CASE Study 1 Answers - MFRS 15 Revenue from Contracts with Customers PDF

Preview

Summary

cara menyelesaikan case study...

Description

MFRS 15 – REVENUE FROM CONTRACTS WITH CUSTOMERS Case Study 1 – Rahman Resources Sdn Bhd and its Subsidiaries Rahman Resources Sdn Bhd is a widely diversified group with several subsidiaries which carry out various activities such as trading, manufacturing, contracting, property development and others. Rahman Resources Group adopted MFRS on 1 January, 2012 when it was first implemented in Malaysia. On 1st January 2018, the Group adopted MFRS 15 – Revenue from Contracts with Customers. The following transactions are a sample of those that have occurred for the financial year ended 31 December 2018. RECOGNISING REVENUE – IDENTIFYING PERFORMANCE OBLIGATIONS One of the subsidiaries operates a trading company and a supermarket in Shah Alam, Selangor and the following transactions took place in December, 2018 :a. Sold 100 Kg of Beras Wangi for a consideration of RM600.00. 

Account for this revenue under MFRS 15. 

A contract is defined as an agreement between 2 or more parties which creates enforceable rights and obligations. The contract may be oral, written or implied by the entities customary business practices.



MFRS 15 also requires the that the contract enables the transfer of control of ownership of goods and services to the customer.



Hence, the sale of 100Kg of Beras Wangi for RM600 implies that the transfer of control of the goods to the buyer has taken place and the amount must be reflected as Revenue in the profit or loss.

b. At the supermarket, a customer selected 10 items and pushed the trolley with the goods to the cashier. The cashier scanned 7 of the items and the amount was RM175.00. The customer was annoyed that the remaining 3 items in the trolley were not selected and shouted abusive words at the cashier. Finally, he paid for the 7 items with his credit card and left with the 7 items. Is the cashier at fault for not scanning the 3 items, or was it within her prerogative not to sell the 3 remaining items? Discuss this in relation to the contract for the sale of goods and revenue recognition under MFRS 15; 

© J Selvarajah

Goods displayed in a supermarket is an “invitation to treat”. The customer picks up the items and makes an offer to the cashier, who accepts the offer by scanning the product into the point of sale (“POS”) register. With the offer and acceptance, and the consideration for the goods, a binding contract for the sale of goods is created.

Case Study 1 – MFRS 15 Revenue from Contracts with Customers

Page 1 of 7



If the cashier did not accept the offer of the customer (which was the 3 items in the trolley, then no binding contract is created and the customer has no grounds to make any complaints.



Hence, in this example, Revenue under MFRS 15 is RM175.00.

c. Another subsidiary manufactures PVC pipes and fittings for the building industry. It enters into a contract to sell a used plant & machinery for RM100,000. A deposit of RM15,000 is collected and the balance will be collected once the machine is delivered to the buyer in 3 months’ time. Does this contract fall within MFRS 15 and if so, how would revenue be accounted for? 

Does this contract fall within MFRS 15 ?



This contract is for the sale of plant and machinery and it does not fall within the provisions of MFRS 15. Sale of used plant and machinery is not part of the ordinary activities of the company.



Any surplus or deficit on the sale is treated as profit or loss on disposal of plant & machinery.



How and when would the revenue be recognised in the financial statements ?



No revenue (as defined under MFRS 15) will be recognised in the financial statements in respect of this transaction.

d. The property development arm of the Group constructs residential properties for sale. The company entered into sales & purchase agreements with purchasers for the sale of 100 units of Double Storey Link Houses for a total consideration of RM55,000,000. Each house sold came with 2 units air-conditioners and 1-unit refrigerator, which were given free. The price of the 2 units air-conditioners and 1-unit refrigerator totalled RM500,000.  

How should the cost of the 2 units air-conditioners and 1 unit refrigerator be accounted for ? The cost of the air-conditioners will be treated as an expense as they have been given free to secure the sale of the property.



How should the revenue on these items be recognised in the financial statements?



No revenue is accounted for in the accounting records as the goods have been given for free.



In Malaysia, goods given free amounting to RM500 per person per financial year, is subject to output tax. Such output tax will be treated as an expense of the company.

© J Selvarajah

Case Study 1 – MFRS 15 Revenue from Contracts with Customers

Page 2 of 7

e. A subsidiary manufacturing leather sofas, beds and other household furniture, provides a 2-year assurance warranty that the products sold will not fail. In the event of any problems, the company will repair the item free of charge, and in the event the item cannot be repaired, a new item as replacement will be given free. In addition, the company has an additional policy for the buyers of its items called a service warranty, and which costs an additional RM2,000, for an additional 3-year warranty after the 2year assurance warranty expires.

f.



