AYB200 Lecture 11: Lecture 11

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4 Jun 2018

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Lecture 11: Income & Expenses

Income, Expenses and Matching

AASB Framework (para 70a) defines income as: ieases i eooi eefits duig the

accounting period in the form of inflows or enhancements of assets or decreases in liabilities that

result i a iease i euit, othe tha those elatig to otiutios fo euit pates

2 Categories of Income

- Revenue (AASB Framework para 74):

o aises i the ouse of odia atiities of a etit ad is efeed to  a aiet

of different names iludig sales, fees, iteest, diideds, oalties ad et.

- Gains represent (AASB Framework paras 75 & 76):

o othe ites that eet the defiitio of ioe ad a, o a ot, aise i the

ouse of the odia atiities of a etit e.g. disposal of non-current assets,

unrealised gains)

Income – revenue or income?

- INCOME – REVENUE OR GAINS?

• Professional judgment involved in differentiating

What is a odia atiit fo oe usiess a ot e odia fo aothe—so the benefits

might be deeed eeue i oe etit ad a gai i aothe

• Gains represent increases in economic benefits and as such are not different in nature

from revenue.

• Gains are usually displayed separately in income statement when recognised

Knowledge of them is useful in making economic decisions

• Gains are often reported net of related expenses.

• Classification as revenue or gain does not affect reported profit

- Income Recognition

• Recognition of income: AASB Framework paras 92 – 93

• Recognised in income statement when:

a iease i futue eooi eefits elated to a iease i a asset o a deease

of a liailit has aise that a e easued elial (i.e. occurs simultaneously with

recognition of increases in assets or decreases in liabilities)

• Procedures for recognising income:

Revenue should be EARNED

‘estit eogitio to those ites that a e easued elial ad hae a

suffiiet degee of etait

Accounting for Income

- DR Asset (increase e.g. cash, accounts receivable) or Liability (decrease)

- CR Income (revenue)

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Expenses

- Expense is a PERFORMANCE measure

- AASB Framework (para 70 (b)) defines expenses as:

deeases i eooi eefits duig the aoutig peiod i the fo of

outflows or depletions of assets or incurrence of liabilities that result in decreases in

euit, othe tha those elatig to distiutios to euit patiipats

- Iludes losses, as ell as those epeses that aise i the ouse of the odia

atiities of the etit AA“B Faeok paa 

- Expenses from course of ordinary activities:

e.g. ost of sales, ages, depeiatio outflo o depletio of assets suh as ash,

ash euialets, ieto, popet, plat ad euipet AA“B Faeok paa

78)

Expenses and Losses

- Losses: othe ites that eet defiitio of epeses.

- May (or may not) arise in course of ordinary activities

- They are a decrease in economic benefits

- Examples of losses: Disasters (fire, floods etc.), disposal of non-current assets.

- May be unrealised (e.g. effect of changes in foreign exchange rates)

- Often reported net of related income

- Displayed separately if useful knowledge for decision making

Expense Recognition

- Recognition of expenses (AASB Framework paras 94 – 98):

he a deease i futue eooi eefits elated to a deease i a asset o a

iease of a liailit has aise that a e easued elial

- Occurs simultaneously with recognition of increase in liabilities or decrease in assets

- Recognised in direct association with earning of income (matching of costs with

revenues)

- If expenses spread over more than one period, recognise them systematically over time

Accounting for Expenses

- DR Expense

- CR Asset (decrease) or liability (increase)

Matching Income and Expenses

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Journal Entries

Financial Statements

Othe opehesie ioe

- AASB 101 Para 7

o othe opehesie ioe opises ites of ioe ad epese that ae

ot eogized i pofit o loss as euied  othe AA“

- Additional and material items: up to the company -> can provide as many lines as they

want

The need for change

- Why change the standard?

