Task Solutions – Revenue from Contract and Customer GC401

Running Head: Impact of IFRS 15 Revenue from Contract and Customers
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Impact of IFRS 15 Revenue from Contract and Customer
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Running Head: Impact of IFRS 15 Revenue from Contract and Customers
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Running Head: Impact of IFRS 15 Revenue from Contract and Customers
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Table of Contents
Part A……………………………………………………………………………………………………………………….. 2
Introduction ……………………………………………………………………………………………………………. 2
Discussion ……………………………………………………………………………………………………………… 3
There are some major lacks of consistency and weakness in IAS 11 and IAS 18. These are:
……………………………………………………………………………………………………………………………… 3
Five steps to decode revenue by IFRS 15: ………………………………………………………………….. 4
Process of issuing new standards: ……………………………………………………………………………… 5
Adoption of IFRS 15 by BMW GROUP ……………………………………………………………………. 8
Part B………………………………………………………………………………………………………………………… 9
Answer A………………………………………………………………………………………………………………. 9
Answer B……………………………………………………………………………………………………………… 10
Running Head: Impact of IFRS 15 Revenue from Contract and Customers
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Part A
Introduction
International Accounting Standards Board (IASB) was established on 06 February 2001.
IASB is an independent accounting standard. IASB is aLondon based organisation and more
than 100 countries companies are regulated by IASB. The total number of members in IASB
is 15 (Readyratios.com 2021).
International Accounting Standards (IAS) 18 define the revenue generated out of sale of
goods, providing services, income as an interest, income from rent, and dividend. IAS 18 was
introduced in 1982 and itwas effective from 1January 1984. IAS 18 measured revenue at the
fair value of inspection received (Iasplus.com 2021).
As per IAS 18 revenue is only shown in the revenue statement when future economic interest
increases due to change in an asset or in aliability (Chartered Education 2015).
IAS 11 Construction contract provide specification on the allocation of income and contract
cost for the billing period in which the construction service is carried out. IAS 11 was
introduced in December 1993 and it was effective from 1January 1995 (Iasplus.com 2021).
IAS deals with accounting of construction contract.
Accounting for construction contract as per IAS 11 is
A) The calculation of termination of contract:
 Net profit: At the end of contract, the profit is anticipated to generated in the contract
then income and cost are to be shown in income statement.
 Net Loss: At the end of contract, if there is loss in the contract then whole loss is
transfer in revenue statement (Ali, 2021).
B) If there is uncertain outcome (no profit) in construction contract then the net result of
the contract is cannot be calculated.
IAS 11 required accrual financial statement and regular perception of the judgment concept
for treatment of construction contract.
International Financial Reporting Standards (IFRS) 15 revenue from contract and customer
was introduce in 28 may 2014 and the effective date is 1January 2018. IFRS 15 replaces IAS
11 Construction Contract, IAS Revenue 18, IFRIC 13 Customer Loyalty Programmes, IFRIC
Running Head: Impact of IFRS 15 Revenue from Contract and Customers
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15 Agreement for Construction of Real Estate, IFRIC 18 Transfer of Asset from Customers,
SIC-31 revenue-barter transaction demand promotion Services (Deloitte, 2021).
IFRS 15 provide model to recognise one overall revenue for all contract with the customers.
This model analyse revenue by using five steps. These steps are:
 Identify the contract
 Recognize the performance duty
 Determine the price of transaction
 Allocate transaction price
 Recognize revenue (pwc 2021)
Discussion
In all countries, revenue is the major information in a set of financial statement. Revenue
plays an important role in computing profits. Revenue affects bank, other financial
institutions, tax authorities and credit rating agencies.
In IAS 11, the revenue is calculating by using stage of completion method also called rating
of completion method. Contract revenue and costs are treated as revenue and expanses in
profit and loss. The one thing that makes the IAS 11 quite complex is the fact that acompany
in the business of construction need to arrive at awell-founded estimate of associated income
and costs of acontract, cause to be able to recognize income. Once enforceable contact is
produced in which specify all the settlement term and contract consideration, itbecome much
easier to satisfy the requirement of IAS 11(Collings 2011).