How should the 2-year assurance warranty be accounted for under MFRS 15;



As the assurance warranty is not capable of being termed as “distinct” under MFRS 15.27, the sale of the sofas, beds etc. and the assurance warranty are required to be treated as one performance obligation.



What about the 3-year additional warranty, how should they be recognised in the financial statements?



The extended warranty also known as a service warranty is treated as a distinct and separate performance obligation and accounted for as revenue over the 3 years (after the first 2 years) after deducting any cost of the warranty expenses, if any.

The construction arm of the Group enters into a contract with a customer to construct a factory, a staff quarters and covered car parks for 30 of the customer’s management and staff for a total consideration of RM4,500,000. The factory costs RM3,000,000, the staff quarters RM1,000,000 and the carparks RM500,000. 

Based on MFRS 15, how should the above revenue be recognised in the financial statements?



The contract is for the construction of all three components, namely the factory, staff quarters, and the covered car parks. They are not separate and distinct performance obligations.



Hence, the revenue should only be recognised when all 3 components are completed.

g. It also enters into another contract to build a retaining wall in 3 phases. Due to the nature of the terrain, there are different attributes for each phase of the wall. The contract calls for each stage to be approved by the Quantity Surveyor. 

In the case of (f) above, consider whether there are 3 performance obligations where revenue will be taken up as each performance obligation is performed;



As discussed, there is only 1 performance obligation in respect of (f) above.

© J Selvarajah

Case Study 1 – MFRS 15 Revenue from Contracts with Customers

Page 3 of 7



In the case of (g) above, is this a contract with a single performance obligation to construct a wall but built in 3 stages?



The contract to build the wall calls for each stage to be approved by the Quantity Surveyor. The contract also describes different attributes for each of the 3 phases of the wall.



In this case, there are 3 separate and distinct performance obligations. In addition, the ownership of the wall (the asset being constructed), is always with the owner and not with the contractor. The contractor only provides the contracting services and he is entitled to account for the revenue for each of the 3 phases.

h. Another manufacturing arm of the Group has sold 2 container loads of transformers (used as a component for electrical products) to a company in Germany. Based on the incoterms, the goods are shipped FOB (free on board) through Port Klang. The containers were loaded on to the ship (ie they crossed the rail) and the shipping company accepted the Bill of Lading. The goods were insured by the purchaser. After leaving Port Klang, the ship collided with another tanker and sank in the Straits of Malacca.

i.



Should the Group account for the revenue under MFRS 15 once the goods were shipped, should they wait till the goods are accepted by the buyer?



As this is a sale of goods with FOB incoterms, the seller discharges his duty upon the transfer of goods to the ship by way of the Bill of Lading accepted by the shipping company.



In an FOB transaction, once the goods “cross the ships rails” the sale is deemed complete and the Group should account for the revenue since their performance obligation is complete. As the goods are insured by the purchaser, the fact that the ship sunk in a collision would result in the purchaser/shipper collecting the insurance claim and paying them over to the Group.



Would there be any difference if the incoterms state that the goods are to be shipped CIF?



In a CIF Transaction, the revenue will only be taken up once the performance obligation is complete – i.e. the purchaser receives the goods. In the event the ship sinks once the goods have crossed the ships rail, the compensation to the Group is in the form of the insurance claims.

The construction company enters into a contract with the owner of a parcel of land to construct 5 units of shop lots for a consideration of RM2,500,000. The construction will be done in phases, and each phase will be billed separately. The project is expected to

© J Selvarajah

Case Study 1 – MFRS 15 Revenue from Contracts with Customers

Page 4 of 7

take 2.5 years to complete. The construction company is also required to give a defects warranty for a period of 6 months after the buildings are complete.

j.



Based on MFRS 15, should the Group account for the revenue on this contract over time – i.e. when each phase is billed separately, or at a point in time, i.e. when the construction is complete?



The Group’s performance of the contract creates or enhances an asset (the 5 units of shop lots) which the customer (the owner of the parcel of land) controls MFRS 15.35(b). Accordingly, the performance obligations are settled over time and the Group should take up revenue as each performance obligation is complete.



If, as the construction is progressing to an advanced stage and part of the 5 units collapses due to the cheaper quality of cement mixture used. The estimated loss on the whole project is RM1,200,000. When should this estimated loss be accounted for under MFRS 15, before the loss is incurred or only when the known loss amount is available?



Provision for loss on a contract must be provided for as soon as there is indication that the loss would arise.

One of the Group companies enters into a contract with a customer to fabricate and manufacture a complex equipment to combat greenhouse gasses that are emitted by that company’s factory. The equipment is highly specialised and can only be used for the customer’s operations. The equipment costs RM750,000 and Group has collected RM200,000 as deposit. As at 31 December 2018, the equipment is 80% complete. 

