NS bought in old inventory from broken point of sale which it then fixes and resell them to the market. It recognizes all the items under inventory

Issue 1

NS bought in old inventory from broken point of sale which it then fixes and resell them to the market. It recognizes all the items under inventory and in post period, if not fixable then it is reclassified into scrap items. Under test count there has been reported 2 units more in case of stationery registers and 3 units less in case of broken register than what is reported in balance sheet. Further piles of goods have been being there which has not been listed in the records which were considered as scrapped item and were considered to be written off in the books of accounts. Scrap item of number 403 has been shown under inventory for amount $199101. On test count, there were few piles of goods which were not accounted by company NS.

Handbook and Analysis

International Accounting Standard 2 is applicable for the inventory accounting treatment. As per this standard, Inventory has to be recorded at lower of cost or net realizable value. Inventory includes such assets which are held for sale or held in the process of consumption or held in the form of material which will be used for the production of finished product. It means inventory includes only Finished goods, Work in progress goods and raw material which will be converted into finished goods.

Inventory are written down as expenses once they are sold out or may be scrapped out as expense. Inventory has been recognized as and when it has been purchased by NS and further when it identifies that the flaws could not be addressed it just converted that inventory into scrap items.

Recommendation and Calculation

As per definition of inventory as mentioned in IAS, Scrap items are not the items which meets the definition of inventory. Scrap items are not held for sale as per the main line of business, nor it forms the material to be used when processing of inventory is done and nor it is raw material for them. In case NS is able to use the Scrap items for the refurbishing of product furthermore, then NS may keep recording the Scrap under Inventory heading in financial statement. In case it is not able to use such scrap as raw material or is not in WIP state, then it should be written down as and when sale is made. If such scrap items are not yet sold, then they should be represented as Inventory to be written off as scrap in the balance sheet items.

Further the amount of $199101 seems to lack assertion of completeness because test count performed shows that there were obsolete or few piles of goods which were not listed in the books of accounts. If such items were written down, then they must be sold out as scrap item in this year itself and if they are not sold and is not usable as well, they have to be recorded in books as scrap. NS has not sold such items yet as that is in its books of account. In case they are usable then they have to be recorded as inventory. It means the goods remain not accounted for in the books of account.

Thus, NS is recommended to revise its inventory figure to include the goods which were not accounted for and which were identified during test count of inventory. Further differences in Stationery scanners and broken register were if identified during adjustment of the piles of goods so received afterwards, then it has also to be adjusted accordingly.

Issue 2:

Receivable for the year 2021 has increased from the year 2020 by 18%. It means the sale revenue has also increased by 18%. There has been loosening of the credit arrangement and customers re allowed to make payment with more days credit which has occurred increase in sale of company. This system has caused the amount received in cash mainly after period of 90 days which is in between 91-120 days where in 2020, the ageing report shows only $350000 outstanding to be received. now it has increased to $1500000. Similarly, more customers are willing to pay after 120 days which in 2020 was $100000 only has now increased to $10,00,000. This has created a doubt over assured collection of receivable from them. Provision of 5% in line with earlier year seems also incorrect for such relaxed credit term.

Handbook and Analysis:

As per IFRS9: Financial Instrument, if there is right to receive the cash then the item has to be classified as financial instrument more precisely financial Asset.

So, accordingly receivables here are financial asset because it has right to receive the cash.

Under financial asset, among Debt instrument, equity instrument and derivative instrument, receivable falls under debt instrument which are to be accounted using Fair value through Profit and loss account(FVPL).

Under this method, the receivables are to be recognized as their original value /fair value at the books of accounts. However, at the yearend like here 30 June, this has to be fair valued and any differences arising in between has to be recognized in profit and loss account.

Section 3856 of ASPE also deals with the same concept for financial instruments.

Recommendation and calculation

Because NS has relaxed its credit period, maximum of customer has shifted their payment style for period beyond 90 days. Hence NS should classify all the receivable under Financial asset items showing brief on ageing of receivable in notes to accounts.

