Osbore Books Update Fiacial Statemets of Limited Compaies Tutorial Website update otes September 2018
2 f i a c i a l s t a t e m e t s o f l i m i t e d c o m p a i e s I N T R O D U C T I O N The followig updates are relevat for AAT Assessmets from September 2018: IFRS 15, Reveue from Cotracts with Customers replaces IAS 18, Reveue The calculatio of accoutig ratios is clarified I F R S 1 5, R E V E N U E F R O M C O N T R A C T S W I T H C U S T O M E R S Please see pages 3-5, (pages 156-159 i the Tutorial) Please see questios ad aswers 5.16 ad 5.17 o pages 7-8 (pages 166-167 i the Tutorial) A C C O U N T I N G R A T I O S AAT ow sets out i full the method of calculatig the accoutig ratios which are relevat to the Uit. All calculatios are as used i the tutorial, but ote the followig: Retur o capital employed is clarified as: profit from operatios/*capital employed x 100% *total equity + o-curret liabilities Gearig is clarified as: *total debt/*total debt + total equity x 100% *o-curret liabilities The alterative method of calculatig gearig (o-curret liabilities/total equity x 100%) eed ot be calculated i Assessmets.
u p d a t e s s e p t e m b e r 2 0 1 8 3 Ameded Tutorial Pages S tat e m e t o F p r o F i t o r l o S S The accoutig stadard that affects the statemet of profit or loss ad other comprehesive icome is IFRS 15, Reveue from Cotracts with Customers. i F r S 1 5 r e v e u e f r o m c o t r a c t s w i t h c u s t o m e r s The core priciple of this stadard is that a etity should recogise reveue to depict the trasfer of promised goods or services to customers i a amout that reflects the cosideratio to which the etity expects to be etitled i exchage for those goods or services. d e f i i t i o s customer a party that has cotracted to obtai goods or services that are the output of a etity s ordiary activities i exchage for cosideratio icome icreases i ecoomic beefits durig the accoutig period i the form of iflows or ehacemet of assets or decrease of liabilities that result i a icrease i equity, other tha those relatig to cotributios from equity participats reveue icome arisig i the course of a etity s ordiary activities t h e f i v e - s t e p p r o c e s s To recogise reveue i accordace with the core priciple of IFRS 15 a etity applies all of the followig five steps:
4 f i a c i a l s t a t e m e t s o f l i m i t e d c o m p a i e s step 1: idetify the cotract with a customer step 2: idetify the performace obligatios i the cotract step 3: determie the trasactio price step 4: allocate the trasactio price to the performace obligatios i the cotract step 5: recogise reveue whe a performace obligatio is satisfied Each of these steps is ow looked at i more detail. s t e p 1 : i d e t i f y t h e c o t r a c t w i t h a c u s t o m e r A cotract is withi the scope of IFRS 15 whe all of the followig are met: the cotract has bee approved by the parties each party s rights i relatio to the goods or services to be trasferred ca be idetified the paymet terms for the goods or services ca be idetified the cotract has commercial substace it is probable that the cosideratio to which the etity is etitled i exchage for the goods or services will be collected s t e p 2 : i d e t i f y t h e p e r f o r m a c e o b l i g a t i o s i t h e c o t r a c t A cotract may cotai more tha oe promise to trasfer distict goods or services (for example a mobile phoe compay sells a phoe together with a mothly package of call time ad data usage). At the iceptio of the cotract, a etity should assess the goods or services promised ad idetify each promise to trasfer to the customer: either a good or service that is distict (for example sellig a mobile phoe hadset) or a series of goods or services that are substatially the same ad that have the same patter of trasfer to the customer (for example sellig a phoe s mothly package for calls ad data)
u p d a t e s s e p t e m b e r 2 0 1 8 5 s t e p 3 : d e t e r m i e t h e t r a s a c t i o p r i c e The trasactio price is the amout of cosideratio the etity expects i exchage for the trasfer of goods or services. It excludes amouts collected o behalf of others, for example Value Added Tax. A cotract may iclude a elemet of variable cosideratio, for example a discout or a performace bous. A etity estimates a amout of variable cosideratio: either by assessig the expected value of the cotract or by assessig the most likely amout (for example a cotract with a customer which gives a overall discout if more tha a specified umber of uits are purchased durig a period ad it is highly probable that there will ot be a subsequet reversal of discout allowed) s t e p 4 : a l l o c a t e t h e t r a s a c t i o p r i c e t o t h e p e r f o r m a c e o b l i g a t i o s i t h e c o t r a c t The trasactio price for each performace obligatio is to be allocated o the basis of the amout of cosideratio to which the etity expects to be etitled i exchage for trasferrig the promised goods or services to the customer. For example a mobile phoe compay will eed to separate the cosideratio of sellig a