IFRS 15, Revenue from Contracts with Customers

Please see the Model Financial Statements for more detail of this standard applied to financial statements.

The following is just a basic summary of IFRS 15 that I made for myself to help me study:

  1. Identifying the contract
  • Definition of a contract – an agreement between two or more parties that creates enforceable rights and obligations.

 

 

 

 

  • Requirements are:

– The parties to the contract have approved the contract and are committed to performing their obligations.

-The entity can identify each party’s rights regarding the goods or services to be transferred.

-The entity can identify the payment terms for the goods or services to be transferred.

-The contract has commercial substance.

-It is probable that the entity will collect the consideration to which it will be entitled in exchange for the goods or services that will be transferred to the customer.

2.Identifying performance obligations

  • a good or service (or a bundle of goods or services) – distinct:
    – the customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer

– the entity’s promise to transfer the good or service to the customer is separately identifiable from other promises in the contract

  • a series of distinct goods or services that are substantially the same and that have the same pattern of transfer to the customer:

– performance obligation satisfied over time

same method used to measure the entity’s progress towards complete satisfaction of the performance obligation.

3. Determining the transaction price

  • Transaction price – is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer, excluding amounts collected on behalf of third parties.
  • Significant financing component:
    Time value of money – entity shall adjust the promised amount of consideration if the timing of payments agreed to by the parties to the contract (either explicitly or implicitly) provides the customer or the entity with a significant benefit of financing the transfer of goods or services to the customer. Finance income is not recognised as revenue, show separately!
  • Practical expedient – an entity need not adjust the promised amount of consideration for the effects of a significant financing component if the entity expects, at contract inception, that the period between when the entity transfers a promised good or service to a customer and when the customer pays for that good or service will be one year or less.
  • Calculate the transaction price on either

– the expected value method: sum of probability-  weighted amounts in a range of possible consideration amounts; or

– The most likely amount: single most likely amount in a range of possible consideration amounts (ie the single most likely outcome of the contract).

4. Allocating the transaction price to performance obligations

  • Stand-alone selling prices – Determine the stand-alone selling price at contract inception of the distinct good or service underlying each performance obligation in the contract and allocate the transaction price in proportion to those stand-alone selling prices.
  • Discount – allocate a discount proportionately to all performance obligations in the contract unless there is observable evidence that the entire discount relates to only one or more performance obligations.

5. Satisfying performance obligations

  • Control – ability to direct the use of, and obtain substantially all of the remaining benefits from, the asset, as well as to prevent other entities from directing the use of, and obtaining the benefits from that asset.
  • Satisfied over time, if either:
    – the customer simultaneously receives and consumes the benefits provided;

– the entity’s performance creates or enhances an asset; or

– the entity’s performance does not create an asset with an alternative use to     the entity

  • Specified point in time – indicators of the transfer of control:
    – The entity has a present right to payment for the asset

– The customer has legal title to the asset

– The entity has transferred physical possession of the asset

– The customer has the significant risks and rewards of ownership of the asset – The customer has accepted the asset

Consolidations Chapter 9: Interim acquisition

A parent might acquire the interest at a date other than the beginning or end of the financial year (like in the case of chapter 1-3 and 8 of Consolidations). In which case the equity will have to be determined at the acquisition date.
The principle stands that all the equity of the subsidiary that accumulated up to the date when the parent acquired the controlling interest, should be shown in the at-acquisition journal entry and eliminated against the investment in the subsidiary by means of a consolidation journal.

