Page 35 - CIMA MCS Workbook February 2019 - Day 1 Suggested Solutions

SUGGESTED SOLUTIONS

4 allocate the transaction price to the performance obligations
5 recognise revenue when or as a performance obligation is satisfied.

A performance obligation is satisfied over time if one of the following applies:

(a) the customer simultaneously receives and consumes the benefits from the entity’s
performance, or
(b) the entity is creating or enhancing an assets controlled by the customer, or
(c) the entity cannot use the asset for an alternative purpose and it can demand payment for
work performed to date.

If a performance obligation is not satisfied over time, then it is satisfied at a point in time,
normally when the customer takes control of the asset. The following are indications that control
has been transferred to the customer:

(a) the entity has a right to payment
(b) the customer has legal title
(c) the entity has transferred physical possession
(d) the customer has the significant risks and rewards of ownership
(e) the customer has accepted the asset.

Application to Crowncare
Revenue recognition for dental services provided should be relatively straightforward. As a
performance obligation is satisfied (e.g. a specified appointment or course of treatment which
may take more than one appointment), revenue should then be recognised.

Patients are normally expected to pay for dental services received upon completion of a
treatment, for example, dental check and teeth polishing by a dental hygienist, for which there
are standard prices. Similarly, National Dental who provide insurance cover against the cost of
dental care will presumably only pay for work actually done by the dentist.

It may be that patients are charged in advance for services not covered by National Dental, such
as work done by dental laboratories. In this situation, Crowncare should ensure that such receipts
are not classified as revenue, but as a payable due to the laboratory. The costs incurred in
providing a service should be matched against the revenue to which it relates.

Requirements of IAS 20 ‐ Government grants and disclosure of government assistance.
IAS 20 requires that, when grants are received, they are matched against the item to which they
relate in the financial statements. Revenue‐based grants should be matched in the SP&L against
the expense to which it relates. If the grant relates to a capital item, the grant should be matched
against the cost of the asset using either the net basis (offset against the cost, with the net cost
subject to annual depreciation) or the gross basis (treated as deferred income and released to
SP&L over the life of the asset, with the gross cost of the asset subject to annual depreciation).
The receipt of subsidies is a form of government assistance and should be accounted for and
disclosed in a similar way.

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