Venue dec 2011

Q4: Venue enters into a contract with a customer to provide computers at a value of $1 million. The terms are that payment is due one month after the sale of the goods. On the basis of experience with other contractors with similar characteristics, Venue considers that there is a 5% risk that the customer will not pay the amount due after the goods have been delivered and the property transferred. Venue subsequently felt that the financial condition of the customer has deteriorated and that the trade receivable is further impaired by $100,000. Solution: Under IAS 18, revenue would be recognised of $1 million and a trade receivable of the same amount set up. The debt would be assessed periodically for impairment and, in this case, it would be deemed to be impaired by $100,000. The 5% risk of not paying does not create a receivables expense as it is the risk of not paying the entire balance and hence is insignificant. If the scenario had been that 5% of the revenue was uncollectable in this instance a receivables expense of $50,000 would be required. This impairment would be recognised as an expense rather than a reduction in revenue. However, if credit risk were taken into account in assessing revenue to be recognised, the transaction price would be reduced to $950,000. Revenue and a receivable would be recognised of this amount. The impairment of $100,000 would be recognised as an expense and not as a reduction in revenue.