1a. As per the case which is provided in the assessment, the management of Dynamics in order to improve the overall sales of the business launched a promotion campaign which included maintenance services. Due to such a campaign, the sales revenue of the business has increased and the same is recognized as revenue for $ 4.4 million.
As per the provisions of IFRS 15, revenue of a business should be recognized on the basis of a five-step model. The first step is identifying the contract which can be a single contract, combined contract which consist of two or more contracts. The contract can also be segmented in two or more contracts for revenue recognition purpose (Tong 2014). The second step is to identify the performance obligation between the party and the performance obligation of a contact should be distinct. The third step is determination of transaction price which is the consideration for the promised goods or services provided by the business. The fourth step is allocation of transaction price to different contract in case multiple performance obligation can be identified by the business (Voulgaris, Stathopoulos and Walker 2014). In such a case, the transaction price for each of the contract should be allocated accordingly to each performance obligation of the business and the same is to be done on the basis of relative stand-alone selling prices (Tsalavoutas and Dionysiou 2014). The last step involves recognition of revenue and the same is done when the performance obligation for the contract is fulfilled.
In the case, the business of Dynamics ltd has sold goods in bulk with an offer of maintenance services which is provided for 3 months while the contract is for 2 years ands therefore the revenue for 3 months period will be recognized immediately which is $ 0.05 million while the remainder of the amount is treated as deferred revenue of the business. The sales which is made by the business must be recognized immediately in the financial statements as per the requirement of IFRS 15. The journal entry for the deferred revenue of the business and the associated calculation for the same is shown below:
$m
Sale of goods ($5m x 80%) 4
Sale of services (3/24 x $0.5m x 80%) 0.05
Revenue to be recognised in year ended 31 December 2017 4.05
Deferred income should be measured at $0.35m (21/24 x $0.5m X 80%)
Revenue (retained earnings should therefore be reduced by $0.35m.
$m $m
Dr. Retained earnings 0.35
Cr. Deferred Income (CL and NCL) 0.35
The above calculation shows that the deferred revenue of the business and the same has been recognised in the current year financial statement which would affect the total revenue of the business and also the profitability of the business (Holzmann and Munter 2015). After adjustment is made, the deferred revenue would be shown in the balance sheet and would be considered as revenue of the business for next year. The revenue of the business would decrease slightly after adjustment in the income statement of the business.
1b. As per the case which is provided in the assessment, the business of Dynamics ltd purchased a customer list from one of the liquidators of the business. The final price which was paid was around $ 21 million and the same is based on the useful life of three years.
As per the provisions of IAS 38, an asset is to be recognized irrespective of whether the same is created or purchased only if it is probable that the future economic benefits of the assets would flow to the entity in future periods and the cost of the assets can be measured reliably. The customer list which is purchased by the business satisfies the criteria specified by IAS 38 and thee same can be considered to be an intangible asset as it is identifiable, non-monetary in nature and does not have a physical existence (Iasplus.com. 2018). The customer list should be capitalized at costs for $ 21 million and is also required to be amortized over the useful life of the asset which is 3 years. The management has further tried to extend the useful life of the assets by purchasing components from other businesses which cannot be considered a part of the purchased assets as this is internally created by the management (Dinh et al. 2015). Therefore, it can be said that the useful life of the customer acquired from liquidator would remain at 3 years and the new additions would be considered as a part of the newly generated intangible assets of the business and therefore should not be capitalized. The computation for amortization on intangible assets and respective journal entry for the same is shown below:
$21m/3 x 10/12 months = $5.8m
$m $m
Dr. Retained earnings 5.8
Cr. Intangible assets 5.8
The carrying amount after deducting amortization should be carried forward. The customer list of the management should be continued to be measured at historical costs as no appropriate measure of the fair value of the business is not available to the business (Vetoshkina and Tukhvatullin 2014). Therefore, the management needs to stick with the choice of accounting policy of measuring the customer list with historical costs and any amendments made in the policy might affect the gearing and returned on capital employed ratios of the business. The amortization expenses of $ 5.8 million would be shown in the income statement of the business while the carrying amount of the customer list will be shown in the balance sheet of the business.
The main purpose of this part is to understand the role and importance of the conceptual framework which a business follows for the purpose of reporting financial information in the annual reports of the business. The conceptual framework in accounting are set of rules and guidelines which the accountants should follow while framing the financial statements of a business and reporting about various requirements of a business (Macve 2015). The role of conceptual framework in the overall accounting process is discussed briefly in the discussion part.
