FACTS OF THE CASE:

1) The primary business activity of Neoen Ltd is developing accounting software packages. Neoen charges $2,000 as installation fees and a separate two-year service for $1,000. Otherwise, it also offers a combined goods and services contract which includes both elements for $3,400.

Conditions for Revenue Recognition

According to the IFRS criteria, for revenue to be recognized, the following conditions must be satisfied:

1. Risks and rewards of ownership have been transferred from the seller to the buyer.
2. The seller loses control over the goods sold.
3. The collection of payment from goods or services is reasonably assured.
4. The amount of revenue can be reasonably measured.
5. Costs of revenue can be reasonably measured.

Conditions (1) and (2) are referred to as Performance. Regarding performance, it occurs when the seller has done what is to be expected to be entitled to payment.

Condition (3) is referred to as Collectability. The seller must have a reasonable expectation that he or she will be paid for the performance.

Conditions (4) and (5) are referred to as Measurability. Due to the accounting guideline of the matching principle, the seller must be able to match the revenues to the expenses. Hence, both revenues and expenses should be able to be reasonably measured.

Steps in Revenue Recognition from Contracts

The five steps for revenue recognition in contracts are as follows:

1. Identifying the Contract

All conditions must be satisfied for a contract to form:

• Both parties must have approved the contract (whether it be written, verbal, or implied).
• The point of transfer of goods and services can be identified.
• Payment terms are identified.
• The contract has commercial substance.
• Collection of payment is probable.

2. Identifying the Performance Obligations

Some contracts may involve more than one performance obligation. For example, the sale of a car with a complementary driving lesson would be considered as two performance obligations – the first being the car itself and the second being the driving lesson.

Performance obligations must be distinct from each other. The following conditions must be satisfied for a good or service to be distinct:

• The buyer (customer) can benefit from the goods or services on its own.
• The good or service is separately identified in the contract.

3. Determining the Transaction Price

The transaction price is usually readily determined; most contracts involve a fixed amount.

4. Allocating the Transaction Price to Performance Obligations

The allocation of the transaction price to more than one performance obligation should be based on the standalone selling prices of the performance obligations.

5. Recognizing Revenue in Accordance with Performance

Recall the conditions for revenue recognition. Conditions (1) and (2) state that revenue would be recognized when the seller has done what is expected to be entitled to payment. Therefore, revenue is recognized either:

• At a point in time; or
• Over time

Identifying the contract

An entity shall account for a contract with a customer that is within the scope of this Standard only when all of the following criteria are met:

(a) the parties to the contract have approved the contract (in writing, orally or in accordance with other customary business practices) and are committed to perform their respective obligations;

(b) the entity can identify each party’s rights regarding the goods or services to be transferred;

(c) the entity can identify the payment terms for the goods or services to be transferred;

(d) the contract has commercial substance (ie the risk, timing or amount of the entity’s future cash flows is expected to change as a result of the contract); and

(e) it is probable that the entity will collect the consideration to which it will be entitled in exchange for the goods or services that will be transferred to the customer. In evaluating whether collectability of an amount of consideration is probable, an entity shall consider only the customer’s ability and intention to pay that amount of consideration when it is due. The amount of consideration to which the entity will be entitled may be less than the price stated in the contract if the consideration is variable because the entity may offer the customer a price concession

Combination of contracts

An entity shall combine two or more contracts entered into at or near the same time with the same customer (or related parties of the customer) and account for the contracts as a single contract if one or more of the following criteria are met:

(a) the contracts are negotiated as a package with a single commercial objective;

(b) the amount of consideration to be paid in one contract depends on the price or performance of the other contract; or

(c) the goods or services promised in the contracts (or some goods or services promised in each of the contracts) are a single performance obligation

Therefore, revenue should be accordingly booked.

2) On July 2020, one of Neoen Pty Ltd’s client engaged legal proceedings and commenced seeking damages from Neoen Pty Ltd due to loss of clients, possibly caused by a faulty accounting software package sold by the company. Neoen Pty Ltd disputes the liability, and its lawyers initially advised that it is probable that the company will not be found liable. The accounting team is not sure whether something should be disclosed in the account in the first place. What would happen then if, owing to developments in the case, it becomes probable that Neoen Pty Ltd is found liable, but the amount of damages to be awarded cannot be measured with sufficient reliability. Finally, what would happen if a reliable estimate could or could not be made of the damages to be awarded

IAS 37 PROVISIONS, CONTINGENT LIABILITIES AND CONTINGENT ASSETS

RECOGNITION CRETARIA:

As per IAS 37 ,

A provision shall be recognized when:

(a) an entity has a present obligation (legal or constructive) as a result of a past event;

(b) it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation; and (c) a reliable estimate can be made of the amount of the obligation. If these conditions are not met, no provision shall be recognised.

In rare cases, it is not clear whether there is a present obligation. In these cases, a past event is deemed to give rise to a present obligation if, taking account of all available evidence, it is more likely than not that a present obligation exists at the end of the reporting period

In almost all cases it will be clear whether a past event has given rise to a present obligation. In rare cases, for example in a lawsuit, it may be disputed either whether certain events have occurred or whether those events result in a present obligation. In such a case, an entity determines whether a present obligation exists at the end of the reporting period by taking account of all available evidence, including, for example, the opinion of experts. The evidence considered includes any additional evidence provided by events after the reporting period. On the basis of such evidence:

(a) where it is more likely than not that a present obligation exists at the end of the reporting period, the entity recognises a provision (if the recognition criteria are met); and

(b) where it is more likely that no present obligation exists at the end of the reporting period, the entity discloses a contingent liability, unless the possibility of an outflow of resources embodying economic benefits is remote

MEASUREMENT CRETARIA

The best estimate of the expenditure required to settle the present obligation is the amount that an entity would rationally pay to settle the obligation at the end of the reporting period or to transfer it to a third party at that time. It will often be impossible or prohibitively expensive to settle or transfer an obligation at the end of the reporting period. However, the estimate of the amount that an entity would rationally pay to settle or transfer the obligation gives the best estimate of the expenditure required to settle the present obligation at the end of the reporting period

DISCLOSURE CRETARIA

An entity shall disclose the following for each class of provision:

(a) a brief description of the nature of the obligation and the expected timing of any resulting outflows of economic benefits;

(b) an indication of the uncertainties about the amount or timing of those outflows. Where necessary to provide adequate information, an entity shall disclose the major assumptions made concerning future events,; and

(c) the amount of any expected reimbursement, stating the amount of any asset that has been recognised for that expected reimbursement

ANALYSIS AND CONCLUSION OF THE CASE

Requirements under IFRS for recognizing, measuring and disclosing these matters in the financial statements of Retrofit, for the current reporting year:

IN PRESENT CASE OF NEOEN PTY LTD,

It is not confident that whether or not they will win the appeal of lawsuit. By taking into account the opinion of the legal experts, if chances of winning is more than no provision is needed to be booked. However, if, owing to developments in the case, it becomes probable that Neoen Pty Ltd is found liable, then provision on estimation basis shall be booked under current liabilities.