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Hi,
In BPP book, question 28 for June 2014 exam, there is this scenario:”Minco often sponsors professional tennis players in an attempt to improve its brand image. At the moment, it has a three-year agreement with a tennis player who is currently ranked in the world’s top ten players. The agreement is that the player receives a signing bonus of $20,000 and earns an annual amount of $50,000, paid at the end of each year for three years, provided that the player has competed in all the specified tournaments for each year. If the player wins a major tournament, she receives a bonus of 20% of the prize money won at the tournament. In return, the player is required to wear advertising logos on tennis apparel, play a specified number of tournaments and attend photo/film sessions for advertising purposes. The different payments are not interrelated.”
THe question treated the bonus 20% as executory contract and the liability is only accrued when the tournament is won. However, why dont we consider this bonus as a contingent liability that will happen due to occurence/non-occurence of future event and disclose the expected amount?
Thanks
Hi,
The executory contract is not within the scope of IAS 37 (https://www.iasplus.com/en-gb/standards/ias/ias37)
Thanks
Hi,
Thank you, totally understand that Exe contract is not under scope of IAS 37. However I was not asking to treat executory contract under IAS 37. I was asking why this bonus is not considered as a contingent liability, as it meets the definition of the contingent liability that will happen due to occurence/non-occurence of future event, and disclose the expected amount. Means I dont treat it as exe contract.
Thanks.
If it is an executory contract then it is not a contingent liability as it is not part of IAS37. Executory contracts are accounted for when the event happens and the duties are performed.
Hi,
Thanks. Then I saw a very similar case in example in BPP book page 562 (textbook) with below case:
“The club capitalises the unconditional amounts (transfer fees) paid to acquire players.
The club proposes to amortise the cost of the transfer fees over ten years instead of the current practice which is to amortise the cost over the duration of the player’s contract. The club has sold most of its valuable players during the current financial year but still has two valuable players under contract.If Seejoy win the national football league, then a further $5 million will be payable to the two players’ former clubs. Seejoy are currently performing very poorly in the league.”
I see that the further 5 million is exactly the same nature as the case in my question but then BPP treated it as contingent liability instead of exe contract. Did I understand anything wrong here?
Regards,
In this instance the duty is being performed during the season as the team is playing every week which forms part of the contract and so the outcome of the contract can be assessed.
In the first example the bonus is only applicable at a point in time, on the playing of every major tournament and so cannot be assessed until the tournament itself.
Thanks
Hi. And how then to account the executory contract? E.g. there is obligation to buy a car for CU2m in 6 months. Shoul we recognise both liability and Receivables in the BS for CU2m?
What if our functional currency is USD? Will there FX difference occure at the reporting date? Reffering this question to Kaplan Test your understanding 18 – Firm commitments in the Derivatives topic.
Regards
MykolaThis question has long disappeared from revision kits and is very old syllabus.
What I can say is that if there is an executory contract to buy a car there will be no double entry until you receive the car. She simply an arrangement to buy a car. Nothing to do with accounting. You cannot recognise or disclose a liability until you have received the asset.
Dear Stephen, isn’t it a contractual obligation (we are obliged to buy a car in line with the contract) wich has arisen in past (yeap, already signed it) and which will cause outflow of economic resources (money) and there is no reasonable way to avoid this.
I’m really lost here why IAS 37 is not applied to the “obligation” part.
You may be required by law to buy the car but that doesn’t mean you can account for it.
If I agree to buy a house I will occupy the house in a month then the seller may well sue me if I don’t occupy- the implications for the accounts are:
– recognise the house on the date of moving in
or
– recognise the provision for the legal claim when it is made against me.Signing a contract is not a past event for accounting purposes – if I sign a contract to sell you some sausages next week I cannot recognise the revenue until the sausages are dispatched to you.
Heh, I really like those Examples and Questions about Sousages, Strawberry during the Exam or preparation. I always start thinking about the food and the blood starts flowing into the stomach 😉
Got the answer. My mistake is I treated signing of a contract as the ‘past accounting event’, which is not so.
Let’s assume yesterday, 24/08/20 was the sousage dispatch date.
1) Should I book:
Cr Cash
Dr Receivablesif I paid you for the sousages on 24/08/20, but those still hasn’t been delivered on 25/08/20?
———-
Let’s assume yesterday, 24/08/20 was the sousage dispatch date.2) Should I book:
Dr Sousages
Cr Payablesif I did receive the tasty sousages from you on 24/08/20, but still haven’t paid for them?
———-
Let’s assume yesterday, 24/08/20 was the sousage dispatch date.2) Should I book:
Dr Receivables
Cr Payablesif no sousages arrived and no payment has been done yet?
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