14.

13 31 July 2012

Dr Bank trust 1 400 000

Cr Application account 1 400 000
(To recognise the aggregate receipt of application monies. The application account is
considered to be a liability.)

4 August 2012

Dr Application account 1 400 000

Cr Share capital 1 400 000

(Once the shares are allotted, the company no longer has a liability to the subscribers. The
subscribers become owners of the entity, rather than creditors.)

Dr Cash at bank 1 400 000

Cr Bank trust 1 400 000

(Once the shares have been allotted the company can then transfer the cash to its usual
operating account.)

15.19 (a) By entering the forward rate agreement with the bank, Lehman Ltd has a guarantee
from the bank relating to how much it will receive in exchange for US$500 000.
Lehman Ltd will receive A$694 444 (500 000 ÷ 0.72) for the printed material
regardless of what happens to the exchange rate. That is, Lehman Ltd will not be
subject to any risk that the amount it will receive will decrease (or increase). In
exchange for reducing the risk, the bank effectively charges Lehman Ltd a fee of
(500 000 ÷ 0.70) – (500 000 ÷ 0.72), which equals $19 842. The greater the
difference between the spot rate and the forward rate, the greater the amount that is
being charged by the bank.

(b) Lehman will receive A$694 444 from the sale (500 000 ÷ 0.72), regardless of any
fluctuations in the exchange rate.

15.25 Mamb Ltd is able to borrow money at either a fixed rate of 10 per cent, or at the 90 day
Bank Bill Rate plus 0.5 per cent (which fluctuates, but is presently 8 per cent). Bong Ltd
can borrow funds at either a fixed rate of 13 per cent, or at a the 90 Bank Bill Rate (BBR)
plus 2.0 per cent.

Mamb Ltd borrows $1 000 000 in funds at a fixed rate of interest of 10 per cent, whereas
Bong Ltd borrows $1 000 000 for four years at the floating Bank Bill Rate plus 2.0 per cent.

Even though Mamb Ltd has an interest rate advantage in both the variable and fixed interest
rate markets, a swap rate can be agreed upon such that both Mamb Ltd and Bong Ltd can
benefit. One answer (and there can be a number of answers here) would be for Mamb Ltd to
make floating rate payments to Bong Ltd at the Bank Bill Rate plus 1.5 per cent, and Bong

1
 Ltd to make fixed rate payments to Mamb Ltd at 12 per cent. The net interest payments of
both, after the agreement would be:

Mamb Ltd Bong Ltd

Pays 10% to primary lender Pays BBR + 2.0% to primary lender
Pays BBR + 1.5% to Bong Ltd Pays 12% to Mamb Ltd
Receives 12% from Bong Ltd Receives BBR + 1.5% from Mamb Ltd
Net interest cost = BBR – 0.5% Net interest cost = 12.5%

After the above interest rate swap, both organisations have their preferred type of
borrowing (that is, either fixed or variable) and both have made a net saving on the rates
that were available in the marketplace on their preferred means of borrowing.

16.1 The AASB Framework does not provide a great deal of guidance in relation to when
revenue should be recognised. The former Australian conceptual framework provided
guidance which is not inconsistent with the contents of the AASB Framework. Specifically,
paragraph 130 of SAC 4 provided a number of tests which would be useful in determining
whether to recognise revenue. These were:

(a) an agreement for the provision of goods and services exists between the entity and
one or more parties external to the entity;

(b) cash has been received, or the entity has a claim against an external party or parties
that:
(i) is for a specified consideration, in the form of cash, other assets, or a
reduction in a liability of the entity;
(ii) cannot be avoided by the external party or parties without the incurrence of a
penalty set sufficiently large as, in normal circumstances, to defer avoidance;

(c) all acts of performance necessary to establish a valid claim against the external party
or parties have been completed; and

(d) it is possible to estimate reliably the collectability of debts or the return of goods
sold.

Where the above tests are met, revenue would generally be recognised, because it will be
probable that an inflow of service potential or future economic benefits have occurred.

Where there is an agreement in place that all production will be acquired by a particular
consumer, and it is probable that the inflow of resources will occur, then in principle it
would be appropriate to recognise revenue at the point of production. This would
particularly be the case if there was a legal arrangement in place that all production will be
purchased. In the absence of such an arrangement, revenue would not typically be
recognised until a sales transaction had taken place. However, we need to consider the
requirements of AASB 118 Revenue, which can act to limit the application of this general
principle. Paragraph 14 of AASB 118 states:

Revenue from the sale of goods shall be recognised when all the following conditions
have been satisfied:

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 (a) the entity has transferred to the buyer the significant risks and rewards of
ownership of the goods;
(b) the entity retains neither continuing managerial involvement to the degree usually
associated with ownership nor effective control over the goods sold;
(c) the amount of revenue can be measured reliably;
(d) it is probable that the economic benefits associated with the transaction will flow
to the entity; and
(e) the costs incurred or to be incurred in respect of the transaction can be measured
reliably.

