My name is Steve Chen, a fellow member of ACCA and course director at APC (www.globalapc.com), teaching ACCA online courses to students from all around the world. This article will explain variable consideration from IFRS 15 Revenue from contracts with customers which is relevant to the ACCA SBR exam.

Just a recap from my previous article about revenue recognition applied in the pre-fabricated housing industry.

According to IFRS 15 Revenue from contracts with customers, 5-step model needs to be applied, and my mnemonic for these 5-step model (which is widely copied by many study texts and lecturers) is COPAR (this can be found in my original YouTube video

https://www.youtube.com/watch?v=hANA_LO5LYA&t=307s ):

Step 1 – Contract identification

Step 2 – Performance Obligation

Step 3 – Price

Step 4 – Allocate price to performance obligations

Step 5 – Recognise revenue – we are focusing on this step in this article.

Let’s see an example in practice (the company name is ‘Tonica plc’):

Tonica plc entered into a contract with a hotel company to construct a prefabricated hotel at the total contract price of $6m.

Tonica plc needs to procure a special elevator for the hotel, and the hotel took possession of the elevator on 1 April 2019. The following contract pricing and costs information are:

Contract price $6m

Subtract: Elevator costs = $(2)m

Subtract: Other expected total costs = $(3)m

Equals to Profits = $1m

The costs incurred to date regarding this contract are $3.5 million, including $2 million for elevator costs and $1.5 million for other costs.

The financial officer calculated the following revenue and costs to be recognised to date:

Percentage of completion: $3.5m costs incurred / $5m total costs = 70%

Revenue $6m x 70% = $4.2m

Subtract: Costs $5m x 70% = $(3.5)m

Equals to Profits = $0.7m

Required:

Identify mistakes made by the financial controller.

Analysis from Steve Chen (ACCA APC Course Director at www.globalapc.com):

The above input method used to calculate the stage of completion is not correct.

Per IFRS 15, the procurement cost of the elevator of $2 million should not be included in the stage of completion calculation because Tonica plc has not been involved in designing and developing it.

Tonica plc purchased from the external third party on behalf of the client. In this case, the stage of completion should be revised as follows:

% = $1.5m /$3m = 50%

The following revenue and costs should be recognised:

Revenue $6m x 50% + elevator costs $3m + $2m = $5m

Subtract costs $3m x 50% + elevator costs = $1.5m + $2m=$3.5m

Equal to Profits = $1.5m

Both revenue and costs include the elevator costs of $2m, and this is the current approach per IFRS 15, in other words, to recognise this at 0 profit. This is also known as the zero-margin approach.

This is a technical area in IFRS 15 where many finance professionals in practice may not notice. From the ACCA SBR exam’s perspective, students are required to comment on the general approach in the standard and comment on the specific applications to the company.

In addition to providing ACCA lectures online, I also wrote articles in ACCA AB magazine. Besides, I am the author of four accounting books. If you are interested in studying ACCA courses with me, please visit my website http://www.globalapc.com for further information, where you can find many of my ACCA demo video lectures.

My name is Steve Chen, a fellow member of ACCA and course director at APC (www.globalapc.com) teaching ACCA online courses to students from all around the world. This article will explain variable consideration from IFRS 15 Revenue from contracts with customers which is relevant to the ACCA SBR exam.

According to IFRS 15 Revenue from contracts with customers, 5-step model needs to be applied, and my mnemonic for these 5-step model (which is widely copied by many study texts and lecturers) is COPAR (this can be found in my original YouTube video

https://www.youtube.com/watch?v=hANA_LO5LYA&t=307s ):

Step 1 – Contract identification

Step 2 – Performance Obligation

Step 3 – Price

Step 4 – Allocate price to performance obligations

Step 5 – Recognise revenue

This article explains the application of variable consideration (in step 3) of the above 5-step model in the pre-fabricated housing industry.

Let’s see an example in practice (the company name is ‘Tonica plc’)

The reason I named this company as 'Tonica plc' was because I am a fan of 'Gin Tonic' cocktail...

Tonica plc has signed a contract with a house developer in EU to construct several residential houses and the agreed price is $2 million to be delivered in 5 months.