Further, the 5% AFDA is not best estimate for such enhanced increase in account receivable. For 18% increase in sales revenue due to relaxed credit period in year 2021 as compared to year 2020, the AFDA rate also has to be revised. It must be around 6% (5%*1.18) or higher is more suggested to ensure that proper figure for collectible is posted in financial statements.

This is a financial instrument and hence any change in the settlement of these receivable has to be routed through profit and loss account.

Thus AFDA to be recorded for the year thus ended will have to be revised by:

Account receivable = 8400000

AFDA made in financial statement 8400000*5%= $420,000

AFDA to be made as per 6% rate= 8400000*6%= $504000

Hence profit will reduce by $84000.

New line of Business

Issue 3:

NS technologies has been involved in the sale of refurbished servers where it procures inventory from broken point of sale and refurbish it to make sale. It has made revenue of $5 million after making sale of around 2000 servers for year ended 30 June. The revenue includes the price for maintenance agreement which is provided for a period of two years. This treatment is not correct as per IFRS 15.

Average of two weeks NS spends for the installation of server and make sure that it integrates with the client system. Next, NS records the revenue as soon as it is dispatched to the customer which is not correct.

Handbook Analysis

ASPE 3400 Paragraph phrases that revenue has to be recognizedonly when the requirements for performance are satisfied, provided that at the time of performance, the ultimate collection is reasonably assured.

According to IFRS 15, a business must recognize revenue from contracts with customers using a five-step process:

Step 1: Determine the customer's contract. The customer has bought Server from NS. Also the maintainance service is to be provided to the customer.

Step 2: Identify the contract's different performance duties.

The following performance duties are included in NS agreement with the customer:

Supply of server and Installation of servers

Providing of maintainace service over period of two years.

Step 3: Calculate the transaction price NS has agreed to deliver the aforesaid services for $5 million in total which is $2500 per servers.

Step 4: Allocation of transaction price:

Performance obligation as identified under step 2 are:

Supply of server and Installation of servers

Providing of maintenance service over period of two years.

As per IFRS 15, for distinct performance obligation, the transaction price has to allocated between them at the Stand alone selling prices. Same has been done in recommendation section.

Step 5: Recognition of Revenue: As per Para in IFRS 15, revenue has to be recognized only when the risk and rewards for the product has been transferred to the customers and customers are in position to reap the maximum benefits from the product as well as collection from the satisfaction of performance obligation is assured to be collected. It means only when the performance obligation is satisified then only NS is required to recognize the revenue for the period.

Recommendation calculation

In line with IFRS15, Revenue from Contract with the Customers, there are two performance obligation for NS on the sale of server to customer. One is providing of servers and installation of servers at their place and the next is maintainace agreement for a period of two years.

Calculation of sale price per server sold:

Revenue to be recognized as per IFRS 15

No. of serves sold= 2000

Revenue generated= 5million

Revenue per server sold = 5000000/2000= $2500

Standalone selling price for Maintenance agreement= $500

So, transaction price of $2500 has to allocated between them as $2000 for sale of servers and $500 for maintained agreement.

Accordingly, revenue that has to be recognized as per IFRS 15 will be $2000 per server at the point in time of sale of Servers.

NS has been using wrong method of recognizing revenue as soon as it delivers the servers to customer while it takes around two weeks to make the server fully functional in accordance with their system and then only customer are able to use it for them.

Hence as per IFRS 15, performance obligation is satisfied only when the client started using the servers which is only after the server has been installed and hence the revenue has to be recognized after installation and not early then that.

Next, NS has to bifurcate total selling price to Maintenance agreement and revenue from sale of servers. Revenue from sale of server has to be recognized at point in time of sale while Maintenance agreement has to recognized as revenue over the period of time of two years.

77001355725540005773420Munich IT SolutionsProfessor: Yahya MAREI

Omnia Al-sharif

7900035000Munich IT SolutionsProfessor: Yahya MAREI

Omnia Al-sharif

right23002457452022

760098002022

Issue 1 : Revenue Recognition for the Project x

A contract for $80 million has been made by MITS with a client. Engineering, design, and installation of solar panels will be included in the contract, as well as a three-year service contract that will begin after the solar panels are installed. The project was 25% complete as of December 31, 2020, with a total invoice amount of $11.5 million.