o Remove inconsistencies and weaknesses in existing revenue requirements

(between standards and the Conceptual Framework)

o Provide a more robust framework

o Improve comparability of revenue recognition practices

o Provide more useful information to users

o Simplify preparation of financial statements

- What does it mean for business? (Implications)

o There will be more judgement for disclosure

o Compensation and bonus plans – changes in timing of revenue recognition may

affect these

o Contracts. Existing terms could take on a new meaning

o Technology. Businesses may have to update current software to capture new

information

o Tax implications: timing of cash payments may be affected, e.g. if recognizing

revenue sooner than in the past

o Investor relations: stakeholders will want to know how the new standard will

hage the opas fiaial pitue

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Document Summary

Revenue (aasb framework para 74): (cid:862)a(cid:396)ises i(cid:374) the (cid:272)ou(cid:396)se of o(cid:396)di(cid:374)a(cid:396)(cid:455) a(cid:272)ti(cid:448)ities of a(cid:374) e(cid:374)tit(cid:455) a(cid:374)d is (cid:396)efe(cid:396)(cid:396)ed to (cid:271)(cid:455) a (cid:448)a(cid:396)iet(cid:455) of different names i(cid:374)(cid:272)ludi(cid:374)g sales, fees, i(cid:374)te(cid:396)est, di(cid:448)ide(cid:374)ds, (cid:396)o(cid:455)alties a(cid:374)d (cid:396)e(cid:374)t(cid:863). Income revenue or gains: professional judgment involved in differentiating. Knowledge of them is useful in making economic decisions: gains are often reported net of related expenses, classification as revenue or gain does not affect reported profit. Est(cid:396)i(cid:272)t (cid:396)e(cid:272)og(cid:374)itio(cid:374) to (cid:862)those ite(cid:373)s that (cid:272)a(cid:374) (cid:271)e (cid:373)easu(cid:396)ed (cid:396)elia(cid:271)l(cid:455) a(cid:374)d ha(cid:448)e a suffi(cid:272)ie(cid:374)t deg(cid:396)ee of (cid:272)e(cid:396)tai(cid:374)t(cid:455)(cid:863) Dr asset (increase e. g. cash, accounts receivable) or liability (decrease) I(cid:374)(cid:272)ludes (cid:862)losses(cid:863), as (cid:449)ell as (cid:862)those e(cid:454)pe(cid:374)ses that a(cid:396)ise i(cid:374) the (cid:272)ou(cid:396)se of the o(cid:396)di(cid:374)a(cid:396)(cid:455) a(cid:272)ti(cid:448)ities of the e(cid:374)tit(cid:455)(cid:863) (cid:894)aa b f(cid:396)a(cid:373)e(cid:449)o(cid:396)k pa(cid:396)a (cid:1011)(cid:1012)(cid:895) Expenses from course of ordinary activities: (cid:862)e. g. (cid:272)ost of sales, (cid:449)ages, dep(cid:396)e(cid:272)iatio(cid:374) (cid:894)outflo(cid:449) o(cid:396) depletio(cid:374) of assets su(cid:272)h as (cid:272)ash, (cid:272)ash e(cid:395)ui(cid:448)ale(cid:374)ts, i(cid:374)(cid:448)e(cid:374)to(cid:396)(cid:455), p(cid:396)ope(cid:396)t(cid:455), pla(cid:374)t a(cid:374)d e(cid:395)uip(cid:373)e(cid:374)t(cid:863) (cid:894)aa b f(cid:396)a(cid:373)e(cid:449)o(cid:396)k pa(cid:396)a. Losses: (cid:862)othe(cid:396) ite(cid:373)s(cid:863) that (cid:373)eet defi(cid:374)itio(cid:374) of e(cid:454)pe(cid:374)ses.

Related Questions

Identify two categories of revenue for Panera Bread from the table in the article Revenue Recognition: Key differences between U.S. GAAP and IFRSs. Compare and contrast the companyâs current U.S. GAAP revenue recognition with the potential adoption of IFRS. Provide the IASB Framework or the IAS statement, the changes in revenue recognition as well as potential challenges the company may face in adoption.