In the contract, it states that if Tonica plc can complete those houses before the deadline (5 months), Tonica plc can be awarded $300,000 extra bonus and if Tonica plc only completes this on time, no bonus is given. However, if Tonica plc delays, the penalty of $500,000 will be applied.

The contract also stated that if those houses achieve the greenhouse certification level (this is a certification offered by the government in that country), Tonica plc can be given an extra bonus of $40,000. Based on past experience, the houses built by Tonica plc have all achieved this certification level because the quality of Tonica plc’s houses is highly reputed in the country.

Required:

How would the above transaction price of the contract be recognised?

Analysis from Steve Chen (ACCA APC Course Director at www.globalapc.com):

Industry characteristics:

In the traditional construction industry, outside factors such as weather conditions, market volatility of materials and operating environments, past experience of getting such bonuses for the similar prefabricated house construction contract should also be considered.

However, in the above case, these factors may not affect the business too much because all of the houses are manufactured in the factory which is not affected too much by the weather conditions.

In applying IFRS 15 Revenue from Contracts with Customers:

Fixed Transaction price: $2 million

Variable considerations – Three possibilities:

             Before the deadline: a bonus (revenue) of $300,000

             On time: 0

             Miss the deadline: penalty of $500,000

Therefore, Tonica plc should estimate the probability of those uncertainties at the time when the contract is signed.

After careful analysis, the Finance director of Tonica plc has determined the following possibilities:

              Before the deadline, +$300,000 with 60% chance

              On time, $0 with 30% chance

              Miss the deadline: -$500,000 with 10% chance

Therefore, the contingent consideration is calculated using a weighted average approach: 60% x $300,000 + 0x30% + ($500,000 x10%) = $130,000

Extra bonus of $40,000 when the greenhouse level is achieved. This should be included in the transaction price because, according to the experience, all of the Tonica plc’s houses have achieved this level. It is highly probable that a significant reversal will not occur (it means Tonica plc can get this bonus).

Total transaction price when the contract is signed is:

$2m +$130,000+$40,000=$2,170,000

Consider the following subsequent issue:

When the first four months have passed, the management has revised the probability because they now think the contract can be completed on time. Hence the transaction price could be revised:

Before the deadline, +$300,000 with 90% chance

On time, $0 with 10% chance

Miss the deadline: -$500,000 with 0% chance

The variable consideration is revised as 90%x$300,000+0+0=$270,000

The total new transaction price is therefore: $2m+$270,000+$40,000=$2,310,000. This means that the additional revenue of $140,000 should be recognised ($2,310,000-$2,170,000).

Conceptual Framework Reference:

Many of you may consider the concept of variable consideration really requires lots of judgment, and I agree with you. However, this concept ensures that revenue will not be overstated when it is recognised. Businesses could not recognise higher revenue at the start, but what businesses could do is recognise lower revenue at the start with additional revenue after that.

Therefore, this complies with the ‘prudence’ concept in the conceptual framework according to IASB.

In addition to providing ACCA lectures online, I also wrote articles in ACCA AB magazine. Besides, I am an author of four accounting books. If you are interested in studying ACCA courses with me, please visit my website http://www.globalapc.com for further information, where you can find many of my ACCA demo video lectures.

My name is Steve Chen, a fellow member of ACCA and course director at APC (www.globalapc.com) teaching ACCA online courses to students from all around the world. This article will explain the topic ‘How to read FOREX chart’ in ACCA Advanced Financial Management (AFM) exam.

In the past, I often had students who have previously failed the ACCA AFM paper before studying with me. After getting to know more about them in terms of their study, I found that they failed the AFM before studying with me because their previous studies were not practical, ie most of them simply memorise the rule without any links with them practice.

In the P level in ACCA studies (Master level), it is essential to be practical so that you learn things in the study texts, lectures, and exams and directly apply them in the real scenarios.

Therefore, the topic in this article is all about ‘How to read FOREX charts’. You should read my previous two articles about Foreign Exchange Rates quotes before reading this one.

Below is an example of a foreign exchange rate of USD/CHF where USD is the base currency, and the rule is simple, always focus on the base currency.

Increase – USD appreciates against CHF as one US dollar can be converted into more CHF.

Decrease – USD depreciates against CFH as one US dollar can be converted into less CHF.