In most cases, control will not pass at the completion of production, hence AASB 118
excludes revenue recognition at point of production. AASB 118, however, does not apply to
revenue arising from some sources—such as the initial recognition of revenue from
agricultural produce (AASB 141 Agriculture would apply and allows agricultural produce to
be valued at fair value less estimated point-of-sale costs). Hence, for some goods, such as
agricultural produce, it can be possible to recognise revenue in advance of a binding sales
agreement and to the extent that a fair value can be reliably determined.

16.9 Pursuant to AASB 111, the aggregate billings on a construction contract shall be deducted
from the asset account, construction in progress (or construction in progress might also be
referred to as contract costs incurred). If progress billings exceed the gross amount of
construction in progress, the net amount should be shown as a liability, otherwise the net
amount is shown as an asset.

16.15 (a) 2013 2014 2015

Contract price $40 000 000 $40 000 000 $40 000 000
Less estimated cost:
Costs to date 10 000 000 26 000 000 32 000 000
Estimated costs to complete 22 000 000 6 000 000 __________
Estimated total cost 32 000 000 32 000 000 32 000 000
Estimated total gross profit/(loss) $ 8 000 000 $ 8 000 000 $ 8 000 000
Per cent complete 31.25% 81.25% 100%
Gross profit recognised in:
2013 $8 000 000 × 31.25% $2 500 000

2014 $8 000 000 × 81.25% $6 500 000

Less profit already recognised 2 500 000
Profit recognised in year 4 000 000

2015 $8 000 000 × 100% $8 000 000

Less profit already recognised 6 500 000
Profit recognised in year $1 500 000

(b) Where stage of contract completion cannot be reliably determined.

For demonstration only; NOT EXAMINABLE

3
2013 2014 2015

4
 (i) To record costs incurred:
Dr Construction in progress 10.0 16.0 6.0
Cr Cash, accounts payable 10.0 16.0 6.0

(ii) To record billings to customers:

Dr Accounts receivable 8.0 20.0 12.0
Cr Billings on contracts in progress 8.0 20.0 12.0

(iii) To record cash collections:

Dr Cash 8.0 20.0 12.0
Cr Accounts receivable 8.0 20.0 12.0

(iv) To record periodic income

recognised:
Dr Construction in progress — — 8.0
Dr Construction expenses 10.0 16.0 6.0
Cr Revenue from long-term contracts 10.0 16.0 14.0

(v) To record final approval and

acceptance:
Dr Billings on contracts in progress — — 40.0
Cr Construction in progress — — 40.0

(c) Journal entries assuming stage of completion can be reliably

determined.
2013 2014 2015
(i) To record costs incurred:
Dr Construction in progress 10.0 16.0 6.0
Cr Cash, accounts payable, etc. 10.0 16.0 6.0

(ii) To record billings to customers:

Dr Accounts receivable 8.0 20.0 12.0
Cr Billings on contracts in progress 8.0 20.0 12.0

(iii) To record cash collections:

Dr Cash 8.0 20.0 12.0
Cr Accounts receivable 8.0 20.0 12.0

(iv) To record periodic income

recognised:
Dr Construction in progress 2.5 4.0 1.5
Dr Construction expenses 10.0 16.0 6.0
Cr Revenue from long-term contracts 12.5 20.0 7.5

5
 (v) To record final approval and
acceptance:
Dr Billings on contracts in progress — — 40.0
Cr Construction in progress — — 40.0

16.18 At issue here is whether the claim against Allgas should be recorded as a receivable and as
income in the accounts of SSB. If the claim was agreed to by Allgas, or the court rules that
Allgas must pay, then there would be an inflow of future economic benefits which did not
relate to a contribution of owners and which increased equity during the reporting period—
consistent with the definition of income. However, at issue is the probability that the inflow
of future economic benefits has occurred or whether the inflow can be measured reliably.
As the court case had not been settled, and as there seems no strong evidence that SSB will
be successful, or otherwise, the inflow is too uncertain to warrant recognition as income.
Nevertheless, the notes to the accounts of SSB (and Allgas) should provide a description of
the claim, and the company’s assessment of the probability than an amount will be received,
as well as an estimate of the expected receipt.

16.19 Because the painting has been given irrevocably as a gift, and not as a loan, it becomes an
asset of the National Gallery of Victoria. Because there has been an inflow of economic
benefits which is not of the nature of a contribution by an owner, the donation is to be
treated as income. In determining the amount to be recorded for the asset, and therefore for
the income, the inflow should be recorded at its fair value. Because it did not go to sale, the
amount will need to be determined by somebody with expertise in valuing such works of
art. Perhaps if Sotheby’s auction reserves have been reliable estimates of market value in
past auctions, then the amount placed on the painting by Sotheby’s might be used as the
basis of measuring the asset. Otherwise, a valuation might be obtained from an independent
‘market analyst’.