Table:

Subject	U.S. GAAP	IFRSs
Concept/objective	realized or realizable and earned.	According to paragraph 83 of the IASB's Framework for the Preparation and Presentation of Financial Statements, revenue is recognized when (1) "it is probable that any future economic benefit" will flow to the entity and (2) such a benefit can be measured reliably. Further, paragraph 93 of the IASB Framework indicates that revenue normally must be earned before it can be recognized.
Definition of revenue	Paragraph 78 of FASB Concepts Statement No. 6, Elements of Financial Statements, defines revenue as "inflows or other enhancements of assets of an entity or settlements of its liabilities (or a combination of both) from delivering or producing goods, rendering services, or other activities that constitute the entity's ongoing major or central operations."	Paragraph 74 of the IASB Framework states, "The definition of income encompasses both revenue and gains. Revenue arises in the course of the ordinary activities of an entity and is referred to by a variety of different names including sales, fees, interest, dividends, royalties and rent." Paragraph 7 of IAS 18 defines revenue as "the gross inflow of economic benefits during the period arising in the course of the ordinary activities of an entity when those inflows result in increases in equity, other than increases relating to contributions from equity participants."
Sale of goods or products	SAB Topic 13 indicates that revenue from the sale of goods or products should not be recognized until it is earned and realized, or realizable. Revenue is generally earned and realized, or realizable, when all of the following conditions have been satisfied: There is persuasive evidence of an arrangement. Delivery has occurred (e.g., an exchange has taken place). The sales price is fixed or determinable. Collectibility is reasonably assured. In addition, ASC 605-15 provides guidance on product transactions that include a right of return. Further, various industry- and transaction-specific guidance is provided in other U.S. GAAP.	Under paragraph 14 of IAS 18, revenue from the sale of goods is recognized if all of the following conditions are met: The "entity has transferred to the buyer the significant risks and rewards of ownership of the goods." The "entity retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold." The "amount of revenue can be measured reliably." "[I]t is probable that the economic benefits associated with the transaction will flow to the entity." The "costs incurred or to be incurred in respect of the transaction can be measured reliably."
Rendering services	>Like revenue from product sales, revenue from service transactions should not be recognized until it is earned and realized, or realizable. Revenue is generally earned and realized, or realizable, when all of the following conditions have been satisfied: There is persuasive evidence of an arrangement. Service has been rendered. The sales price is fixed or determinable. Collectibility is reasonably assured. Other than the limited guidance in >ASC 605-20, no specific guidance on the rendering of services exists under U.S. GAAP. The appropriate method for recognizing revenue in such transactions depends on the individual transaction but is usually based on the proportional performance as of the balance sheet date.	Paragraph 20 of IAS 18 states, "When the outcome of a transaction involving the rendering of services can be estimated reliably, revenue associated with the transaction shall be recognised by reference to the stage [i.e., percentage] of completion of the transaction at the balance sheet date." Paragraph 20 goes on to list specific conditions for determining whether an outcome of a transaction can be estimated reliably. And subsequent paragraphs provide guidance on determining the stage of completion. Paragraph 26 of IAS 18 states, "When the outcome of the transaction involving the rendering of services cannot be estimated reliably, revenue shall be recognised only to the extent of the expenses recognised that are recoverable."
Software arrangements	ASC 985-605 provides guidance on recognizing revenue in a software arrangement.	There is no specific guidance on software revenue recognition in IFRSs. An entity should apply the provisions of IAS 18 as appropriate.