The fact that, redrafting of the current IASs would not improve the current issue present with
the standards, is well known as IASB. A company which reports under IFRS, could recognize
an entirely dissimilar levels of revenue based on the standard on which itapplies.
There are some major lacks of consistency and weakness in IAS 11 and IAS
18. These are:
 Due to lack of consistency in guidance in IAS 18 and IAS 1, many companies unsure
about when they need to calculate revenue. This is mostly happened in the case of
Running Head: Impact of IFRS 15 Revenue from Contract and Customers
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goods and service because sometimes services are provided after goods sold (for
example, awarranty) (Collings 2011).
 Lack of guidance are shown in IAS 18 when the transaction of delivery involves more
than one goods and services. IAS 18 does not define when and how segregate
transition into component when there is multiple transaction. IAS 18 also does not
know how to calculate the elements in multiple-element (Putra, 2021).
 Sometimes contract allow to pay consideration in avariable term to the company or
by the company. In this case, IAS 18 and IAS 11 have not the proper guidance to
calculate how much revenue should be taken at the time of review (Putra, 2021).
 IAS 18 and IAS 11 does not allow the companies to considered the amount of revenue
as per the time value of money method. For example, the worth of euro 1000 will not
be same in after five or ten years. This happens because of time value of money.
(Collings 2011).
 Sometimes company provides incentives on extra sale if the target achieved. The
provision of IAS 11 and IAS 18 treated all the transaction as a revenue without
knowing that the company has due some duty to fulfil.
 The selling price that can be recognized for aparticular goods and services is known
as observable selling price. This revenue is generated due to change of certain goods
and customer services and this revenue is not recorded in the financial statements
(Collings 2011).
Five steps to decode revenue by IFRS 15:
1) Recognize the contract with customer: Here, the company applies the proposed
criteria to the rights and duties of each contract agreed with the customer. In some
cases, acompany can combine multiple contracts into asingle contract (Owusu 2020).
2) Recognise the segregate performance duty in contract: The condition of the contract
will include the company’s assurance to transfer goods or services to its customers.
The standard refers to these commitments as “performance obligations.” Any other
performance duty will be accounted for segregate. If the company sells goods or
services segregate or provides benefits to the company’s customers, the goods or
services are different. On the contrary, the proposed rules recognize that goods and
service is not identifiable as long as they are “bundled” with remain goods and
services in the contract (Lim, Devi and Mahzan 2015).
Running Head: Impact of IFRS 15 Revenue from Contract and Customers
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3) Deciding the price of contract: The agreement price is the value that customer pays
the contracting company for its production duties. In general, this is likely to be a
stable price, but itis not unexpected for such consideration to alternate or be settled in
aform other than cash. If the contract intends to continue for asignificant period, the
transaction price must be discounted to its current value. Only if the contract is
important. The transaction price must be adjusted to match the consideration paid to
the customer. The proposed standard refers to these events under the influence of
“credit risk”. These effects are not reflected in the transaction price itself and are
displayed as segregate items near to the revenue line (Owusu 2020).
4) Allocate price of transaction: Once the transaction price is calculated, the Company
will allocate it to each individual production duty according to the relative
autonomous selling price of each individual product and service. In many cases,
autonomous selling prices for goods or services are not always valid, and in such
circumstances the company will quote. The proposed new standard also addresses
when an entity allocates reduction or contingent deliberation to one production duty
on behalf of all production duties in the contract (Lim, Devi and Mahzan 2015).
5) Revenue recognises on completion of contract: Income is realised only when
company fulfils its performance duties by transferring assure goods and services to
the consumer. To determine when aproduct or service is transferred, you must apply
genuineness to the form. The duty is therefore fulfilled when the consumer acquires
authority of the goods and services. In its present form, IAS 18 requires entities to
calculate income from the sale of products if five conditions are met.
