Module 2:

Presentation, Revenue And

Profit
 What you will learn?

 Presentation of financial statements – IAS 1

 Accounting policies, changes in accounting

estimates, and errors – IAS 8

 Revenue from contracts with customers – IFRS 15

 IAS 1: Presentation of financial statements
General features of financial statements

Fair Materiality and

Going concern Accrual basis aggregation
presentation
FS present fairly FS should be FS other than Each material
financial prepared on cash flow class of similar
position, going concern information items should be
performance basis should be presented
and cash flow of prepared on separately
an entity accrual basis

Frequency of Comparative Consistency of

Offsetting
reporting information presentation
Assets and A complete set Comparative Consistent
liabilities and of FS should be information presentation
income and prepared at should be and classification
expenses should least annually presented for should be
not be offset the preceding retained
period
IAS 1: Presentation of financial statements
Content of financial statements

Statement of Financial Position (SOFP)

Statement of Profit or Loss and Other

Comprehensive Income (SPLOCI)

Financial Statement of Cash Flows (SOCF)

Statements see details in module 6

Statement of Changes in Equity (SOCIE)

Notes to the Financial Statements

IAS 1: Presentation of financial statements
Statement of Financial Position

Assets and liabilities should be

presented: Information should be
current items and non-current disclosed
items

expected to be
Classes of property, plant
realized in normal
and equipment
operating cycle

held for purpose of

Classifications of inventory
trading

expected to be
Current
realized within 1 Types of provision
items
year

unrestricted cash or Details of classes of share

cash equivalent capital

a liability has to be A description of reserves

settled within 1 year within equity
 IAS 1: Presentation of financial statements
Statement of Profit or Loss and Other Comprehensive Income

SPLOCI may be presented as one statement or two

seperate statements

Other comprehensive income

Profit or loss includes
includes

Items of income Revaluation surplus arising on PPE

Remeasurement of defined
Items of expenses pension schemes

Cash flow hedges

Change in fair value of financial

instruments

Exchange differences arising on

translation of foreign subsidiary
 IAS 1: Presentation of financial statements
Statement of Profit or Loss and Other Comprehensive Income
2019 2018
$’000 $’000

Revenue 43,000 26,000

Cost of sales (28,000) (18,000)

Gross profit 15,000 8,000

Other income 2,000

Distribution costs (2,000) (800)

Administrative expenses (4,000) (2,200)

Finance costs (500) (300)

Profit before tax 10,500 4,700

Income tax expense (1,400) (900)

Profit for the year 9,100 3,800

Other comprehensive income

Gain on property revaluation 2,000

Investment in equity instrument 200

Toal comprehensive income for the year 9,300 5,800

 IAS 1: Presentation of financial statements
Statement of Profit or Loss and Other Comprehensive Income

Expenses in profit or loss may be analysed using: “nature of

expense” or “function of expense”

Nature of expense Function of expense

Revenue X Revenue X
Other income X Cost of sales (X)
Change in inventories (X) Gross profit X
Raw materials used (X) Other income X
Employee benefit
(X) Distribution costs (X)
expense
Administrative
Depreciation expense (X) (X)
expenses
Other expense (X) Other expenses (X)
Profit before tax X Profit before tax X
 IAS 1: Presentation of financial statements
Statement of Profit or Loss and Other Comprehensive Income

Items in Other Comprehensive Income

Items can be reclassified Items cannot be reclassified

Share of OCI OCI will not Share of OCI

OCI may be of associate be of associate
reclassified may be reclassified will not be
to profit or reclassified subsequently reclassified
loss to profit or to profit or to profit or
loss loss loss
 IAS 1: Presentation of financial statements
Statement of Profit or Loss and Other Comprehensive Income

Disclosure requirement

Share of profit or loss of

Revenue
associates/joint ventures

Gains/losses on Gains/losses on
derecognition of financial reclassification of financial
assets assets

Finance costs Tax expense

Impairment losses (and Single amount for

reversals) discontinued operations
IAS 1: Presentation of financial statements
Statement of changes in equity (SOCIE)

SOCIE includes

Total comprehensive income for the period

The effects of changes in accounting policies and

corrections of errors recognised in accordance with IAS 8

A reconciliation between the carrying amount at the

beginning and end of the period
 IAS 1: Presentation of financial statements
Statement of changes in equity (SOCIE)

Share Share Retained Revaluatio

Total
capital premium Earnings n surplus
$
$ $ $ $
Balance at 1 January 100,000 250,000 567,000 210,000 1,127,800
20X8
Changes in accounting - - (20,400) - (20,400)
policy
Restated balance at 1 100,000 250,000 547,400 210,000 1,107,400
January 20X8
Dividends - - (40,000) - (40,000)
Total comprehensive - - 76,500 42,000 118,500
income
Balance 31 December 100,000 250,000 583,900 252,000 1,185,900
20X8
Issue of shares 20,000 60,000 - - 80,000
Dividends - (45,000) - (45,000)
Total comprehensive - 82,300 (26,000) 56,300
income
Balance 31 December 120,000 310,000 621,200 226,000 1,277,200
20X9
IAS 1: Presentation of financial statements
Notes to the financial statements

