Reference no: EM132908676
Trainee at ANALYST Malaysia Berhad
You have just started working as a trainee in a research house, ANALYST Malaysia Berhad, which recently accept two new customers. The senior financial analyst presents you with the following notes that he made concerning the two new customers for the financial year ended 31 December 2020 and request you to address the issues raised:
Company 1: PDT Berhad
PDT Berhad is primarily engaging in property development and township management. On 1 March 2020, the company entered into a contract with MJB Berhad to develop shopping gallery and a recreational park for the total costs of RM230,000,000. PDT Berhad promised to fulfil the obligation by first developing the shop lots, then the shopping gallery, and lastly the recreational park using one performance obligation only but to be completed in stages. The breakdown of the estimated costs are, as follows:
Estimated costs
Shop lots: RM80,000,000
Shopping gallery: RM70,000,000
Recreational park: RM80,000,000
Total: RM230,000,000
Transaction price: RM265,000,000
On 1 December 2020, the shop lots and the shopping gallery were completed and the MJB Berhad obtained control of the whole property. However, on this date, the development of the recreational park has not been started. The costs to procure the recreational park is significant relative to the total expected costs to completely satisfy the performance obligation. On 31 December 2020, PDT Berhad recognise revenue of RM265,000,000.
Company 2: REST Berhad
The primary activity of REST Berhad is constructing residential houses. On 1 January 2020, REST Berhad entered into a binding sales contract with MyHouse Sdn Bhd for four units of houses. The contract specifies that all the four houses are in the same size and with similar floor plans but in different location. In addition, the contract stated that MyHouse Sdn Bhd will make payment for the remaining price when it receives physical possession of the houses. Upon signing the contract, MyHouse Sdn Bhd paid a deposit, which is refundable only if REST Berhad fails to complete the residential houses as underlined in the contract. If MyHouse default on the contract before the houses are completed, REST Berhad has the right to keep the deposit. On 1 February 2020, REST Berhad started the construction of the four units of the houses. Two of the houses were completed in October 2020 while the remaining two houses were completed on 1 December 2020 and MyHouse obtained the physical possession of the houses on 1 December 2020 and made payment for the remaining price. In the Notes to the financial statements, REST Berhad disclosed that it recognized the revenue for the four unit of houses using percentage of completion method starting from 1 February 2020. The stage of completion is measured by reference to the proportion of contract costs incurred for work performed to date bear to the estimated total contract costs.
REQUIRED:
Problem (a) Discuss the appropriateness of the revenue recognition of PDT Berhad, as underlined in MFRS 15 Revenue from contracts with customers. Justify your answer with FIVE (5) valid reasons.
Problem (b) Discuss the appropriateness of the revenue recognition of REST Berhad, as underlined in MFRS 15 Revenue from contracts with customers. Justify your answer with FIVE (5) valid reasons.
Problem (c) Describe the impact of the revenue recognition of REST Berhad on the company's financial statement. Justify your answer with THREE (3) valid reasons.