The accounting process is a systematic process which presents financial information and performance of a business in front of the users. For such purpose professionals are required to follow a reporting framework which systematically classifies material information of the business and the present the same in such a way that they are easily interpretable. The conceptual framework which is established by IASB provides such a framework to businesses for the purpose of reporting significant financial information. The primary purpose of the conceptual framework is to provide the IASB with a framework on the basis of which new accounting standards can be developed as per the requirements of reporting and the same is also used by accountants as guideline for preparing the annual reports of a business (Zhang and Andrew 2014). In addition to this, conceptual framework is also useful for developing an understanding as to what is portrayed in the annual report of the business and take appropriate decisions on the basis of the information which is shown in the annual report of the business.
The conceptual framework of a business contributes to the setting process of accounting standards which are main foundation of the reporting of financial information. Therefore, it is valid point that if a business can appropriately follow conceptual framework all current issues in accounting process will get sorted. The mission of the accounting boards is to develop an appropriate accounting standard which contributes to transparency and better presentation of financial information and such is made possible with the help of conceptual framework of a business. In time to time basis, the IASB bring about amendment in the conceptual framework of the business with a view making improvement in the reporting process of the business. Some of the recent upgrades which have brought about in the reporting framework of a business is related to various concepts of measurements and basis on which measurement is done in the reporting framework of a business.
Conceptual Framework plays a vital role in accounting as it is the basis on which financial reports are prepared by accounting professionals. The main utility of conceptual framework for the users is that it helps them to understand and interpret the financial information and then take decisions regarding investment (Lewandowski 2016). In addition to this, conceptual framework helps in promotion of harmonization principle for accounting standards. In addition to this, the conceptual framework is developed in such a way that it can bring about consistency in the reporting of financial information around the world. This would greatly benefit the accounting professionals for following a unified approach in reporting of financial information of a business.
The conceptual framework of a business was developed with a view point of helping the users, investors and board of directors of the company in taking vital decisions for the business. The conceptual framework presents the financial information in such a way that the users of the annual reports can easily understand the reporting process (O’Riordan and Fairbrass 2014). The conceptual framework of a business also takes into consideration the qualitative characteristics of financial statement which is further classified as fundamental characteristics and enhancing characteristics. Some of the characteristics which are identified are stated below in details:
Thus, the above discussion shows that conceptual framework in accounting process requires businesses to follow the above characteristics. The conceptual framework of a business helps in bring about consistency and transparency in the reporting process.
Conclusion
The above analysis shows that conceptual framework in accounting is very important for the purpose of enhancing the value of the financial statements but also for the purpose of helping the users of the financial statement to effectively understand the financial information and determine the performance of the business. The conceptual framework also brings about a consistency in the reporting process and also plays a vital role in standard setting process of IASB. Therefore, it can be said that the conceptual framework in financial reporting process can effectively solve all current issues in accounting and further enhance the creditability of the financial statements.
Reference
Bauer, A.M., O’Brien, P.C. and Saeed, U., 2014. Reliability makes accounting relevant: a comment on the IASB Conceptual Framework project. Accounting in Europe, 11(2), pp.211-217.
Dinh, T., Eierle, B., Schultze, W. and Steeger, L., 2015. Research and development, uncertainty, and analysts’ forecasts: The case of IAS 38. Journal of International Financial Management & Accounting, 26(3), pp.257-293.
Holzmann, O.J. and Munter, P., 2015. Challenges in Achieving Convergence Between US GAAP and IFRS—The Case of the Revenue Recognition Standard. Journal of Corporate Accounting & Finance, 26(6), pp.101-106.
Iasplus.com. (2018). IAS 38 — Intangible Assets. [online] Available at: https://www.iasplus.com/en/standards/ias/ias38 [Accessed 23 Nov. 2018].
Lewandowski, M., 2016. Designing the business models for circular economy—Towards the conceptual framework. Sustainability, 8(1), p.43.
Macve, R., 2015. A Conceptual Framework for Financial Accounting and Reporting: Vision, Tool, Or Threat?. Routledge.
O’Riordan, L. and Fairbrass, J., 2014. Managing CSR stakeholder engagement: A new conceptual framework. Journal of Business Ethics, 125(1), pp.121-145.
Tong, T.L., 2014. A Review of IFRS 15 Revenue From Contracts With Customers.
Tsalavoutas, I. and Dionysiou, D., 2014. Value relevance of IFRS mandatory disclosure requirements. Journal of Applied Accounting Research, 15(1), pp.22-42.
Vetoshkina, E.Y. and Tukhvatullin, R.S., 2014. The problem of accounting for the costs incurred after the initial recognition of an intangible asset. Mediterranean Journal of Social Sciences, 5(24), p.52.
Voulgaris, G., Stathopoulos, K. and Walker, M., 2014. IFRS and the use of accounting-based performance measures in executive pay. The International Journal of Accounting, 49(4), pp.479-514.
Zhang, Y. and Andrew, J., 2014. Financialisation and the conceptual framework. Critical perspectives on accounting, 25(1), pp.17-26.
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