phoe hadset from the cosideratio of providig a call time ad data package. Ay overall discout for a budle of goods or services whe compared with the sum of the stadaloe sellig prices is allocated betwee performace obligatios proportioately to the stadaloe sellig prices. For example a isurace compay may offer a discout if a family isures two or more cars with it at the same time the discout is allocated proportioately to the cost of isurig each car. However, there may be certai circumstaces where the discout relates to oe or more, but ot all, of the performace obligatios. For example the discout o isurace might be a special promotio which applies oly to isurig two or more cars, but ot whe takig isurace for house cotets. s t e p 5 : r e c o g i s e r e v e u e w h e a p e r f o r m a c e o b l i g a t i o i s s a t i s f i e d Reveue is recogised i fiacial statemets whe a etity satisfies a performace obligatio by trasferrig a promised good or service to a customer, ie cotrol of the good or service is passed. A performace obligatio ca be satisfied: either over time, for example providig a servicig package for a car or at a poit i time, for example delivery of a car to the customer Reveue is recogised over time if oe of the followig criteria is met: the customer simultaeously receives ad cosumes all the beefits provided by the etity as the etity performs
6 f i a c i a l s t a t e m e t s o f l i m i t e d c o m p a i e s the etity s performace creates or ehaces a asset that the customer cotrols as the asset is created the etity s performace does ot create a asset with a alterative use to the etity, ad the etity has a eforceable right to paymet for performace completed to date If a etity does ot satisfy its performace obligatio over time, it satisfies it at a poit i time. Reveue is recogised whe cotrol is passed at a certai poit i time. The followig are some of the factors that may idicate the poit i time at which cotrol passes: the etity has a preset right to paymet for the asset the customer has legal title to the asset the etity has trasferred physical possessio of the asset the customer has the sigificat risks ad rewards of owership of the asset the customer has accepted the asset m e a s u r i g p r o g r e s s t o w a r d s c o m p l e t i o o f p e r f o r m a c e o b l i g a t i o s For performace obligatios satisfied over time reveue is recogised by measurig progress towards completio. Measuremet ca use methods such as: output methods, which measure the value of goods or services trasferred to date relative to the remaiig goods or services promised uder the cotract; such methods iclude appraisals of results achieved, milestoes reached, time elapsed, uits produced or uits delivered. For example 400 out of 1,000 uits at a total cotract price of 100,000 have bee supplied this year; reveue for this year is 40,000. iput methods, which recogise reveue o the basis of iputs to the performace obligatio relative to the total expected iputs to satisfy that performace obligatio; such methods iclude resources cosumed, labour hours expeded, costs icurred, time elapsed or machie house used. Where iputs are expeded evely throughout the performace period, reveue ca be recogised o a straight-lie basis. For example a cotract with a price of 200,000 is 60 per cet complete i terms of costs icurred by the ed of the fiacial year, givig a reveue value of 120,000.
u p d a t e s s e p t e m b e r 2 0 1 8 7 Ameded Activities 5.16 To recogise reveue uder IFRS 15, Reveue from Cotracts with Customers, a etity applies a five-step process. Set out each step i the followig table. Step 1 Step 2 Step 3 Step 4 Step 5 5.17 SweetDream Beds Ltd has a fiacial year ed of 31 December. O 1 July 20-6 the compay sigs a cotract to supply beds to Albury Hotels Group plc which is udertakig a refurbishmet scheme at a umber of its hotels. The cotract states a sale price of 200 per bed but, if Albury Hotels buys more tha 1,000 beds durig the first year of the cotract, the price is reduced by 20% o all beds supplied uder the cotract. By 31 December 20-6 Albury Hotels had bought 800 beds. To comply with IFRS 15, Reveue from Cotracts with Customers, what amout should SweetDream Beds Ltd record as reveue from this cotract for the year eded 31 December 20-6? Explai your aswer. ote: igore VAT.
8 f i a c i a l s t a t e m e t s o f l i m i t e d c o m p a i e s Ameded Activities Aswers 5.16 Step 1 Step 2 idetify the cotract with the customer idetify the performace obligatios i the cotract Step 3 Step 4 Step 5 determie the trasactio price allocate the trasactio price to the performace obligatios i the cotract recogise reveue whe a performace obligatio is satisfied 5.17 800 beds at 200 each less 20% discout = 128,000. This amout of cosideratio is based o SweetDream Beds Ltd s expectatio of sellig more tha 1,000 beds to Albury Hotels Group plc durig the period of the cotract. This meas that the 20% discout is most likely to apply to all beds sold to this customer, ad it is highly probable that there will ot be a subsequet reversal of discout allowed.