Handbook Analysis:

According to IFRS 15, a business must recognize revenue from contracts with customers using a five-step process:

Step 1: Determine the customer's contract. The customer has hired MITS to engineer, design, deliver, and install solar panels. MITS is also obligated to supply services for a three-year period under the contract.

Step 2: Identify the contract's different performance duties. The following performance duties are included in MITS' contract with the customer:

Engineer and design solar panels

Deliver solar panels

Install solar panels Provide three-year servicing after installation

Step 3: Calculate the transaction price MITS has agreed to deliver the aforesaid services for $80 million in total.

Allocation

Engineering and design $8,000,000

Solar panels $14,000,000

Installation $49,000,000

Three-year service contract, commencing once installation is complete $9,000,000

Total $80,000,000

Step 4: Assign the contract price to the contract's performance obligations.

The total transaction price must be allocated to the performance requirements by MITS. This distribution was made in accordance with the contract.

Step 5: Recognize revenue

The income will be recognized by MITS once all of the contract's performance obligations have been fulfilled.

Recommendation:

MITS assigns transaction prices to performance obligations under the contract, but this allocation must be based on the individual prices of these performance obligations. The calculation is as follows:

Stand-alone selling prices $ of total price Allocated price

Engineering and design $10,000,000 12.20% $9,756,098

Solar panels $15,000,000 18.29% $14,634,146

Installation $45,000,000 54.88% $43,902,439

Three-year service contract $12,000,000 14.63% $11,707,317

Total $82,000,000 100.00% $80,000,000

Three-year service contracts are treated differently than other performance obligations. Other performance requirements are fully integrated.

The total transaction price for engineering and design, solar panels, and installation is $ 68,292,683.

MITS may use the completion rate method to recognize revenue associated with these performance obligations.

Revenue for 2020= 0.25 * $ 68,292,683 = $ 17,073,171

Expenses associated with this project, as well as income, should be allocated on a unit price basis.

Stand-alone selling prices $ of the total price Allocated costs

Engineering and design $10,000,000 12.20% $7,219,512

Solar panels $15,000,000 18.29% $10,829,268

Installation $45,000,000 54.88% $32,487,805

Three-year service contract $12,000,000 14.63% $8,663,415

Total $82,000,000 100.00% $59,200,000

Engineering and design, solar panels, and installation costs total $50,536,585.

In 2020, the costs will be $14,800,000.

Therefore, the profit will be as follows:

Sales

Project A $17,073,171

Other small contracts $8,290,000

Total Sales $25,363,171

Cost of sales

Project A $14,800,000

Other small contracts $4,780,000

Total Cost of Sales $19,580,000

Gross profit $5,783,171

Issue 2: Warranty

MITS provides a 5-year warranty program as part of the sales contract, under which MITS replaces any solar panels that do not meet product standards.

Handbook Analysis:

According to IFRS 5, the warranty is reported as a separate performance obligation. The transaction price will be assigned separately.

Company shall recognize the Estimated Guarantee Cost as a Guarantee Obligation. When the warranty period expires, the proportional amount of the warranty obligation will be recognized as an expense.

Recommendation:

MITS should record the warranty obligations in the amount of $1,312,000 at the outset. Make the following entry in your journal:

$1,312,000 DR Warranty Expense CR Warranty Obligations $1,312,000

MITS should make the following journal entry as the warranty costs are incurred:

$225,000 CR

DR Warranty Obligations $225,000 in cash

The Queen and Prince Ltd

right5749290January 1, 2022

Yahya MareiStudent Names: Omnia Al-Sharif 100497189, Ali Badri 136466166, Faisal Baothman 1420981851000000January 1, 2022

Yahya MareiStudent Names: Omnia Al-Sharif 100497189, Ali Badri 136466166, Faisal Baothman 142098185

Refundable Deposits

Issue:

This year, six months before the wedding date, QP began collecting completely refundable deposits. The deposits secure the date and will be credited to the rental cost when the wedding takes place. Deposits are reported as revenue when they are received. As of December 31, 2020, the wedding deposits for 2021 were $25,000 each.