Process of issuing new standards:
IASB has the right to issue new IFRS on the base of international consulting process. There
are four steps in process of issuing new standards. These are as follows.
1) The first step in this system is agenda dialogue. The IASB wishes to determine what
information is truly recommended to consumers in order to make better requirements of
financial reporting. Therefore, in order to meet all consumer needs, the IASB will
analysis on the relevance of the information to the customer and how to reliably
information. In addition, you ought to feel about the suggestions at current available, the
feasibility of accelerated convergence, expectations of pleasure with the IFRS developed
and advisable beneficial resource constraints.
Running Head: Impact of IFRS 15 Revenue from Contract and Customers
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In sequence for the IASB to examine afuture program, IASB staff must identify, review,
and highlight material affair that may attract the observation of the IASB. Therefore, all
stakeholders, including the IFRS Advisory Board, research staff, the IFRS Interpretation
Committee and other standard setters are debate the capable program proposed by the
IASB.
The IASB must meet the principle to calculate if the due process is added in the yearly
improvement process. These principles are clarifying astandard, solve dispute, be clearly
defined and have limited scope, and complete the required minimum period of 3months
to comment on ayearly development.
Once the review is complete, the due process will add any transform indicated in the
yearly development process. The primary aim of the yearly development process is to
improve the status of the IFRS by adding or modifying definite IFRSs to provide advice
and choice of word, or by rectify minor dispute or deletion (da Rocha 2018).
2) Most of the IASB’s projects start with investigation to certify that new standards are
needed. Generally, the IASB’s investigation begins by exploring the problem and
underline possible solutions. When trying to provide aclarification and request opinions
from members of a constituency, commonly but not necessary, the IASB will issue a
document for public examination. If the IASB finds any related accounting issues that
prove the need to change the standard or need to issue anew standard, the IASB will
initiate the development of anew standard.
All dialog take place at IASB meetings, even when an additional accounting standard-
setter is doing the exploration. The draft dialog paper prepared by other standards
developer will be readdressed by the IASB to make sure that the assessment can form a
valid support for public comment.
When the IASB outlines the draft document or public dialog or preliminary comments,
behalf the research enquiry and guidance of the staff, the IFRS Advisory Committee and
the accounting standard retriever, the guidance of employed group, and the conferral of
the request parties will be taken into consideration.
After obtaining IASB approval for the declaration of a draft-defined dialog paper, the
IASB issues arequest for public comments and sets the comment period on the dialog
paper to 120 days. However, composite projects may take extra time. The project team
assess the remark letter of the IASB after announcing final time (da Rocha 2018).
Running Head: Impact of IFRS 15 Revenue from Contract and Customers
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3) When aiming to solve the issues recognize by the research program, the IASB begins by
examine the study, adds comments to the dialog document, release asubmission draft for
public discussion. IFRS technical staff and board members consult with various
stakeholders to collect additional evidence.
The submission period for exposure drafts is generally 120 days. In the event of ararely
important substance, the IASB can shorten the period, but still provide minimum 30 days
to present its opinion. However, to do so, the governing board must carefully approve the
decision with at least 75% approval (da Rocha 2018).
4) After the standard is published, the IASB will provide consulting for execution to
identify potential issues during processing, support performance of the standard, and
maintain the standard. When this situation arises, the IFRS Interpretation Committee may
conclude to develop an IFRIC interpretation of the standard.
The IASB uses the PIR (Post-Implementation Review) to ensure that standard goals are
being met. As per the IFRS Research Program, first, “review important or controversial
issues for the expansion of IFRS standards. Second, consider issues that have engage the
notice of the board of directors after publication. Finally, consider issues that have drawn
the notice of the board of directors after publication. Identify areas where unpredicted
costs or performance issues have occurred.
“Normally, the IASB begin aPIR two years after the date when criteria were used. It
starts with an assessment of the issue of investigation, and once the issue is specified, the
IASB discusses the matter openly. The IASB also reviews relevant academic research
and other reports.