SOCIE should

Present information about the basis of basic of

preparation and accounting policies

Disclose information required by IFRS Standards that is

not disclosed elsewhere

Provide other relevant information not presented

elsewhere
IAS 8: Accounting Policies, Changes in
Accounting Estimates and Errors
Definition of accounting policy

principles

bases Preparing and

Accounting presenting
conventions
Policies financial
rules
statements
practices
IAS 8: Accounting Policies, Changes in
Accounting Estimates and Errors
Selection of accounting policies

Existence of relevant
IFRS Standard or Use that standard or interpretation
Interpretation

Use management’s judgement

Absence of relevant
IFRS Standard or
Interpretation referred to

Definitions,
Standards recognition
dealing with criteria,
similar issues measurement
in framework
IAS 8: Accounting Policies, Changes in
Accounting Estimates and Errors
Changes in accounting policies

Adopting an accounting policy for a new

Types of type of transaction or event not dealt
events which with previously by the entity
do not
constitute
changes in
Adopting a new accounting policy for a
accounting
transaction or event which has not
policy
occurred in the past or which was not
material
IAS 8: Accounting Policies, Changes in
Accounting Estimates and Errors
Changes in accounting policies

Accounting policies should be applied consistently

Required by a
new Standard or
Interpretation

Accounting
practicable
policies only Apply
Provide more retrospectively
change if
relevant and Retrospective
impracticable applied to the
reliable
earliest period
information that is
practicable
IAS 8: Accounting Policies, Changes in
Accounting Estimates and Errors
Definition of accounting estimates

An approximation of the amount to be

debited or credited on items for which no
precise means of measurement are available

Based on specialized knowledge and

Accounting
judgement derived from experience and
Estimates
training

Used in financial statements to determine

amounts cannot measured with precision and
certainly
IAS 8: Accounting Policies, Changes in
Accounting Estimates and Errors
Accounting estimates

Changes in accounting
Accounting estimates
estimates

Methods of An adjustment
depreciation resulting from
reassessing the
expected future
Residual values benefits/obligations
associated

Amounts of provisions

Apply prospectively
IAS 8: Accounting Policies, Changes in
Accounting Estimates and Errors
Errors

Mathematical
mistakes

Mistakes in applying Correct errors

accounting policies retrospectively
Errors
Oversights and Restate the
misinterpretation comparative
amounts

Fraud
IAS 8: Accounting Policies, Changes in
Accounting Estimates and Errors
Example

A company has always valued inventory on a FIFO basis. In 20X9 it

decided to switch to the weighted average method of valuation. Gross
profit in the 20X8 financial statements was calculated as follows

$’000

Revenue 869

Cost of sales

Opening inventory 135

Purchasing 246

Closing inventory (174) (207)

Gross profit 662

It is necessary to recalculate the amounts for 20X7, so that opening

inventory for 20X8 is valued on a weighted average basis.
IAS 8: Accounting Policies, Changes in
Accounting Estimates and Errors
Example

 Opening inventory for 20X8 based on WA method = $122,000

 Closing inventory = $143,000

$’000

Revenue 869

Cost of sales

Opening inventory 122

Purchasing 246

Closing inventory (143) (225)

Gross profit 644

 Gross profit for 20X8 decrease $18,000  reduce net profit and RE
 Adjustment to opening RE in 20X9 = $18,000
IFRS 15: Revenue from Contracts with
Customers
Five-step model

Model for recognising and measuring revenue

STEP
Identify the contract
1

STEP
Identify the performance obligations
2

STEP
Determine the transaction price
3

STEP Allocate the transaction price to each

4 performance obligation

STEP
Recognise revenue
5
IFRS 15: Revenue from Contracts with
Customers
Five-step model

STEP 1
Identify the contract

Approved by all parties

Rights can be identified

Features of a
Payment terms can be identified
“contract”

Commercial substance

Consideration is probable
IFRS 15: Revenue from Contracts with
Customers
Five-step model

STEP 2
Identify the performance obligations

Performance obligation

Series of distinct
Distinct goods/services
goods/services

Entity's
A
Customer promise to
performanc
can benefit transfer the A single
e obligation
from the good or method of
that is
good or service is measuring
satisfied
service separately
over time
identifiable
IFRS 15: Revenue from Contracts with
Customers
Five-step model

STEP 2
Identify the performance obligations

Example

Steadman Construction Co is contracted to build an office for a

customer. It will design the building, purchase materials, prepare the
site, construct the property, install wiring and air conditioning and finish
the property.