  • The main trick when working with the interim acquisition is to take out the income and expenses that relate to the pre-acquisition period (from beginning of reporting period until the date of acquisition) so that only the profit that relates to the post-acquisition period (from the date of acquisition until the end of the reporting period) of the subsidiary is left over and used further in the Analysis of Equity.
  • That means that each income and expense item must be carefully evaluated to determine to which period it relates. It can be stated that the income and expenses are equally distributed, then only the fraction of the year relating to the pre-acquisition period will be eliminated of that specific item.
  • This elimination of the income and expenses, sales and cost of sales related to the pre-acquisition, is done in the at-acquisition consolidations journal.
  • At-acquisition consolidations journal portraying the elimination of income and expenses, sales and cost of sales that should not form part of the at-acquisition equity of the subsidiary:
  Dr Cr
Ordinary Share Capital – Opening balance (S) x  
Retained earnings – Opening Balance (S) x  
Revenue (S) x  
       Cost of Sales (S)   x
       Other expenses (S)   x
       Income tax expense (S)   x
       Investment: S Limited (P)   x
       Non-Controlling Interest (SCE)   x
Goodwill (SFP) x  

 

  • Only the profit amount for the post-acquisition period is left over and with that, the retained earnings opening balance of the trial balance of S is added to get the total retained earnings at acquisition.
  • Next, each amount in the Consolidated Statement of Profit or Loss and Other Comprehensive Income will be adjusted as follows after the above mentioned is taken into account:

100%P + 100%S – a pre-acquisition fraction of the amount – intra-group transaction

  • Assets and liabilities in the Consolidated Statement of Financial Position are not affected by this adjustment between the pre – and post-acquisition period, only those items that relate to profit in the Consolidated Statement of Profit or Loss and Other Comprehensive Income.
  • It is also possible that the gross income may not be distributed evenly throughout the year as it is assumed with most of the income and expense items unless otherwise stated.

Consolidations Chapter 8: Preference Shares

The following notes are made on important principles and concepts I have learned in this chapter:

  1. Preference share capital is share capital that has preference over the other share capital of an entity. The share capital in chapter 1-4 only consisted of ordinary share capital.
  2. These preference shares get their dividends paid out first, have no voting rights like in the case of ordinary shares and their dividends are based on an annual fixed percentage.
  3. Preference shares can either be
  • Cumulative – preference shareholders are entitled to the dividends even if the entity does not declare preference dividends for that specific period (can be in arrears for previous years not declared); or
  • Non-Cumulative – preference shareholders are not entitled to the dividends if the entity does not declare preference dividends for that specific period (cannot be in arrears for previous years not declared).
  1. Preference share capital has its own Analysis of Equity.
  2. In the Analysis of Equity, the preference share capital will only have retained earnings at-acquisition date if the preference shares are cumulative and are in arrears form BEFORE the date of acquisition.
  3. The preference share capital will also only have retained earnings in the ‘since’-period (from date of acquisition until the beginning of the current period) in the Analysis of Equity if the preference shares are cumulative and are in arrears DURING this ‘SINCE’-period.
  4. The profit attributable to the preference share capital in the CURRENT period in the Analysis of Equity is the amount of dividends declared for that specific period.
  5. When distributing the profit for the current period for ordinary shares, the profit (dividend) attributable to preference shares (see point 7 above) must first be taken out of the subsidiary’s total profit so that the remaining profit can go to the parent’s and Non-Controlling Interest’s ordinary shareholders.
  6. Point 8 is because of the fact that preference shares have a preference over others to get their dividend – form the profit for the year – first (see point 1 and 2).
  7. Most of the extra calculations from introducing the preference shares are done in the Analysis of Equity – Preference Share Capital, these amounts are then used just like in the case of the Analysis of Equity – Ordinary Share Capital to calculate correct end-balances to be disclosed in the Consolidated Financial Statements of the Group, already shown in the Consolidations Chapter 1-3 entry on this e-portfolio.
  8. At-acquisition journal entry:
  Dr Cr
Preference Share Capital – Opening Balance (S) x  
Goodwill x  
        Investment in S Ltd (P)   x
        Non-Controlling Interest (SCE)   x

 

Consolidations Chapter 4: Intra-group transactions

The following important notes are made during this chapter:

  1. Only the transactions made between the parent and the subsidiary must be eliminated via a journal entry.
  2. Transactions between the parent and other entities or the subsidiary and other entries are not classified as intra-group and should not be eliminated.
  3. Only intragroup transactions must be eliminated between the parent and subsidiary that do not affect profit or loss.

