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TED Co BPP revision kit page 18

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AAA Exams › TED Co BPP revision kit page 18

  • This topic has 3 replies, 2 voices, and was last updated 6 years ago by Kim Smith.
Viewing 4 posts - 1 through 4 (of 4 total)
  • Author
    Posts
  • January 12, 2019 at 2:02 pm #501058
    lachu910
    Member
    • Topics: 28
    • Replies: 38
    • ☆☆

    Q:- “ln some countries Ted Co’s products are distributed under licences
    which give the licence holder the exclusive right to sell the products in that country. The cost of each licence to thedistributor depends on the estimated sales in the country to which it relates, and licences last for an average of fiveyears. The income which Ted Co receives from the sale of a licence is deferred over the period of the licence. At 31May 2OX5 the total amount of deferred income recognised in Ted Co’s statement of financial position is $18 million”

    For the part relating to “Licence Income audit risk” the ans for deferred income is :

    “This income should be accounted for in line with IFRS 15, and again it may be difficult to determine exactly
    when performance obligations are satisfied. This depends on whether the promise to grant a license
    includes any other promised goods or services, for example whether the software will be updated during the
    period of the licence. If no such goods or services are included, then it may be that performance obligations
    are satisfied at that point in time”
    that means revenue is significantly understated.
    I dnt understand how “other performance obligation under the contract” will determine if the revenue is recognised over time or at a point in time beacuse per IFRS 15 recognition criteria for “over time is “-

    – ‘the customer simultaneously receives and consumes the
    benefits provided by the entity’s performance as the entity
    performs
    – the entity’s performance creates or enhances an asset
    that the customer controls as the asset is created or
    enhanced, or
    – the entity’s performance does not create an asset with an
    alternative use to the entity and the entity has an
    enforceable right to payment for performance completed
    to date

    January 13, 2019 at 9:37 am #501168
    Kim Smith
    Keymaster
    • Topics: 133
    • Replies: 8295
    • ☆☆☆☆☆

    Good question – I want you to set aside the specific details of Ted and consider the following:
    BB receives $10,000 from XX in exchange for which XX is the granted an exclusive right to sell BB’s products in Ruritantia. Over the next 4 years BB will ship goods to XX, which XX will sell and their sales and purchases will be accounted for “normally”. But what about the $10,000? For BB, this is a cost of sale which might, in the absence of any better estimate, be treated as a period expense – i.e. $2,500 each year. Or, suppose XX estimated sales volumes of 1,000 units in year 1 increasing by 1,000 a year each year (i.e. 10,000 over 4 years) – it could expense $1,000 year 1, increasing by $1,000 each year over the 4 years.
    But what does this have to do with BB’s recognition of the $10,000 licence fee? Absolutely nothing … and if BB has NO performance obligations under the licence it must recognise it immediately (at a point in time) as there will be no grounds for deferring it. If, however, under the licence agreement, BB must provide XX, for free, with marketing materials and/or customer support that would normally have to be paid for – BB will have performance obligations. In this case, under IFRS, revenue must be recognised over time (apportioned according to the relative stand-alone prices of the different components of the obligations).
    Does that help?

    January 14, 2019 at 6:45 am #501561
    lachu910
    Member
    • Topics: 28
    • Replies: 38
    • ☆☆

    Ok..got it now..thank you 🙂

    January 14, 2019 at 7:55 am #501601
    Kim Smith
    Keymaster
    • Topics: 133
    • Replies: 8295
    • ☆☆☆☆☆

    You’re very welcome!

  • Author
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Viewing 4 posts - 1 through 4 (of 4 total)
  • The topic ‘TED Co BPP revision kit page 18’ is closed to new replies.

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