Although each element of the construction process is capable of being

distinct, in the context of the contract, the company provides a
significant service in integrating the input processes to produce a
property.
Therefore there is a single performance obligation, being the
construction of the property.
IFRS 15: Revenue from Contracts with
Customers
Five-step model

STEP 3
Determine the transaction price

Elements for considering

TRANSACTION PRICE the transaction price

The amount of Significant financing

components
consideration an entity
Variable consideration
expects to be entitled to in
exchange for transfering the Non-cash consideration
promised goods/services
Consideration payable to
a customer
IFRS 15: Revenue from Contracts with
Customers
Five-step model

STEP 3
Determine the transaction price

Example

Taplop Co supplies laptop computer to businesses.

1/7/20X8: entered contract with Trill Co – Trill Co purchases latop $500/unit
If Trill Co purchase more than 500 laptops/year, price reduces to $450/unit
Taplop year end on 30/6.
a, At 30/9/20X8, Trill Co bought 70 laptops. Taplop Co estimates Trill Co
purchase would not exceed 500 in the year to 30/6/20X9, and Trill Co would
not be entitled to the volume discount.
b, During quarter ended 31/12/20X8, Trill Co purchased an additional 250
laptops. Taplop estimates Trill Co purchases would exceed the threshold for
the volume discount in the year to 30/6/20X9.
IFRS 15: Revenue from Contracts with
Customers
Five-step model

STEP 3
Determine the transaction price

Example

a, Recognized revenue in Taplop Co in quarter ended 30/9/20X8

Taplop recognized revenue of 70 x $500 = $35,000

b, Recognize revenue in Taplop Co in quarter ended 31/12/20X8

Taplop should recognize revenue of $109,000
Calculation: $112,500 (250 laptops x $450) less change in transaction
price of $3,500 (70 laptops x $50 price reduction) for the the reduction of
price in the laptop sold in the quarter ended 30/9/20X8.
IFRS 15: Revenue from Contracts with
Customers
Five-step model

STEP 4
Allocate the transaction price

Allocate base on stand-alone price

Stand-alone price of each performance obligation

IFRS 15: Revenue from Contracts with
Customers
Five-step model

STEP 5
Recognise revenue

Entity has a present right to payment for the asset

Customer has legal title to asset

Revenue
at a point Entity has transferred physical possession of the asset
in time
Customer has significant risks and rewards related
to ownership of the asset

Customer has accepted the asset

IFRS 15: Revenue from Contracts with
Customers
Five-step model

STEP 5
Recognise revenue

Customer simultaneously receives and

consumes all the benefits provided

If any of 3
criterias
Revenue are met The entity’s work creates or enhances an
asset controlled by the customer
overtime

Entity's performance does not create an

asset with an alternative use & has an
enforceable right to payment for
performance completed to date
IFRS 15: Revenue from Contracts with
Customers
Five-step model

Example

Lingard Co sells a cable TV system to Monica under the following terms

on January 20X5:
 Monica has to pay a monthly fee of $80 for 12 months. Monica
receives a cable TV set top box and access to all the TV channels.
 The contract does not contain any other conditions and, once signed,
the receipt of the consideration is unconditional.
 Lingard Co sells the set top box by itself for $250 and charges monthly
access to the TV service without the set top box for $65 a month.
What amount of revenue should Lingard Co recognise in the year ended
31 March 20X5?
IFRS 15: Revenue from Contracts with
Customers
Five-step model

Example

STEP 1
A contract is in place between Lingard
Identify the
Co and Monica for a 12 month period
contract

STEP 2 Lingard Co has two separate

Identify the performance obligations:
performance  Deliver a set top box
obligation  Deliver cable TV access for 12 months

STEP 3
Determine the
12 x $80 = $960
transaction
price
IFRS 15: Revenue from Contracts with
Customers
Five-step model

Example

STEP 4 Standalone
%Total Revenue
Allocate price
transaction Box $250 24.3% $233
price to Monthly $780
75.7% $727
performance access to TV (= $65 x 12)
obligations Total $1,030 $960

 Box - performance obligation is already transfered on 1.1.X5 – Total TV

revenue is recognised
 Monthly access to TV – performance obligation satisfied overtime so on
31.03.X5 recognised revenue is $181 (=$727/4)

Debit Credit
STEP 5 Cash ($80 x 3) $240
Recognise Receivable $174
revenue Revenue $414
($233 + $181)
IFRS 15: Revenue from Contracts with
Customers
Five-step model

Practice question

EF Co provides a wireless router and 12 months’ superfast broadband

package to a customer for $220 payable in advance. A customer buying
the router separately would pay $30 and a customer buying the
broadband package separately would pay $20 per month.
a, How much of the transaction price is allocated to the performance
obligation to provide the router, the broadband package?
b, When is the transaction price allocated to the broadband package
recognised?
IFRS 15: Revenue from Contracts with
Customers
Five-step model

Practice question

a, How much of the transaction price is allocated to the performance

obligation to provide the router, the broadband package?
The total transaction price is allocated prorate to standalone selling
price. The sum of the standalone selling prices is $270 ($30 + (12 x $20))
b, When is the transaction price allocated to the broadband package
recognised?
Recognize over the 12 month period
IFRS 15: Revenue from Contracts with
Customers
Recognition of revenue over time

calculate the work completion on the basis of

Input method the entity’s inputs (labor hours, resources
consumed...)

