Revenue 256 Progress Costs to date Total costs 20x41 9,100/26,000 = 35% 20x2 22,500/30,000 = 75% Statement of profit or loss 34March 31 March 20X1 20x2 $000 $000 Revenue 4) (40,000 x 35%) 141000 16,000 (40,000%75%)-14,000) Costof sales (9,100) (13,400) _(22,500-9,100) Gross profit 4,900 2,600 Statement of financial position 000 34 March 20X41 Non-current assets Property, plant and equipment 2.700 Current assets Contract asset 1,200 (See be1ou 31 March 20X2 Non-current assets Property, plantand 1,500 equipment Current assets Contract asset 1,000 (See below) Working for contract ass 20x1 $000 Revenue (cumulative) 14,000 Less: invoiced to date (cumulative) (12,800) Contract asset, 4,200 (Cost 3,600 less 900 depreciation) (Cost 3,600 less 2,100 depreciation) 20X2 000 30,000 (29,000) 1,000 KAPLAN PUBLISHINGyA Chapter 11 al Test your understanding 9 1 A Step 1 — Overall sm Total revenue 5.0 Costs to date (1.8) Costs to complete (2.2) Total profit 10 Step 2- Progress Progress = 2 million/S million = 40% Step 3 - Statement of profit or loss Revenue (40% = 5) 2 Cost of sales (1.8) Gross profit 02 208 Step 1 - Overall $000 Total revenue 370 Costs to date (330) Costs to complete (80) Total loss (40) Step 2- Progress Work certified/Price = 320/370 = 86% Step 3 - Statement of profit or loss Revenue (86% * 370) 320 Cost of sales — to date (330) Cost of sales — provision (30) Total loss (40) We recognise the whole of the loss in order to be prudent, so we create a provision for the additional cost. KAPLAN PUBLISHING 287Revenue 258 ‘$63 million Step 1 - Overall $m Price 90 Costs to date (7) Costs to complete (33) Total loss, (20) Step 2 - Progress Costs to date/Total costs = 77/110 = 70% Step 3 - Statement of profit or loss Revenue (70% 90) 63 Cost of sales - to date (7) Cost of sales — provision to recognise full loss 6) Total loss (20) The revenue to be recognised will be 70% * total revenue of $90 million = $63 million. The contract makes an overall loss of $20 million which must be recognised immediately in order to be prudent. D Step 4 — Statement of financial position Current assets Contract asset (63 revenue — 55 cash received) 8 Current liabilities Provision (to recognise full loss) 6 B - While assessing the likelihood of economic benefits is part of identifying the contract, itis not listed as one of the five steps, D—As an agent, Daphne should only record the commission of $100,000 in revenue. As the cash has been received, Daphne must record that in cash and create a payable for $900,000 to the balance to Celeste. KAPLAN PUBLISHINGyA Chapter 11 KAPLAN PUBLISHING ‘$3,375,000 — There are two performance obligations here. The revenue from the sale of the equipment should be recognised at a point in time, and the revenue in relation to the support should be recognised over time. The service element costs $300,000 a year. ‘As Coal Co makes a margin of 20%, this would be sold for $375,000 per year ($300,000 « 100/80). Therefore the total revenue for the service for 2 years = $375,000 x 2 = $750,000. The revenue on the goods = $4m — $750,000 = $3,250,000. The revenue in relation to the service is recognised over 2 years. By 31 December 20X7, 4 months of the service has been performed so can be recognised in revenue ($375,000 = 4/12 = $125,000). Therefore the total revenue = $3,250,000 + $125,000 = $3,375,000 ‘A ~ This transaction should be treated as a loan secured on the property. Therefore the only entry into the statement of profit or loss for the year will be $400,000 finance cost ($4m x 10%), 259Revenue 260 KAPLAN PUBLISHINGChapter 12 Leases Chapter learning objectives Upon completion of this chapter you will be able to: * account for right-of-use assets and lease liabilities in the records of the lessee * explain the exemption from the recognition criteria for leases in the records of the lessee * account for sale and leaseback transactions where sale proceeds are equal to fair value This chapter is new knowledge, not previously covered within Financial Accounting. The principles of the knowledge gained will also be seen in Strategic Business Reporting. The chapter also provides information on evidence useful in Audit and Assurance. is to record and process transactions and events, You use the right accounting treatments for transactions and events, These should be both historical and prospective — and include non-routine transactions. Working through this chapter should help you understand how to demonstrate that objective. 7,4 ‘One of the PER performance objectives (POS) PER KAPLAN PUBLISHING 264Leases LESSEE ACCOUNTING ‘SALE AND LEASEBACK R 1 Leases: Definitions “A lease is a contract, or part of a contract, that conveys the right to use an asset (the underlying asset) for a period of time in exchange for consideration.” The lessor is the ‘entity that provides the right to use an underlying asset in exchange for consideration.’ The lessee is the ‘entity that obtains the right to use an underlying asset in exchange for consideration.” A right-of-use asset ‘represents the lessee’s rights to use an underlying asset for the lease term.’ (IFRS 16, Appendix A) 2 Lessee accounting le Basic princi At the commencement of the lease, the lessee should recognise a lease liability and a right-of-use asset. Initial measurement The liability The lease liabilty is initially measured at the present value of the lease payments that have not yet been paid. Lease payments should include any of the following: * fixed payments ‘+ amounts expected to be payable under residual value guarantees * options to purchase the asset that are reasonably certain to be exercised * termination penalties, if the lease term reflects the expectation that these will be incurred 262 KAPLAN PUBLISHING