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Here is the question: (title to this thread contains reference)
Norman has recently started issuing vouchers to customers when they stay in its hotels. The vouchers entitle the customers to a $30 discount on a subsequent room booking within three months of their stay. Historical experience has shown that only one in five vouchers are redeemed by the customer. At the company’s year end of 31 May 2008, it is estimated that there are vouchers worth $20 million which are eligible for discount. The income from room sales for the year is $300 million and Norman is unsure how to report the income from room sales in the financial statements.
Here’s the answer:
Discount vouchers
The treatment of the vouchers is governed by IAS 18 Revenue. The principles of the standard require that(i) The voucher should be accounted for as a separate componentof the sale
(ii) The amount of the proceeds allocated to such vouchers should be measured at fair value.
The vouchers are issued as part of the sale of the room and redeemable against future bookings. The substance of the transaction is that the customer is purchasing both a room and a voucher. This means that revenue should be reported as the amount of consideration received less the fair value of the voucher.
In determining the fair value, the following considerations apply:(i) The value to the holder, not the seller
(ii) The discount the customer obtains
(iii) The percentage of vouchers that will be redeemed
(iv) The time value of money
Vouchers worth $20 million are eligible for discount as at 31 May 20X8. However, based on past experience, it is likely that only one in five vouchers will be redeemed, that is vouchers worth $4 million. Room sales are $300 million, so effectively, the company has made sales worth $(300m + 4m) = $304 million in exchange for $300 million. The proceeds need to be split proportionally, that is the discount of $4 million needs to be allocated between the room sales and the vouchers, as follows:
Room sales:
304/300× $300m = $296.1m
Vouchers (balance) = $3.9m
The $3.9 million attributable to the vouchers is only recognised when the obligations are fulfilled, that is when the vouchers are redeemed.I don’t understand where on earth all these rules are coming from? I don’t understand the written parts to the answer nor do I understand the numbers. It’s so hard!
What’s happening in the scenario and what’s the thing of voucher and room sales differing and then integrating? Please explain to me the rationale behind the scenario and what’s the issue and the numbers too. Thanks!
On a separate issue, here’s the examiner’s report from June 2008 relating to the above question:
The second part of the question required candidates to discuss the treatment of discount vouchers and government grants. The treatment of customer loyalty programmes is the subject of IFRIC 13.The examination will require candidates to have knowledge of certain IFRIC’s to supplement the accounting treatment required by the standard. Candidates performed quite well on this part of the question and applied their knowledge of IAS 18 very well to the cases in point
Is the above still relevant in 2014? I mean do “present day P2 students” also need knowledge of IFRIC’s? Because I think the exam has changed in style a bit and above all, no IFRIC’s are mentioned in the examinable documents for Dec 2014 so are they necessary?
Quotation from the answer!
“Discount vouchers
The treatment of the vouchers is governed by IAS 18 Revenue. The principles of the standard require that …..”That’s where “all these different rules are coming from”
When a voucher-giving supplier issues vouchers with a sale, there are two elements to the sale – in the above situation there is the room element and a voucher element for which the hotel receives 300
the voucher, from experience, is only likely to involve an outflow of 4m so is only worthe 4m whereas the room is 300
but only 300 is received so, proportionately, the room sale is worth 296.1 and the voucher sale is worth 3.9
room sale is recognised immediately whereas voucher sale is recognised on the voucher being cashed in
I think that answers your first post
I too have looked at the syllabus and can only trust the examiner and the ACCA not to ask a question that is not in the syllabus. Of course, it does very occasionally happen but, thankfully, highly infrequently
It’s not in the detailed syllabus – it’s not in the exam! Probably!
Aishaasad, I seem to remember that the discount split is clearly explained within the printed solution. Check it out and, if you’re still not sure, post again
yes Sir you are right its there but i do not get that calculation and logic behind that
Then I’ll need to check the question again
Give me a few hours – in fact, post again and give me time to find the question. If you don’t post I shall look at the thread and think that mine is the last voice and the thread is complete!
The statistical probability of the vouchers being encashed is only 20% of the outstanding vouchers ie only 20% * $20m = $4m
So, on the sale of the room the benefit being given out is $300 for the room + $4 for the voucher.
So to recognise the “correct” value of the room sale per se is 300 / 304 and the voucher is 4 / 304
These fractions are applied to the room sales to give $296.1 and $3.9 respectively
So when a hotel sells a room, that’s only worth $296.1 and only that amount should be recognised as revenue in the year of the room sale.
When a voucher is encashed, then it’s treated as a sale in the year in which it is encashed
I think that that should do it for you but, if not, post again
that mean we are taking total sale 300 and proportionating that and not 304 shouldnt we take 300 now with 4 being recognised when voucher encashed ????
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