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  • 6 Marks

CR – Nov 2014 – L3 – SB – Q2c – Revenue Recognition (IFRS 15)

Assess revenue recognition change for NIXAQ sales under IFRS 15 and calculate total revenue for the year.

Maidogo Limited sells NIXAQ, a product manufactured by it, from several retail outlets. In previous years, the company has undertaken responsibility for fitting the product in customers’ premises. Customers pay for the product at the time they are ordered. The average length of time it takes from ordering to its fitting is 14 days. In previous years, Maidogo Limited had not recognised a sale in its books until the product had been successfully fitted because the rectification costs of any fitting error would be expensive.
With effect from 1 April, 2013, Maidogo Limited changed its method of trading by sub-contracting the fitting to approved contractors. Under this policy, the sub-contractors are paid by Maidogo Limited, and they (the sub-contractors) are liable for any errors made in the fitting. Consequently, Maidogo Limited is proposing to recognise sales when customers order and pay for the goods rather than when they have been fitted. Details of the relevant sales figures are:

Sales Figures Amount (N’000)
Sales made in retail outlets for the year to 31 March 2014 69,000
Sales value of NIXAQ fitted in the 14 days to 14 April 2013 3,600
Sales value of NIXAQ fitted in the 14 days to 14 April 2014 4,800

Note: The sales value of NIXAQ in the 14 days to 14 April 2013 are not included in the annual sales figure of N69million, but those for 14 April 2014 are included.

Required:
Discuss whether or not the above represents a change of accounting policy, and calculate the amount that you would include in the revenue for NIXAQ in the year to 31 March 2014. (6 Marks)

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  • 7 Marks

CR – Nov 2014 – L3 – SB – Q2a – Revenue Recognition (IFRS 15)

Discuss revenue recognition principles for different scenarios and calculate the revenue for NIXAQ sales.

(a) Labalaba Plc operations involve selling cars to the public through a chain of retail car showrooms. It buys most of its new vehicles directly from the manufacturer on the following terms:

  • Pay the manufacturer for the cars on the date they are sold to customers or six months after they are delivered to its showroom, whichever is earlier.
  • The price paid will be 80% of the retail price as set by the manufacturer at the date that the goods are delivered.
  • Pay the manufacturer 1.5% per month (of the cost to Labalaba) as a “display charge” until the goods are paid for.
  • May return the cars to the manufacturer at any time up to the date the cars are due to be paid for and incur the freight cost of any such returns. Labalaba Plc has never taken advantage of this right of return.
  • The manufacturer can recall the cars or request them to be transferred to another dealer at any time up to the time they are paid for by Labalaba.

Required:
Advise the management of Labalaba Plc as to which party bears the risks and rewards in the above arrangement and show whether there is a sale and how the transactions should be treated by each party. (7 Marks)

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  • 6 Marks

CR – Nov 2014 – L3 – SB – Q2c – Revenue Recognition (IFRS 15)

Assess revenue recognition change for NIXAQ sales under IFRS 15 and calculate total revenue for the year.

Maidogo Limited sells NIXAQ, a product manufactured by it, from several retail outlets. In previous years, the company has undertaken responsibility for fitting the product in customers’ premises. Customers pay for the product at the time they are ordered. The average length of time it takes from ordering to its fitting is 14 days. In previous years, Maidogo Limited had not recognised a sale in its books until the product had been successfully fitted because the rectification costs of any fitting error would be expensive.
With effect from 1 April, 2013, Maidogo Limited changed its method of trading by sub-contracting the fitting to approved contractors. Under this policy, the sub-contractors are paid by Maidogo Limited, and they (the sub-contractors) are liable for any errors made in the fitting. Consequently, Maidogo Limited is proposing to recognise sales when customers order and pay for the goods rather than when they have been fitted. Details of the relevant sales figures are:

Sales Figures Amount (N’000)
Sales made in retail outlets for the year to 31 March 2014 69,000
Sales value of NIXAQ fitted in the 14 days to 14 April 2013 3,600
Sales value of NIXAQ fitted in the 14 days to 14 April 2014 4,800

Note: The sales value of NIXAQ in the 14 days to 14 April 2013 are not included in the annual sales figure of N69million, but those for 14 April 2014 are included.

Required:
Discuss whether or not the above represents a change of accounting policy, and calculate the amount that you would include in the revenue for NIXAQ in the year to 31 March 2014. (6 Marks)

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  • 7 Marks

CR – Nov 2014 – L3 – SB – Q2a – Revenue Recognition (IFRS 15)

Discuss revenue recognition principles for different scenarios and calculate the revenue for NIXAQ sales.

(a) Labalaba Plc operations involve selling cars to the public through a chain of retail car showrooms. It buys most of its new vehicles directly from the manufacturer on the following terms:

  • Pay the manufacturer for the cars on the date they are sold to customers or six months after they are delivered to its showroom, whichever is earlier.
  • The price paid will be 80% of the retail price as set by the manufacturer at the date that the goods are delivered.
  • Pay the manufacturer 1.5% per month (of the cost to Labalaba) as a “display charge” until the goods are paid for.
  • May return the cars to the manufacturer at any time up to the date the cars are due to be paid for and incur the freight cost of any such returns. Labalaba Plc has never taken advantage of this right of return.
  • The manufacturer can recall the cars or request them to be transferred to another dealer at any time up to the time they are paid for by Labalaba.

Required:
Advise the management of Labalaba Plc as to which party bears the risks and rewards in the above arrangement and show whether there is a sale and how the transactions should be treated by each party. (7 Marks)

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