Construction-type contracts	ASC 605-35 provides guidance on construction-type contracts. ASC 605-35-25-90 indicates that when the percentage-of-completion method is deemed inappropriate (e.g., when dependable estimates cause the outcome to be doubtful), the completed-contract method is preferable. ASC 605-35-25-25 through 25-27, the customer must approve the scope and price of change orders before the related revenue can be recognized.	IAS 11, Construction Contracts, provides guidance on construction-type contracts. Paragraph 32 of IAS 11 indicates that when the percentage-of-completion method is deemed inappropriate (e.g., when the outcome of the contract cannot be estimated reliably), revenue is recognized to the extent that costs have been incurred, provided that the costs are recoverable. Use of the completed-contract method is prohibited under IFRSs. Paragraph 13 of IAS 11 specifies that when it is probable that the customer will approve the scope and price of a change order, the related revenue can be recognized.
Milestone method	ASC 605-28 provides guidance on the application of the milestone method for recognizing revenue in research or development arrangements.	There is no specific guidance in IFRSs on the application of the milestone method for recognizing revenue in research or development arrangements.
Multiple-element arrangements	ASC 605-25 provides guidance on multiple-element revenue arrangements and establishes detailed criteria for determining whether each element may be separately considered for recognition. This guidance does not apply to arrangements or deliverables that are within the scope of other authoritative literature (e.g., ASC 985-605).	Paragraph 13 of IAS 18 indicates that the recognition criteria under IAS 18 are usually applied separately to each transaction unless either of the following conditions applies: "[I]t is necessary to apply the recognition criteria to the separately identifiable components of a single transaction in order to reflect the substance of the transaction." Two or more transactions "are linked in such a way that the commercial effect cannot be understood without reference to the series of transactions as a whole."
Bill-and-hold arrangements	The SEC staff lists specific criteria that must be met for revenue to be recognized in bill-and-hold arrangements before delivery of the product. (Non-SEC entities also use these revenue recognition criteria because no other authoritative guidance in U.S. GAAP addresses the accounting for these transactions.) The criteria restrict revenue recognition to limited circumstances.	Illustrative Examples to IAS 18 list criteria for recognizing revenue under bill-and-hold arrangements before delivery of the product. While the objective for recognizing revenue in bill-and-hold arrangements may be similar to that in U.S. GAAP, the criteria are not the same.
Gross versus net	ASC 605-45 provides guidance on whether to report revenue on the basis of the gross amount billed to the customer (as a principal) or the net amount retained by the company (as an agent).	Paragraph 8 of IAS 18 requires that revenue be reported on a net basis in agency relationships but does not provide specific guidance to consider. Improvements to IFRSs issued in April 2009) provides examples that indicate whether an entity is acting as a principal or as an agent.
Customer loyalty programs	Revenue recognition for customer loyalty programs is not specifically addressed in U.S. GAAP. (The EITF attempted to address this issue but did not reach a consensus.) Although entities account for customer loyalty programs in different ways, such programs are typically accounted for under ASC 605-25 as multiple-element arrangements or under an incremental-cost model.	IFRIC 13 indicates that customer loyalty programs are deemed multiple-element revenue transactions and that the fair value of the consideration received should be allocated between the components of the arrangement.
Rebates, discounts, incentives, and other consideration	ASC 605-50 indicates that consideration given by an entity to its customers is presumed to be a reduction of revenue unless an identifiable benefit whose fair value can be reasonably estimated is received.	Paragraph 10 of IAS 18 states that revenue "is measured at the fair value of the consideration received or receivable taking into account the amount of any trade discounts and volume rebates allowed by the entity." There is no specific guidance on other types of consideration given by an entity to its customers.
Specific industry and other guidance	Certain standards in U.S. GAAP provide specialized guidance on revenue recognition, including guidance that applies to specific industries and transactions.	IFRSs provide no (or limited) revenue recognition guidance that applies to specific industries or transactions.

