this transaction in the year ended 31 December
20X1?
IFRS 15 SEP/DEC 2020
IFRS 15 SEP/DEC 2020
IFRS 15 SEP/DEC 2020
IFRS 15 SEP/DEC 2020
IFRS 15 SEP/DEC 2020
IFRS 15 SEP/DEC 2020