Source: https://markets.businessinsider.com/

Another way to simplify the chart is to think about the FOREX quote as the share price, and as you can see, the price falls from July 2020 onwards.

I teach ACCA Financial Management and Advanced Financial Management papers for quite a few years, and one of my ACCA students Martin Valent who studied ACCA AFM with me (join my online course at www.globalapc.com) became the first prize winner in March 2017 ACCA P4 Advanced Financial Management exam in Slovakia. I am passionate about teaching ACCA AFM paper as this paper is quite practical. Students often found things learned in other papers, such as financial and management knowledge, linked with strategic papers such as ACCA SBL.

My name is Steve Chen, a fellow member of ACCA and course director at APC (www.globalapc.com) teaching ACCA online courses to students from all around the world. This article will explain the topic ‘Quoted Foreign Exchange Rates’ in ACCA Advanced Financial Management (AFM) exam.

The quoted foreign exchange rates topic is divided into two articles, and this is article two.

Banks often quote foreign exchange rates into bid and offer prices, and let me give you an example:

Banks usually quote foreign exchange rate with a spread, ie difference between bid and offer price to make a profit.

Bid price is the price that banks buy from the entity. Offer price is the price that banks sell to the entity. Bid price is lower than the offer price, ie bank buys low and sells high.

However, we often interpret the above quotation standing from our (entity’s) perspective. Focusing on the base currency (USD), if we need (buy) USD, we choose a higher price (offer price). If we sell USD and get CHF, we choose a lower price (bid price).

Again, the key to this is to focus on the base currency, which is USD, and if:

Business wants to buy USD, select the offer price.

Business wants to sell USD, select the bid price.

I teach ACCA Financial Management and Advanced Financial Management papers for quite a few years, and one of my ACCA students Martin Valent who studied ACCA AFM with me (join my online course at www.globalapc.com) became the first prize winner in March 2017 ACCA P4 Advanced Financial Management exam in Slovakia. I am passionate about teaching ACCA AFM paper as this paper is quite practical. Students often found things learned in other papers, such as financial and management knowledge, linked with strategic papers such as ACCA SBL.

In addition to providing ACCA lectures online, I also wrote articles in ACCA AB magazine. Besides, I am the author of four accounting books. If you are interested in studying ACCA courses with me, please visit my website http://www.globalapc.com for further information, where you can find many of my ACCA demo video lectures.

My name is Steve Chen, a fellow member of ACCA and course director at APC (www.globalapc.com) teaching ACCA online courses to students from all around the world. This article will explain the topic ‘Quoted Foreign Exchange Rates’ in ACCA Advanced Financial Management (AFM) exam.

The quoted foreign exchange rates topic is divided into two articles, and this is article one.

There are usually different quotes for foreign exchange rates for different currencies. These include indirect and direct quotes.

Indirect quote is where one domestic currency could be exchanged into a variable amount of foreign currencies.

Direct quote is where one foreign currency could be exchanged into a variable amount of domestic currencies.

Higher value currencies such as UK pounds and US dollar usually use indirect quote where lower value currencies usually use direct quote.

For example, USD/RMB 6.840:

To the USD, this is the indirect quote as one domestic currency (USD) could be exchanged into variable amount of foreign currencies (RMB 6.840).

To the RMB, this is the direct quote as one foreign currency (USD) could be exchanged into variable amount of domestic currencies (RMB 6.840).

I hope I have simplified the quoted foreign exchange rates in this article. In the next article, I will explain how to read quoted foreign exchange rates in bid and offer prices.

I teach ACCA Financial Management and Advanced Financial Management papers for quite a few years, and one of my ACCA students Martin Valent who studied ACCA AFM with me (join my online course at www.globalapc.com) became the first prize winner in March 2017 ACCA P4 Advanced Financial Management exam in Slovakia. I am passionate about teaching ACCA AFM paper as this paper is quite practical. Students often found things learned in other papers, such as financial and management knowledge, linked with strategic papers such as ACCA SBL.

In addition to providing ACCA lectures online, I also wrote articles in ACCA AB magazine. Besides, I am the author of four accounting books. If you are interested in studying ACCA courses with me, please visit my website http://www.globalapc.com for further information, where you can find many of my ACCA demo video lectures.