Elimination of possible intra-group transactions:

Dividends

Only declared, not paid:

  Dr Cr
Other income (P) (SCI) x  
Non-Controlling Interest (SCE) x  
      Dividends declared (S) (SCE)   X

 

  Dr Cr
Shareholders fo dividends (S)(SFP) x  
      Dividends receivable (P) (SFP)   x

 

Declared AND paid

  Dr Cr
Other income (P) (SCI) x  
Non-Controlling Interest (SCE) x  
      Dividends declared/paid (S) (SCE)   X

 

Rent

  Dr Cr
Other Income/ Rent Income (Lessor P or S) (SCI) x  
      Other Expenses/ Rent expense (Lessee P or S) (SCI)   x

 

Loans

  Dr Cr
Finance income (Lender P or S) (SCI) x  
      Finance Cost (Borrower P or S) (SCI)   x
     
Loans due (Borrower P or S) (SFP) x  
      Loans granted (Borrower P or S) (SFP)   x

 

Management/ Administration fees

  Dr Cr
Other Income/ Management fees received                  (Service provider P or S) (SCI) x  
      Other Expenses/ Management fees paid                      (Service receiver P or S) (SCI)   x

 

Other intra-group transactions and balances that must be eliminated are the followings that are explained in further chapters:

  • Sales of inventories
  • Debtors and creditors
  • Property, plant and equipment

 

Consolidations Chapter 1-3

As seen in the above picture, I would like to compare Business Combinations to the all familiar game that we all played as kids known as Pacman. Often businesses with more capital and in need to expand in the most cost-effective way will ‘eat’smaller entities’ assets and absorb their liabilities in order to gain a controlling interest through the acquisition of shares so that they can affect the returns that they get from these entities for their own benefits. The acquirers act as Pacman, eating and using the acquiree’s equity.

Chapter 1-3 of Consolidations is covered in FRK100, therefore, the following work is assumed knowledge and my reflection on what I have learned is a revision of 2017.

Basic concepts and definitions I have learned:

Minority passive investments

  • Share investments that are purchased only for the purpose of generating future economic benefits – dividend income or capital gains. Due to the small ownership percentage and/or very limited contractual rights, the investor can not influence the economic activities of the entity in order to affect returns.
  • If these investments are less than 12 months they are disclosed as current assets, but more than 12 months, then they are disclosed as non-currents assets.

Minority active investments

  • Share investments and/or other limited contractual rights to exert significant influence, but not control, over the activities of the entity in order to affect returns earned by the investor.
  • These investments are disclosed as non-current assets.

 

Majority active investments

  • Share investments and/or other limited contractual rights to direct the economic activities of the investee to influence the level of returns earned by the investor.
  • Influences in the economic activities of the investee can be on the policy-making level and on the day-to-day operational level.
  • The element of control is present, not only influence.
  • This is presumed to be a business combination by IFRS.

Business Combination (according to IFRS 3, Business Combinations, Appendix A)

  • “a transaction or other event in which an acquirer obtains control of one or more businesses”

Control (IFRS 10, Appendix A and IFRS 3, Appendix A)

  • A situation in which “an investor is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee”

Power

  • Refers to the rights held by the investor, which are either
    – voting rights through ownership of shares; or
    – contractual rights

A Business (according to IFRS 3, Business Combinations, Appendix A)

  • “an integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing a return in the form of dividends, lower costs or other economic benefits directly to investors and other owners, members and participants”

Wholly-owned Subsidiary

  • Refers to a company whose entire share capital is held by a single controlling company (the parent).

 

At-acquisition

  • The date at which the acquirer(parent) acquires a controlling interest in the acquiree (subsidiary).
  • The assets and liabilities of the subsidiary at acquisition are eliminated against the investment of the parent (and of the non-controlling interest if not wholly owned).
  • Goodwill or a gain on bargain purchase is the purpose of this elimination in the at-acquisition journal.