In the final stage, the IASB establishes a process by which a report condenses the
findings and afeedback statement from the PIR. Therefore, new research standards, or
maintenance projects, may arise depending on the confirmation provided by the PIR (da
Rocha 2018).
BMW was corporate in 1916 as an aircraft engine manufacturer. It is a German based
international company whose headquarter is in Munich, Germany. At the beginning stage
BMW produce motorcycle engine, farm equipment ’sand railway brakes.
From 1928 BMW become an automobile manufacturing company. The first car was sold by
BMW is BMW 3/15.
Running Head: Impact of IFRS 15 Revenue from Contract and Customers
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From 1930 BMW was entered in the range of sports and luxury cars segment.
In 2010 BMW Group entered in electric car manufacturing. BMW ActiveHybrid 7 was the
first hybrid car of BMW. From 2013 BMW started to produce electric cars. The first electric
car is BMW i3 (bmwgroup.com 2021).
BMW Group owned BMW, Mini, Rolls-Royce and BMW Motorrad and also provides
services like financial and mobility (Bmw.in 2021).
As per report 2020, 120726 employees working in BMW Group and the revenues (2020)
Euro 98,990,000,000. BMW Group has 31 production and assembly in 15 countries with the
sales network in 140 countries and 4672 Apprentices worldwide (bmwgroup.com 2021).
Adoption of IFRS 15 by BMW GROUP
The new IFRS 15 standard have absorbed many requirements and explanations related to
income recognition in a single provision. This standard also establishes the concept of
uniform revenue recognition in all department.
According to the initial provisions of IFRS 15, the BMW Group has adopted new conditions
for contract revenue used by customers in FY2018 backdated selection. Accordingly, the
opening balance as of January 1, 2017, the reported figure and as of December 31, 2017 has
been adjusted. Exemption clause, allowing the performance of the contract Before January 1,
2017, so as not to According to IFRS 15. Influence Application exemptions are classified as
unimportant since it only affects the BMW Group in some individual cases
(Press.bmwgroup.com 2019),
Accounting for the repurchase agreement and the right to return the sold vehicles, but the
financial services department will then lease these vehicles to customers, guide to the deletion
within the earliest recognition group. The adoption of IFRS 15 resulted in As of January 1,
2017, the group’s shareholding decreased by EUR 498 million, offsetting adeferred tax of
EUR 239 million (December 31, 2017: Revenue reserve decreased by EUR 553 million).
Deferred tax amounts to 192 million euros) (Press.bmwgroup.com 2019). The decrease in the
deferred tax amount as of December 31, 2017 is because of the productive US federal
corporate tax rate on January 1, 2018. On the previous date, the consolidation of the group’s
internal businesses also led to the identifying of assets and liabilities related to income rights,
Running Head: Impact of IFRS 15 Revenue from Contract and Customers
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which led to an increase in other current assets and other current liabilities. It has little impact
on fiscal year 2018 performance (Press.bmwgroup.com 2019).
As per the IFRS 15, the cost of publicity calculates in the car segment, such as sales support
or remaining value grant, must be consider, so it has the influence of decrease income.
Variable consideration is calculate based on the amount of consideration at which the BMW
Group is to be qualify. Some The cost was previously reported as cost of sales. Decrease in
revenues and cost of sales due to change in category of income statement. For fiscal year
2017, the total categorization recorded in the automotive sector was 2.9 billion, but this did
not have amajor impact at the group level (Press.bmwgroup.com 2019).
If the product sales include aprecise service amount, the income is continuing and accepted
as income for aperiod of time. The variable deliberation charged for acomposite contract is
distributed among all service duties, except it is straight traceable to the sale of the vehicle.
Time changes of income recognition resulted in increase of 89 million euros in the group’s
revenue reserve on January 1, 2017, after deducting deferred taxes. 38 million euros
(December 31, 2017: The Group’s income reserves increase by 112 million euros, offsetting
42 million euros of deferred taxes). Impact on earnings is not important in fiscal year 2018.
After the adjustments, the EBIT margin of the automotive sector in FY2017 increased by
0.3%. Point to 9.2% (Press.bmwgroup.com 2019).