Cost incurred
% work completion =
Cost incurred + further estimated cost to
complete contract

calculate the work completion on the basis of

Output method the value of the goods/services transfered

Work certified
% work completion =
Total contract price
IFRS 15: Revenue from Contracts with
Customers
Recognition of revenue over time

Revenue recognized = % work completion x Total contract price

in the period
Total contract price – Cost incurred –
Total contract = Further estimated cost to complete contract
profit

Total contract profit > 0 :

COGS = (Cost incurred + further estimated cost) x % work
completion
Profit recognised = Total contract profit x % work completion

Total contract profit < 0 : loss

Loss in the period = Total contract loss
COGS recognised = Revenue recognised – loss in the period
IFRS 15: Revenue from Contracts with
Customers
Example: Contract profits

Peppa Co has the following contract in progress:

$m

Total contract price 750

Costs incurred to date 225

Estimated costs to completion 340

Payments invoiced and received 290

IFRS 15: Revenue from Contracts with
Customers
Example: Contract profits

Estimated profit $m Statement of profit or loss $m

Total contract price 750 Revenue (40% x $750) 300

Cost of sales
Less costs incurred to
(225) (40% x (225 + 340)) (226)
date
Profit (40% x 185) 74
Less estimated costs
(340)
to completion Statement of financial
$m
position
Estimated profit 185
Costs incurred to date 225
Percentage complete
Recognised profits 74
Cost to date/total estimated Less receivable (290)
costs:
225/(225+340) = 40% Contract asset 9
IFRS 15: Revenue from Contracts with
Customers
Example: Contract loss

Peppa Co has the following contract in progress:

$m

Total contract price 550

Costs incurred to date 225

Estimated costs to completion 340

Payments invoiced and received 290

IFRS 15: Revenue from Contracts with
Customers
Example: Contract loss

Estimated loss $m Statement of profit or loss $m

Total contract price 550 Revenue (40% x $550) 220

Cost of sales
Less costs incurred to
(225) (balancing figure) (235)
date
Loss (15)
Less estimated costs
(340)
to completion Statement of financial
$m
position
Estimated loss (15)
Costs incurred to date 225
Percentage complete
Recognised loss (15)
Cost to date/total estimated Less receivable (290)
costs:
225/(225+340) = 40% Contract liability (80)
IFRS 15: Revenue from Contracts with
Customers
Example: Output method
The main business of Santolina Co is building work. At the end of Sep 20X3
there is an uncompleted contract on the books, details as follows

Date commenced 1.4.X1

Expected completion date 23.12.X3

$m

Total contract revenue 290,000

Costs to 30.9.X3 210,450

Value of performance obligations satified to 30.9.X3 230,000

Amounts invoiced for work certified to 30.9.X3 210,000

Cash received to 30.9.X3 194,000

Estimated costs to completion at 30.9.X3 20,600

Santolina Co calculates satisfaction of performance obligations based on

work certified as a percentage of contract price.
 IFRS 15: Revenue from Contracts with
Customers
Example: Output method
$ SOPL $

Final contract Revenue (work cer) 230,000

290,000
price Cost of sales
Less: costs to date (210,450) ((210,450 + 20,600) x
(183,247)
79.31%)
Estimated future
(20,600) Gross profit 46,753
costs

Estimated final SOFP

58,950 $
profit Contract asset

Costs to date 210,450

The recognised profit is
found as follows: Attributable profit 46,753
Estimated x Work certified
final profit Total contract price 257,203
230,000 Amounts invoiced (210,000)
$58,950 x
290,000
= $58,950 x 79.31% Contract asset 47,203

Profit recognised = $46,753 Contract receivables

16,000
(210 -194)
IFRS 15: Revenue from Contracts with
Customers
Presentation of contracts with customers

Contracts with customers are presented in the SOFP

depending on the relationship between the entity’s
performance and the customer’s payment

An entity’s right to consideration in

exchange for goods or services that the
Contract
entity has transferred to a customer when
asset
that right is conditioned on something
other than the passage of time

An entity’s right to consideration that is

Receivable
unconditional

An entity’s obligation to transfer goods or

Contract
services to a customer for which the entity
liability
has received consideration from the customer