 

Gain on bargain purchase

  • This gain is created when the acquirer pays an amount less than the fair value on the acquisition date of the identifiable assets and liabilities of the subsidiary.
  • This discount is recognised as an income in the parent’s Statement of Profit and Loss and Other Comprehensive Income.

Goodwill

  • This is created when the acquirer pays an amount more than the fair value on the acquisition date of the identifiable assets and liabilities of the subsidiary.
  • The goodwill amount is recognised in the parent’s Statement of Financial Position under Non-Current Assets.

Non-Controlling Interest (IFRS 10, Consolidated Financial Statements, Appendix A)

  • “the equity in the subsidiary not directly or indirectly attributable to the parent”
  • Amount of controlling interest of the Non-Controlling Interest is shown as a percentage in relation to the subsidiary (just as in the parent’s case too).
  • The Non-Controlling Interest can be measured at either fair value of proportionate of share at the at-acquisition date.

It is important to remember that the parent and subsidiary are separate legal entities but one reporting entity.

I personally enjoy using the Analysis of Equity method to determine specific amounts needed when compiling the consolidated financial statements of a group.

The following is the basic format of the  Analysis of Equity:

    Parent 70% 30%
Analysis of Equity of Subsidiary Total At-acquisition Since-acquisition Non-Controlling Interest
At-acquisition        
Share capital      
Retained Earnings      
Total equity (net assets)     ­-  
Goodwill/ Gain on bargain purchase A    
Consideration +

Non-Controlling Interest

    ­- B
 
Since-acquisition        
From the date of acquisition until the beginning of the current period        
Retained earnings (@-TB)   H C
Current period        
Profit for the year   F D
Dividends paid   G E
 
Total   J I

 

When compiling the Consolidated Financial Statements of a group, the following principle is extremely important to apply, thereafter the above amounts marked with the letters A-J will be used to adjust the amounts accordingly so that the correct amounts are disclosed in the Consolidated Financial Statements :

100%P + 100%S

Conceptual Framework 1989 and 2010

Basic and only the key definitions I have learned contained in the following two frameworks:
(Please note that my own application of the definitions are not given, but rather the exact way in which the Framework states it, as I have studied it)

The objective of general purpose financial reporting
To provide financial information about the reporting entity that is useful to existing and potential investors, lenders and other creditors in making decisions about providing resources to the entity. Those decisions involve buying, selling or holding equity and debt instruments, and providing or settling loans and other forms of credit.
This objective of general purpose financial reporting forms the foundation of the Conceptual Framework.


1989:

Underlying assumptions
Accrual basis
The effects of transactions and other events are recognised when they occur (and not as cash or its equivalent is received or paid) and they are recorded in the accounting records and reported in the financial statements of the periods to which they relate.

Going concern
The financial statements are normally prepared on the assumption that an entity is a going concern and will continue in operation for the foreseeable future. It is assumed that the entity has neither the intention nor the need to liquidate or curtail materially the scale of its operations.

Qualitative characteristics
Understandability
An essential quality of the information provided in financial statements is that it is readily understandable by users.  For this purpose, users are assumed to have a reasonable knowledge of business and economic activities and accounting and a willingness to study the information with reasonable diligence. Information about complex matters that should be included in the financial statements because of its relevance to the economic decision-making needs of users should not be excluded merely on the grounds that it may be too difficult for certain users to understand.

Relevance
Information must be relevant to the decision-making needs of users. Information is deemed relevant if it influences the economic decisions of users by helping them evaluate past, present or future events or confirming, or correcting, their past evaluations. Relevant information also has predictive or confirmative value. Relevance depends on the materiality of the information. Information is material if its omission or misstatement could influence the economic decisions of users taken on the basis of the financial statements. Materiality depends on the size of the item or error judged in the particular circumstances of its omission or misstatement.

