Page 29 - CIMA MCS Workbook May 2019 - Day 1 Suggested Solutions

SUGGESTED SOLUTIONS

Right‐of‐use lease obligations are not currently disclosed in Jord’s SOFP, suggesting that it has no
lease obligations.

Entering into right‐of‐use lease agreements in the future may be a way of financing investment in
machinery. If Jord did do this, it would change its capital structure and would introduce an
element of gearing. It is currently an ungeared entity.

Jord has significant PPE balances in its SOFP, including the premises. If finance was required it
could consider entering into a sale and leaseback arrangement, although this may appear to be
quite a significant means of raising finance. Care would need to be exercised to ensure that only
such agreement did not amount to a transaction subject to IFRS 15 relating to satisfaction of a
performance obligation. If this was the case, IFRS 15 would apply and the sale would lead to de‐
recognition of the asset and a gain or loss on disposal recognised in the statement of profit or
loss.

Requirements of IFRS 15 Revenue from contracts from customers
IFRS 15 specifies a ‘five‐step approach’ to recognition of revenue as follows:
1. Identify the contract with the customer
2. Identify the performance obligations in the contract
3. Determine the transaction price
4. Allocate the transaction price between the performance obligations
5. Recognise revenue when a performance obligation is satisfied – either over a period of time
or at a point in time.
Normally, revenue will be recognised over a period of time if specific criteria are complied with.
Otherwise, revenue will be recognised at a point in time, normally when control of the asset (i.e.
the finished house) is transferred to the new owner.

Contracts may also include an element of variable consideration, i.e. an amount which may/may
not be earned depending upon contract performance. For example a bonus may be receivable by
an entity if it completes construction and installation of a house within a specified period of time.
Variable consideration can be recognised only to the extent that it is highly unlikely that there will
be a subsequent reversal of that earlier recognition

Application to Jord
Jord needs to ensure that it complies with IFRS 15. The revenue recognition pattern may be
different to the basis upon which payment is due from the customer. For example, if an initial
deposit is paid by the customer at the time a contract is agreed, arguably, Jord has not done
anything to earn revenue at that point in time, and the amount received should be classified as
deferred income.

Does Jord allocate the total revenue receivable on a contract between different elements of
activity e.g. design services, product sales and fitting/installation? If so, there is an argument for
application of revenue recognition principles to be applied to each separable element if they can
be regarded as separate performance obligations.

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