greyhornet170

Which of the following characteristics may result in theclassification of a liability being changed from current tononcurrent:

a) violation of a subjective acceleration clause

b) violation of a objective acceleration clause

c) a demand provision for payment

d) refiancing after the balance sheet date

Pending litigation would generally be considered:

a) nonmonetary liabilty

b) contingent liability

c) estimated liability

d) current liability

Barrons Co. current ratio is 2:1. Which of the followingtransactions would normally increase Barney's current ratio?

a) purchasing inventory on account

b) borring money by signing a long-term note

c) collecting an account receivable

d) purchasing land for cash

On multiple step income statement, gains or losses on sale ofequipment would be shown

a) before gross profit on sales

b) after gross profit on sales but before income from conitnuingoperations

c) after income from continuing operations but before incomefrom extraordinary items

d) after income before extraordinary items but before netincome

A single step income statement is a format that

a) compares the current years income with last year's income

b) recongnizes subtotals at intermediate stages such as grossmargin

c) combines revenues and gains and subtracts from them expensesand losses, resulting in income from operations

d) reports sales revenue, cost of goods sold, gross margin, andall other expenses

In contrast with a multiple-step income statement, a single stepincome statement does NOT show the amount of

a) income taxes on continuing operations

b) cost of goods sold

c) gross profit

d) earnings per share

The amount of income reported for tax purposes

a) is nomally greater than the net income reported tostockholders

b) must be computed according to GAAP

c) is used to compute earnings per share

d) may differ from the amount of income detemined for financialreporting purposes

Under the general rule of revenue recognition, revenue isrecognized when

a) marketability and market price are assured

b) a contractual agreement exists, and cash collection isassured

c) the earnings process is complete, and a valid promise ofpayment has been received

d) all related expenses have been incurred

Seaworth Company's gross sales in 2014 were 3930000. Assumingsales returns and allowances were 74000 sales discounts were 35000and freight-out was 28000 what were Seaworthy's net sales in2014?

a) 3792000

b) 3821000

c)3856000

d) 3930000

On June 30, 2014 Sonata COmpanys operating facilities inNebraska were detroyed by a flood. The loss of $700000 was notcovered by insurance. Sonata's tax rate for 2014 is 40 percent. InSonatas income statement for the year ended sept 30 2014 this eventshould be reported as an extraordinary loss of

a) 0

b) 280000

c) 420000

d) 700000

In a statement of cash flows, payments to acquire debtinstruments of other entities would typically be classified as cashoutflows for

a) financing activities

b) equity activities

c) operating activities

d) investing activities

A gain on the sale of a plan asset in the ordinary course ofbusiness should be presented in a staement of cash flows preparedusing the indirect method as

a) a cash inflow from investing activities

b) a cash inflow from financing activities

c) a deduction from net income

d) a addition to net income

In a statement of cash flows, proceeds from issuing equityinstruments should be classified as cash inflows from

a) brokerage activities

b) financing activities

c) investing activites

d) operating activities

When preparing a statement of cash flows using the indirectmethod, the amortization of trademarks should be reported as a

a) increase in cash flows from investing activities

b) reduction in cash flows from investing activities

c) increase in cash flows from operating activities

d) reduction in cash flows from operating activites

A loss in the sale of machinery in the ordinary course ofbusiness should be presented in a statement of cash flows( indirectmethod) as

a) an addition to net income

b) a deduction from net income

c) an inflow and outflow of cash

d) an outflow of cash

In preparing a statement of cash flows, which of the followingtransactions would be considered an investing activity?

a) sale of a business segment

b) Issuance of bonds payable at a discount

c) purchase of treasury stock

d) sale of capital stock

In a statement of cash flows (indirect method), depreciation istreated as an adjustment to reported net income becausedepreciation

a) is an inflow of cash to reserve account for assetreplacement

b) reduces the reported net income and involves an inflow ofcash

c) reduces the reported net inome but does not involve anoutflow of cash

d) usually represents a significant portion of operatingexpense

orchidfrog938

You have obtained the following information:

STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR TO 31 DECEMBER

		20X8	20X7
	Note	Draft ($m)	Actual ($m)
Revenue	(1)	645.5	606.5

Other income	(2)	15.6	14.4

Changes in inventories		3.8	(16.4)

Cost of materials		(334.1)	(286.8)

Employee benefits expense		(91.0)	(83.9)

Depreciation	(3)	(29.8)	(23.6)

Other expenses	(4)	(116.3)	(100.6)

Interest income, net	(5)	12.3	(20.9)

Profit before tax		106.0	130.5

Income tax expense		(44.4)	(47.7)