Part B
Answer A
Under IFRS 15, since there is fluctuation in the transaction price and there is need to apply
the provision of IFRS 15 about fluctuation deliberation.
IFRS 15 explain that, if there is any variable consideration element in the contract them
amount of consideration is calculated by the entity for the variable right under the contract.
Here Revenue would be recognised by $400000 and receivable by $400000 recorded.
Running Head: Impact of IFRS 15 Revenue from Contract and Customers
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Which subsequently, negotiated and resulted into final settlement discount of $20000 and
remaining $380000 received from customer.
Journal entries
Date Particulars Dr/Cr Amount ($) Amount
($)
01-01-2020 Customer Dr 400000
Revenue from contract with customer Cr 400000
30-01-2020 Cash/Bank Dr 380000
Cash/Settlement Discount Dr 20000
Customer Cr 400000
The transaction price, according to IFRS 15, is the amount to which an entity anticipates
being entitled in return for the transfer of goods and services. An organisation will consider
prior normal business practises when making this judgement. [IFRS 15:47]
Therefore, transaction price shall be after considering the volume discount, which entity
expects to receive from customer.
Effect of above in Financial Statement
Revenue from operation is increases by $400000
Receivable is increases from $400000 and decreases by $400000 (Net NIL)
Settlement Discount is treated as an expanse and itis increases by $20000
Cash or Bank balance is increases by $380000
Answer B
Running Head: Impact of IFRS 15 Revenue from Contract and Customers
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As per IFRS 15 Revenue should be recorded as afair value (after discounting) and interest
generated from the revenue is the part of income.
Revenue from contract with customer shall be recorded by 800000.26 (being discounted by
8% for 3 years) and every year end interest income on such Receivable (asset) would be
recognised and would inflate the receivable (asset) by the same as per the following asset
amortisation table and on 30 Sept 2023 the Receivable result in realisation of 1007557.
Asset Amortisation Table
Year end Opening Balance Interest @8% Closing Balance Tenure
31-12-2020 800000.26 16000.01 816000.26
Oct to Dec
(3 months)
Journal entries
Date Particulars Dr/Cr Amount ($) Amount ($)
30-09-2020 Receivable (Asset) Dr 800000.26
Revenue from contract with
customer
Cr 800000.26
31-12-2020 Receivable (Asset) Dr 16000.01
Interest income (3 months) Cr 16000.01
Effect of above in financial statement
Revenue from operation is increases by $800000.26
Receivable is increases from $816000.26 ($ 800000.26 +$16000.01 )
Interest income is increases by $16000.01
Running Head: Impact of IFRS 15 Revenue from Contract and Customers
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Reference
Ali, A., 2021. IAS 11 Construction Contracts |Accounting Treatment |Examples |Summary.
[online] Accounting Simplified. Available at: https://accounting-simplified.com/ifrs/ias-11-
construction-contracts/ [Accessed 23 August 2021].
Bmw.in, 2021. The BMW Group. [online] Bmw.in. Available at:
https://www.bmw.in/en/topics/Fascination-BMW/the-corporation-original/the-bmw-
group.html
Chartered Education, 2015. Introduction to IAS 18 Revenue -Chartered Education. [online]
Chartered Education. Available at: https://www.charterededucation.com/ifrs/introduction-to-
ias-18-revenue/ [Accessed 23 March 2015].
Collings, S., 2011. IFRS revenue recognition plans explained. [online] AccountingWEB.
Available at: https://www.accountingweb.co.uk/business/financial-reporting/ifrs-revenue-
recognition-plans-explained [Accessed 24 November 2011].
da Rocha, R., 2018. IASBs ’process for issuing of new standards (IFRS 16 -Lease). [online]
Linkedin.com. Available at: https://www.linkedin.com/pulse/iasbs-process-issuing-new-
standards-ifrs-16-lease-ricardo [Accessed 19 February 2018].
Deloitte, 2021. IFRS 15 — Revenue from Contracts with Customers. [online] Iasplus.com.
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