Handbook and Analysis:

As described in paragraph ASPE 3400, revenue is recognizedwhen the requirements for performance are satisfied, provided that at the time of performance, the ultimate collection is reasonably assured.

Recommendation:

Based on the analysis above, QP cant recognize the revenue of $25,000 because the risk of the wedding event has not happened by that time therefore it doesnt fulfill the ASPE 3400 standard. Consequently, QP should record $25,000 as deferred revenue. Once the wedding event has occurred then they can recognize the deposit payment of $25,000 as revenue as by that time the event would have occurred.

Advertising in Kiras Magazine Exchange Service

Issue:

Kira, Sasha's best friend, runs a local newspaper. In exchange for the Queen's use in 2020, Sasha promised to allow Kira's magazine to advertise in The Queen. In the spring of 2020, ads would have cost $4,850.

In September, the Queen was used twice, and the daily rate would have been $1,500. The financial statements did not reflect these transactions.

Handbook and Analysis:

Non-Monetary Transactions have their own section in ASPE: ASPE 3831.

Under ASPE, there are three essential procedures to recognising non-monetary transactions.

Determine whether the transaction qualifies as a Non-Monetary transaction. Check to see if the transaction has any commercial value. Finally, decide which estimate is more reliable to utilise for the transaction.

ASPE 3831.05 provides guidance as to the definition of Non-Monetary transaction.

A Non-monetary transactions can be one of two things:

(i) Non-monetary exchanges: "which are exchanges of non-monetary assets, liabilities or services for other non-monetary assets, liabilities or services with little or no monetary consideration involved;" OR

(ii) Non-monetary non-reciprocal transfers: "which are transfers of non-monetary assets, liabilities or services without consideration." For example, a donation would be considered a Non-monetary, non-reciprocal transfer. (CPA Solved, 2019)

Because Sashas decision to exchange the use of The Queen for advertisement in Kiras magazine and while there is no monetary value in this exchange

therefore, it meets ASPE 3831 for non-monetary transaction

Recommendation:

QP should record the below transaction to remove the non-monetary transaction.

Advertising expense entry of $1500 debit

Sales $1500 credit

Lawsuit Contingency

Issue:

During a wedding at The Queen in early 2020, a wedding guest engaged in risky behavior, prompting other guests to file a lawsuit. The Queen's or any of the QP's estates were not harmed in any way. QP was identified as one of the defendants in the complaint because the incident occurred at a QP event. QP was forced to pay $800,000, which it did without consulting its lawyers on November 30, 2020. QP's lawyer objected to Sasha's settlement without consulting him, and he filed an appeal right away. The lawyer believes QP will be refunded the $800,000 judgment plus interest within two to three years, according to the letter dated January 10, 2020.

Handbook and Analysis:

As per ASPE 3290 Contingencies, a contingency is an existing condition or situation involving uncertainty as to possible gain or loss to an enterprise that will ultimately be resolved when one or more future events occur or fail to occur. (ASPE 3290.05)

A lawyer can release the probability of gain in the notes to the year-end financial statements if they are certain that QP will be refunded $800,000 with interest.

Recommendation:

As the lawyer mentioned that it may take up to 3 years to receive the money, there is no entry required now, and once it is received it will be adjusted to the account receivable. However

QP should disclose the possible contingent gain of $800,00 in the financial statement.

Fixed-price contract

Issue:

Sasha signed a five-year fixed-price deal for wine in January 2018 to shield QP against market volatility. During each of Sasha's first three years on the job, the price of wine continued to rise. However, by the end of 2020, the price of wine had plummeted substantially. Sasha predicts that the price per case will likely stay the same or even fall over the next two years. On December 31, QP was entitled to cancel the contract, with Sasha's cancellation clause triggering a $60,000 payment. The payment was made in January 2021.

Handbook and Analysis:

As per ASPE 1000.41 the accrual concept for revenue and expenses: They are being recognized when they are occurred not when the cash is exchanged.

Recommendation:

Adjustment entry to debit $60000 as cancelation expense and credit the accounts payable of $60000 on Dec 31, 2020.