Profit for the year		61.6	82.8

STATEMENT OF FINANCIAL POSITION AT 31 DECEMBER

		20X8	20X7
	Note	Draft ($m)	Actual ($m)
Assets
Non-current assets
Intangible assets	(6)	47.8	40.5
Property, plant and equipment	(7)	124.5	102.5
		172.3	143.0
Current assets
Inventories	(8)	30.3	27.9
Trade receivables		73.1	50.3
Cash and cash equivalents		111.4	86.0
Total assets		387.1	307.2
Equity and liabilities
Equity		5.8	5.8
Share capital		15.3	15.3
Share premium		112.1	80.1
Retained earnings		133.2	101.2
Non-current liabilities
Provisions	(9)	160.1	121.4
Current liabilities
Trade payables		33.5	31.8
Tax		50.4	44.3
Other liabilities		9.9	8.5
Total equity and liabilities		387.1	307.2

Notes

(1) Revenue from business activities:

Revenue from business activities
	20X8 ($M)	20X7 ($M)
Vehicles	588.0	526.0
Parts and accessories	39.6	36.8
Other	17.9	43.7
	645.5	606.5

Other income includes gains on the disposals of tangible assets and income from the reversal of provisions.

Average number of employees:


	20X8 (Draft)	20X7 (Actual)
Wage earners	484	499
Salaried employees	483	477
Apprentices and trainees	36	37
	1,003	1,013

Other expenses include costs for warranties, administration and distribution, maintenance and insurance.

Interest income, net:

	20X8 (Draft ($m)	20X7 (Actual $m)
Interest and similar income	16.8	25.1
Interest and similar expenses	(4.5)	(4.2)
	12.3	20.9

Intangible assets include development costs, also franchises and industrial rights and licenses. During the year, $12.7 million (20X7 - $6.3 million) was spent on developing a new sports model, the Fox.

Property, plant and equipment:

	Land and Buildings	Equipment	Assets under construction	Total
	$m	$m	$m	$m
Cost
1 January 20X8	61.8	212.1	19.0	292.9
Additions	5.0	28.9	9.4	43.3
Disposals	0.0	(4.5)	0.0	(4.5)
Reclassification	3.0	8.9	(11.9)	0.0
31 December 20X8	69.8	245.4	16.5	331.7

Depreciation
Current year	1.9	18.4	0.0	20.3
Accumulated	28.7	178.5	0.0	207.2

Net book value
31 December 20X8	41.1	66.9	16.5	124.5
31 December 20X7	34.9	48.6	19.0	102.5

(8) Inventories comprise:


	20X8 (Draft $m)	20X7 (Draft $m)
Raw materials, consumables and supplies	8.3	7.3
Work-in-progress	6.8	4.8
Finished goods	15.2	15.8
	30.3	27.9

(9) Provisions mainly cover manufacturing warranty, product liability and litigation risks. Also, provisions have been established for deferred maintenance and IT reorganization.

The following additional information is available:

(i) Pavia has achieved record sales in 20X8 with the delivery of 10,153 vehicles (20X7 â 7,642 vehicles).

(ii) Although some sales are direct to individual customers the majority are ordered through dealers who take new vehicles on consignment.

(iii) Since 1 January 20X8 Pavia has offered 0% finance for three years on new vehicle sales in its most competitive markets.

(iv) The launch of the Fox has been postponed from late 20X8 to early 20X9 as internal trials have revealed that the doors are not sufficiently secure at high speeds.

(v) A car part required for the Cipeta model is bought-in exclusively from an overseas manufacturer. Deliveries of supplies have been unpredictable in 20X7 causing disruption to the Cipeta model assembly schedules.

1. Evaluate how you might use analytical procedures to provide audit evidence and reduce the level of detailed substantive procedures.

N.B these are pointers are for this question:

Analytical Procedures - Examples: o Receivables - Receivables - Compare gross margin % with previous years (by product line). (Possible misstatement â Over/understatement of sales and accounts receivable). This analytics will reduce the detailed substantive procedure because we have identified that there may be a possible over/understatement of sales so now we need to perform additional audit procedures on sales/revenue. For example by selecting a sample of invoices generated throughout the year and comparing to the General Ledger to ensure completeness and accuracy. Note: Use the information in the case to calculate the analytical procedures you have identified. Also, explain how the analytical procedures will provide audit evidence and help to reduce the level of detailed substantive procedures.

AYB200 Lecture 11: Lecture 11

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