The Finance Manager is not sure whether he needs to account for the revenue up to 80% as at the financial year end.



The contract is for the Group to fabricate and manufacture the equipment for a total consideration of RM750,000. As at 31 December 2018, the fabrication is incomplete and the performance obligation has not been completed. Therefore, no revenue can be taken up for the year ended 31 December 2018.



Advice the Finance Manager of the correct treatment for this transaction.



The Finance Manager should be advised that the revenue of RM750,000 can only be taken up once the fabrication is complete and the equipment is transferred to the buyer.

k. The Malaysian Association for the Blind (“MAB”) prints postcards and greeting cards based on drawings by its blind members. The printed postcards (set of 10 cards) are sent by post to their database of past donors. The price per set of 10 cards is RM20.00. The instruction on the letter enclosing the printed cards state that if the cards are not

© J Selvarajah

Case Study 1 – MFRS 15 Revenue from Contracts with Customers

Page 5 of 7

required, they are to inform the MAB within 10 days, so that they can send a runner to collect the cards, or alternatively, to post the cards back to MAB.

l.

m.



Should MAB account for the revenue after the 10 day period has expired, or only when the money is received by them?



The revenue should be recognised once the 10-day period has passed as MAB has completed its performance obligations and the donor has not rejected the offer.



If they do account for the revenue after the 10-day period has expired, what would happen if the monies are not collectible?



The Group will have to make the appropriate impairment of receivables.

The Rahman Resources Group runs the Rainforest Club for members. Members can pay an entrance fee of RM10,000 and monthly subscription of RM200 per month to use the various facilities at the club, including the restaurant, where the food is charged separately. Alternatively, the member can pay a “life membership” fee of RM150,000 and no further subscriptions are required for his lifetime membership of the club. Other payments such as food consumed in the restaurant etc, needs to be paid. The lifetime average is 25 years. 

How should the entrance fee of RM10,000 be recognised in the financial statements?



The entrance fee of RM10,000 entitles the person to become a member and enjoy the benefits of the club. The entrance fee will be accounted for a revenue once the member has received his membership card or his membership is approved and he can use the facilities of the club. The Group has completed its performance obligations in that the member is now allowed the use of the club facilities.



How should the “life membership” fee of RM150,000 be accounted for under MFRS 15 ?



The “life membership fee” of RM150,000 is in effect an advance payment and it should be recognised as revenue over the expected life of the member on the straight-line basis.

The Group also manages the Bankers Club where members must pay a life membership fee of RM20,000 to become a member of the club. Yearly subscription of RM2,000 are payable. The club is used mainly for dinners and business lunches and afternoon tea. Only members are allowed in the Club and any others wanting to go to the Club, must be accompanied by a member. 

© J Selvarajah

How should the life membership fee be accounted for under MFRS 15 ?

Case Study 1 – MFRS 15 Revenue from Contracts with Customers

Page 6 of 7



In this case, the life membership fee of RM20,000 is a separate performance obligation and is required to be recognised a revenue when the performance obligation is satisfied, i.e. the new member is given his membership rights to the Bankers Club.



Should the yearly subscription be accrued if the member has defaulted?



The yearly subscription must be accrued as the Group has made available the facilities of the club for the member’s use. If the member has defaulted, an impairment of the amount due has to be made in the financial statements.

n. Petron Car Wash outlet in Jalan Besar, Kuala Lumpur has introduced a customer loyalty programme. For every 6 car washes carried out at the outlet, 1 free car wash will be given. The average price for a car wash is RM15.00. The outlet expects 30% of the customers to claim the 7th car wash for free. In a period of 1 month, approximately 1,000 cars are washed.



How much revenue should Petron account for as its revenue for the one month that they have provided the car wash service, by reference to MFRS 15 ?

    

Average cars washed per month 1,000 x RM15.00 per car For every 6 car washes, 1 car wash is given free. Therefore the cost per car wash is RM15.00 / 7 washes 30% of the 1,000 car owners will claim the free wash Unearned car wash revenue will be 300 x RM12.86

  

Bank Car wash revenue Unearned revenue on free car wash



If the full revenue cannot be taken up, where should the amount collected be recognised in the financial statements?



A indicated above, they should be shown as “Unearned Revenue on Free Car Wash”

© J Selvarajah

Dr.

= RM15,000.00 = RM12.86 = 300 car owners = RM 3,858.00

RM15,000.00 Cr. RM11,142.00 Cr. RM 3,858.00

Case Study 1 – MFRS 15 Revenue from Contracts with Customers

Page 7 of 7...