MAY 22, 2020
ACS3730 ASSIGNMENT PART 1
FINANCIAL ACCOUNTING C
NIGEL MBOISSA
26987813
Question 1
a)
● Issue: Whether or not the performance obligations are recognised at
the right time and what exactly are these performance obligations.
● Principle: Paragraph 22 of IFRS 15 states that “At contract inception,
an entity shall assess the goods or services in a contract with a
customer and shall identify as a performance obligation each promise
to transfer to the customer either:
-
A good or service (or a bundle of goods or services) that is distinct;
-
A series of goods or services that are substantially the same and that
have the same pattern of transfer to the customer.”
Paragraph 31 of IFRS 15 states “An entity shall recognise revenue
when (or as) the entity satisfies a performance obligation by transferring
a promised good or service (ie an asset) to a customer. An asset is
transferred when (or as) the customer obtains control of that asset.”
Paragraph 35 of IRFRS 15 states “An entity transfers control of a good
or service over time and, therefore, satisfies a performance obligation
and recognises revenue over time, if the following criteria is met:
-
The customer simultaneously receives and consumes the benefits
provided by the entity’s performance as the entity performs.”
● Application: TrojanSA sells a bundle goods and services to their
customers which is distinctly their tracking units (which are generally
sold, but in this special, the tracking units are leased out over the life of
the contract), which come jointly with tracking services (SkyTrojan in
this case) and installation which is in line with paragraph 22 of IFRS 15.
The performance obligations to be carried out by TrojanSA in terms
of this SkyTrojan special are the following:
-
Installation of the tracking units at R200 per installation
-
Location tracking
-
Jamming detection
-
GPS navigation services and,
-
A lease of the tracking unit for the duration of these special
contracts.
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TrojanSA should recognise the present obligations as they are carried
out throughout the life of contract (SkyTrojan special), which would be
supplying tracking devices and installing them as they are provided,
followed by the month to month service included in the SkyTrojan special
which are location tracking, jamming detection, GPS navigation services
and leasing of the tracking unit for the duration of the contract (2 years),
starting from 1 March 2019, which is the date in which the performance
obligations were carried out by TrojanSA over to Pantha Logistics.
● Conclusion: In conclusion we have identified the performance
obligations of TrojanSA in this SkyTrojan special which include location
tracking, jamming detection, GPS navigation services and leasing of
the tracking unit for the duration of the contract and installation of the
tracking units. These performance obligations will be recognised as
soon as they are carried out to the customer.
b)
Memorandum
To: Saint John Peterson (Financial Manager of Pantha Logistics Pty Ltd.)
From: Nigel Mboissa (Accountant at TrojanSA)
Date: 25 February 2019
Subject: Lease of tracking units - Accounting treatment
Accounting treatment of the lease of tracking units from the SkyTrojan special
will be discussed throughout the memorandum, alongside all possible options
in which Pantha can account for the tracking units. It will be thoroughly
discussed in an IPAC (Issue, Principle, Application and Conclusion) format.
● Issue: Whether or not there are options to account for the tracking units
in the SkyTrojan special and how Pantha should account for these
tracking units.
● Principle: Paragraph 22 of IFRS 16 (which addresses recognition for
the lessee) states that “At the commencement date, a lessee shall
recognise a right-of-use asset and a lease liability”. Paragraph 23 of
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IFRS 16 goes on to state that “At the commencement date, a lessee
shall recognise the right-of-use asset at cost” initially and paragraph 26
addresses initial measurement of the lease liability, which states “At the
commencement date, a lessee shall measure the lease liability at the
present value of the lease payments that are not paid at that date. The
lease payments shall be discounted using the interest rate implicit in
the lease, if that rate can be readily determined. If that rate cannot be
readily determined, the lessee shall use the lessee’s incremental
borrowing rate.”. Paragraph 29 of IFRS 16 (subsequent measurement
of right-of use assets) states that “After the commencement date, a
lessee shall measure the right-of-use asset applying a cost model,
unless it applies either of the models described in paragraphs 34 and
35.” (Fair value model and revaluation model). Paragraph 36 of IFRS
16 (subsequent measurement of the lease liability) states that “After the
commencement date, a lessee shall measure the lease liability by:
-
Increasing the carrying amount to reflect interest on the lease
liability
-
Reducing the carrying amount to reflect the lease payments
made; and
-
Remeasuring the carrying amount to reflect any reassessment or
lease modifications, or to reflect revised in-substance fixed lease
payments.”
● Application: The tracking units of the SkyTrojan special, leased out by
TrojanSA can be classified as a right-of-use asset by Pantha Logistics,
and since these tracking units are being leased out to Pantha, they will
have to account/bring rise to a lease liability on 1 March 2019
(commencement date). On the 1st of March 2019, Pantha should
initially measure the right-of-use asset (tracking units) at cost, which
would be at R1750. The lease liability of leasing the tracking units
would be initially measured at the present value of the lease payments
not paid to date, that would then be R700 monthly, multiplied by 24
months. The lease liability payments of R700 monthly would then have
to be discounted by 9.5% (nominal and pre-tax discount rate per
annum). Subsequent measurement of the right-of-use asset is what
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will bring about the options of how Pantha Logistics can account for the
tracking units under this lease, which would be measuring the tracking
units using cost model, fair value model (for right-of-use assets that
meet the definition of IAS 40’s investment property) or revaluation
model (for right-of-use assets that relate to a class of property, plant
and equipment). Subsequent measurement of the lease liability will be
measured by increasing the carrying amount by the financing
component to reflect interest of 9.5% on the lease liability, reducing the
carrying amount of the lease liability by the lease payments made
monthly (R700 per month), and remeasuring the carrying amount to
reflect any reassessment or lease modifications, or to reflect revised insubstance fixed lease payments, which isn’t applicable to Pantha in this
case.
● Conclusion: In conclusion, Pantha Logistics can in fact account for the
tracking units leased out in the SkyTrojan special using the cost, fair
value or revaluation model, these are the options Pantha can consider.
Pantha should record the tracking units as per the rules and regulations
of a lessee as defined in IFRS 16 Leases.
c)
● Issue: Whether or not the rehabilitation costs of TrojanSA’s project
have been recognised and measured in accordance with IAS 37
Provisions, Contingent Liabilities and Contingent Assets.
● Principle: Paragraph 14 of IAS 37 states that “A provision shall be
recognised when:
-
An entity has a present obligation (legal or constructive) as a result of a
past event;
-
It is probable that an outflow of resources embodying economic
benefits will be required to settle the obligation; and
-
A reliable estimate can be made of the amount of the obligation
If these conditions are not met, no provision shall be recognised.”
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Paragraph 36 of IAS 37 states that “The amount recognised as a provision
shall be the best estimate of the expenditure required to settle the present
obligation at the end of the reporting period.”
● Application: The rehabilitation cost of TrojanSA’s project should be
recognised as a provision as it is an obligation (to rehabilitate the
damaged environment), arising from from a past event (TrojanSA’s
project to erect signal towers) which will generate an outflow of
economic benefits (cost of the rehabilitation) that can be reliably
estimated (estimate of R4.5million in rehabilitation costs made by a
professional estimator). The rehabilitation cost is measured at the best
estimate, which would essentially be the amount estimated by the
professional estimator of R4.5 million over TrojanSA’s financial
accountant’s estimate of R3 million.
● Conclusion: TrojanSA’s rehabilitation costs for this specific project can
be recognised as a provision because it meets the recognition criteria
of a provision and is in line paragraph 14 of IAS 37. This provision has
to be measured by the best estimate which is that of the professional
estimator (R4.5 million).
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