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Treatment of Purchase and sales contracts

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA SBR Exams › Treatment of Purchase and sales contracts

  • This topic has 1 reply, 2 voices, and was last updated 8 years ago by P2-D2.
Viewing 2 posts - 1 through 2 (of 2 total)
  • Author
    Posts
  • May 13, 2017 at 6:43 pm #386107
    satheesh90
    Member
    • Topics: 36
    • Replies: 25
    • ☆☆

    I got confused about the below transaction is being treated in the BPP rivision kit:-

    Transaction:-

    Electron buys and sells oil and currently has a number of oil trading contracts. The contracts to purchase oil are treated as non-current assets and amortised over the contracts’ durations. On acceptance of a contract to sell oil, fifty per cent of the contract price is recognised immediately with the balance being recognised over the remaining life of the contract. The contracts always result in the delivery of the commodity.

    Relevant portion of solution :-

    The first point to note is that the contracts always result in the delivery of the commodity. They are therefore correctly treated as normal sale and purchase contracts, not financial instruments. The adoption of a policy of deferring recognising revenue and costs is appropriate in general terms because of the duration of the contracts. Over the life of the contracts, costs and revenues are equally matched. However, there is a mismatch between costs and revenues in the early stages of the contracts. In the first year of the contract, 50% of revenues are recognised immediately. However, costs, in the form of amortisation, are recognised evenly over the duration of the contract. This means that in the first year, a higher proportion of the revenue is matched against a smaller proportion of the costs. It could also be argued that revenue is inflated in the first year. IFRS

    My confusion :- The solution ratifies that the treatment of the purchase contract is Non current asset and it should be dealt as per IAS 36. But it is not at all mentioning this aspect . The purchase contract is not IAS 36 ??? If not what type of Non current asset it is ?

    May 16, 2017 at 10:27 am #386407
    P2-D2
    Keymaster
    • Topics: 4
    • Replies: 7163
    • ☆☆☆☆☆

    Hi,

    Are you sure it mentions IAS 36? I don’t believe that it does.

    Thanks

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