Reliability
Information is reliable when it is free from material error and bias and can be depended upon by users to be represented faithfully.

Financial statements are at risk of being less faithfully represented than what it purports to portray.  This is not due to bias, but rather to inherent difficulties either in identifying the transactions and other events to be measured or in devising and applying measurement and presentation techniques that can convey messages that correspond with those transactions and events.

Substance over form principle portraits that information about transactions are presented in accordance with their substance and economic reality and not merely their legal form.

Financial statements must be free from bias, thus, neutral. They are not neutral if, by the selection or presentation of information, they influence the making of a decision or judgement in order to achieve a predetermined result or outcome.

Financial Statements must also be prepared in a prudent manner. Prudence is the inclusion of a degree of caution in the exercise of the judgements needed in making the estimates required under conditions of uncertainty, such that assets or income are not overstated and liabilities or expenses are not understated.

To be reliable, the information in financial statements must be complete within the bounds of materiality and cost.

Comparability
Users must be able to compare the financial statements of an entity through time in order to identify trends in its financial position and performance, as well as to be able to compare the financial statements of an entity with its competitors.

Constraints presenting relevant and reliable information:
Timeliness
Undue delay in the reporting of information may cause that the information can lose its relevance. To provide information on a timely basis it may often be necessary to report before all aspects of a transaction or other events are known, thus impairing reliability.  Conversely, if reporting is delayed until all aspects are known, the information may be highly reliable but of little use to users who have had to make decisions in the interim. A balance between reliability and relevance is needed, therefore the overriding consideration is how best to satisfy the economic decision-making needs of users.

The balance between benefit and cost
The benefits derived from information should exceed the cost of providing it.  This evaluation is substantially a judgemental process.

The balance between qualitative characteristics
The aim is to achieve an appropriate balance among the characteristics in order to meet the objective of financial statements.

True and fair view/fair presentation
The application of the principal qualitative characteristics and of appropriate accounting standards normally results in financial statements that convey what is generally understood as a true and fair view of, or as presenting fairly such information.


2010

Below, only the information that differs from the already stated above information is set out and those differing the most are marked in red.

Underlying consumption
Going concern
(See 1989 Framework)
(The Accrual basis like in the 1989 Framework is not listed here under the underlying assumptions)

Fundamental qualitative characteristics

Relevance
(See 1989 Framework)

Faithful Representation
According to this standard, financial reports represent economic phenomena in words and numbers. To be useful, financial information must not only represent relevant phenomena, but it must also faithfully represent the phenomena that it purports to represent. To be a perfectly faithful representation, a depiction would have three characteristics. It would be complete, neutral and free from error. Of course, perfection is seldom, if ever, achievable. The Board’s objective is to maximise those qualities to the extent possible.

A complete depiction includes all information necessary for a user to understand the phenomenon being depicted, including all necessary descriptions and explanations.

A neutral depiction is without bias in the selection or presentation of financial information. A neutral depiction is not slanted, weighted, emphasised, de-emphasised or otherwise manipulated to increase the probability that financial information will be received favourably or unfavourably by users.

Free from error means there are no errors or omissions in the description of the phenomenon, and the process used to produce the reported information has been selected and applied with no errors in the process. In this context, free from error does not mean perfectly accurate in all respects.

Enhancing qualitative characteristics

Comparability
Comparability is the qualitative characteristic that enables users to identify and understand similarities in, and differences among, items.

Verifiability
Verifiability helps assure users that information faithfully represents the economic phenomena it purports to represent. Verifiability means that different knowledgeable and independent observers could reach consensus, although not necessarily complete agreement, that a particular depiction is a faithful representation.

Timeliness
(See 1989 Framework)

Understandability
(See 1989 Framework)

 

 

 

 

 

Elements of the financial statements
(identical in both editions of the Framework)

Financial position

  • An asset is a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity.
  • A liability is a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits
  • Equity is the residual interest in the assets of the entity after deducting all its liabilities.

