Reference no: EM132607085

The timing of revenue (income) recognition has long been an area of debate and inconsistency in accounting. Industry practice in relation to revenue recognition varies widely; the following are examples of different points in the operating cycle of businesses that revenue and profit can be recognised:

1. on the acquisition of goods;
2. during the manufacture of production of goods;
3. on delivery/acceptance of goods;
4. when certain conditions have been satisfied after the goods have been delivered;
5. receipt of payment for credit sales;
6.  on the expiry of a guarantee or warranty.

In the past the "critical event" approach has been used to determine the timing of revenue recognition. The International Accounting Standards Board in its Conceptual Framework for Financial Reporting ("the Framework) has defined the "elements" of financial statements, and it uses these to determine when a gain or loss occurs.

Required:

Question a) Explain what is meant by the critical event in relation to revenue recognition and discuss the criteria used in the Framework for determining when a gain or loss arises.

Question b) For each of the stages of the operating cycles identified above, explain why it may be an appropriate point to recognise revenue and, where possible, give a practical example of an industry where it occurs.

Question c) William has entered into the following transactions/agreements in the year to 31 March 2019:

i) Goods, which had cost of RM20,000, were sold to Wholesaler for RM35,000 on 1 June 2018. Jenson has an option to repurchase the goods from Wholesaler at any time within the next two years. The repurchase price will be RM35,000 plus interest charged at 12% per year from the date of sale to date of repurchase. It is expected that William will repurchase the goods.

ii) William owns the right to a fast food franchise. On 1 April 2018 it sold the right to open a new outlet to Mr Tupac. The franchise is for five years. William received an initial fee of RM50,000 for the first year and will receive RM5,000 per year thereafter. William has continuing services obligations on its franchise for advertising and product development that amount to approximately RM8,000 per year per franchised outlet. A reasonable profit margin on rendering the continuing services is deemed to be 20% of revenues received.

iii) On 1 September 2018 William received total subscriptions in advance of RM240,00. The subscriptions are for 24 monthly publications of a magazine produced by William. At the year-end William had produced and despatched six of the 24 publications. The total cost of producing the magazine is estimated at RM192,000 with each publication costing a broadly similar amount.

Required:

Describe how William should treat each of the above examples in its financial statements in the year to 31 March 2019.