Performance

  • Income is increased in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants.
  • Expenses are decreases in economic benefits during the accounting period in the form of outflows or depletions of assets or incurrences of liabilities that result in decreases in equity, other than those relating to distributions to equity participants.

IAS 10: Events After Reporting Period

IAS 10 is covered in FRK100, therefore, the following work is assumed knowledge and my reflection on what I have learned is a revision of 2017.

What I have learned:

The definition according to paragraph 3 in the Standard for events after reporting period is as follows:

Events after the reporting period are those events, favourable and unfavourable, that occur between the end of the reporting period and the date when the financial statements are authorised for issue. Two types of events can be identified:

(a) those that provide evidence of conditions that existed at the end of the reporting period (adjusting events after the reporting period); and

(b) those that are indicative of conditions that arose after the reporting period (non-adjusting events after the reporting period).

Important notes that I have gotten from this standard:

  1. During the time between the end of a company’s financial year-end and the date when the financial statements are authorised for the issue, the company does not stop with its activities and operations, therefore, transactions can arise in this time. This Standard leads us to account for these transactions in a specific way.
  2. An adjusting event is for example when a debtor is declared insolvent (the event) during the time from a company’s financial year-end and the date when the financial statements are authorised for issue. This means that at the reporting date (financial year end) of the company, the condition (warning/indicator of the event) that the debtor was going to become insolvent or battling to pay debts, was evident. The financial statements relating to that specific year shall be adjusted accordingly even after the reporting date because it is deemed an adjusting event.
  3. A non-adjusting event is for example when a company receives a penalty from a court case decision (the event) for a particular reason during the time from a company’s financial year-end and the date when the financial statements are authorised for issue. If the entity was only sued (condition) after the reporting period then it is an event that is indicative that the condition arose after the reporting period. The financial statements for the current year shall not be adjusted. A note to disclose this event and condition is required by this Standard so that users can still make effective economic decisions and so that the financial statements are still faithfully represented.

#008 Google Classroom Assignment

Model Financial Statements – Referencing International Accounting Standards (IAS) and International Financial Reporting Standards (IFRS)

 

 

SAA Case – Blog

A potential reason for the delay of the release of the annual report of South African Airways (SAA) for the year ended 31 March 2017, in terms of going concern:

The reasons for the long delay in releasing their annual report for the year ended 31 March 2017, is the major liquidity problems that South African Airways (SAA) face. The SOE is currently R13.8bn in debt with a predicted loss of R4bn by the end of March 2018.

Part of why there are still liquidity problems in the SAA is that Treasury has denied allowing state own entities to continue to seek financial support. Because it is there own responsibility to become financially viable, SAA does not have so much support form the state anymore as in previous years (there primary source of finance has denied helping them). Thus, they don’t receive equity anymore. It has been reported that the financial support SAA required from Treasury, would’ve helped them remain a going concern. So without there financial support, SAA struggles to get equity elsewhere in order to stay a going concern, prolonging the release of the annual report.

Because SAA is still in the process of merging with equity participants, such as Mango and SA Express, they never had equity participants to receive equity from in the first place when economic circumstances were taking a dip in South Africa and the state started denying them financial support. Without equity participants to provide SAA with the necessary equity to settle its debt, SAA will be liquidated and will not remain a going concern.

On the date when SAA does release there annual financial reports, their reputation will decline as this SOE reveals to the public that they were unable to strengthen their balance sheet. SAA will lose more investments as investors and other stakeholders leave the company in fear of losing more of there money. Public trust will be lost when SAA is no longer seen as a going concern, so by prolonging the actual release of their annual report and keeping the terrible news about the company’s financial problems as secret as possible, SAA softens the hit they expect to get.

More potential reasons for the prolonging release of their annual report is corrupt and inefficient leadership. By not managing the finances in an ethical way or identifying problems earlier through trustworthy auditors, financial problems arise, putting the state owned entity at risk of not being a going concern.