Accounting for Revenue and Provisions

This solved assignment delves into key accounting concepts related to revenue recognition, provisions, and contingent liabilities. It provides a detailed analysis of how these concepts are applied in a specific business scenario involving Beachlife Ltd and Goodsports Ltd. The assignment explores the accounting treatment for sales with maintenance obligations, the creation of provisions, and the disclosure of contingent liabilities under International Financial Reporting Standards (IFRS). It serves as a valuable resource for students seeking to understand and apply these crucial accounting principles.

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20 January 2018
Mr Christopher Sampson
718 Geelong Street,
Melbourne, VIC 3000
Telephone [phone]
www.magentaandassociates.com.au
20 January 2018
Mr. Christopher Sampson
The managing Director
Beachlife Ltd.
Level 7, 927 William Street,
Brisbane QLD 4000
Respected Sir,
Thank you very much for providing a quick response to us via e-mail. We assure you that
like all previous times, this time also we promise to provide you with a solution and advice

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20 January 2018
Mr Christopher Sampson
which will be best for you towards taking an appropriate decision in relation to the issues which
have been raised by you. As always this time also we expressly assure you that all advice
provided to you by us would be in compliance to legal provisions especially the provisions of
AASB, IFRS and the Corporation Act 2001 (Cth).
It must be known to you that the nature of intangible assets is not physical. A few assets
which can be categorized under intangible assets are goodwill, business methodologies, patents,
brand recognition and trademarks. These assets may exist over a indefinite or definite period.
The process which is used to determining the valuation of intangible assets is not very simple in
the same way as it is with valuation of Brand Recognition, therefore it needs solid and definite
methodology for its evaluation. When it comes to internally recognized intangible assets it
cannot be given a valuation unless it has been sold. According to the provisions of International
Financial Reporting Standards (IFRS) and Para 63 of IAS 38 the ability of the consumer to
differentiate between brand through a symbol or logo is known as brand recognition. The
expectations of the customers is also raised in relation to the quality of the product and provide
support to the organization to collect its attributes and accordingly promote the products. As the
regular market does not deal with intangible assets such as brand recognition, there are several
issue in relation to its valuation. In addition it has been stated by Bond, Govendi and Wells
(2016) that the amount which is often paid towards such assents are less than its actual value. For
instance, as stated in the issue though the directors wish to generate $800000 in relation to the
brand value of ‘Sun n Surf Shirts’; when they are actually selling it in the market they may get
$650,000.

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20 January 2018
Mr Christopher Sampson
For the purpose of indentifying the internally generated assets such as brand, there are
three options available in relation to the recognition in financial statement in compliance of
objectivity, effectiveness, integrity and efficiencies. According to the options the externally
required brand is treated as goodwill in relation to the purchasing company’s financial statement.
The recognition of intangible assets in compliance of AASB 138 can be done when reliable
measurement of its value can be done the expectation is that that future economic attributes will
attribute the company. As provided by you through the e-mail reliably the measurement of the
brand value cannot be done and in addition as there is no definite useful life in relation to the
brand they cannot be a part of the financial assets of the company. However such disclosure can
be done through note via financial statements.
In relation to the second issue raised by you, we would like to advice you that the
following has to be taken into consideration in relation to recognition and measure of revenue for
cash outflows and inflows of customer contract.
 Recognition of contract with customer
 Recognition of obligation to perform contract
 Distributing the transaction cost towards performance obligation to the contract
 Recognizing revenue after the completion of contract performance obligation
Moreover, according to accounting standards the amount which is kept separate by an
organization in order to meet future commitment is known as “provision”. The primary objective
of a provision is to make the current year balance appropriate by adjusting it. Under the income

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20 January 2018
Mr Christopher Sampson
statement provisions are recorded as expenses and in relation to balance sheet as current liability.
In order to create a provision the need has to be probable in relation to a future date towards the
balance sheet and the obligation also has to be contractive or legal in nature. A contingent
liability is a form of liability which is in relation to the expectation of uncertainty taking place. A
contingent liability is only brought under the income statement as loss or expense and under the
balance sheet as liability, when the chances of the uncertain event happening are high and the
liability can be reliable estimated.
It has been stated by you in the e-mail that, the seller was under the obligation of
providing one year maintenance which accounted to $7500 in relation to the contract of sale
between Beachlife Ltd and Goodsports Ltd. However it is to be noted that in case Goodsports
Ltd is not satisfied with the maintenance cost provided by Beachlife they would be entitled to get
a refund of 15% of the total amount which is ($ 90000 * 15%) = $ 13,500. Thus the company
will treat the transaction as recording the sales at $90000 in relation to the income statement as
the sale and the payment has been done in the same financial year as the date is 30th December.
In addition, as the company has an obligation of paying the maintenance charge which can also
be estimated reliably at $7500 it would be recorded as current liability in balance sheet and as
provisions in income statement. Moreover, as an established probability is not present in relation
to contingent liability which accounts to $13,500 it has to be disclosed via notes in financial
statement rather than its inclusion.
We hope we have been able to address your concerns effectively. However, if you have
any queries , please feel free to contract us.

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20 January 2018
Mr Christopher Sampson
Yours sincerely
Ms. Lisa Magenta
Manager
Magenta and Associates
Copy Stewart Hudson
Enc Letter Writing Handout

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20 January 2018
Mr Christopher Sampson
Bibliography
Bond, D., Govendir, B. and Wells, P., 2016. An evaluation of asset impairment decisions by
Australian firms and whether this was impacted by AASB 136.
Goodwin, J., Atilgan, Y., Simsir, S.A. and Ahmed, K., 2016. Investor reaction to accounting
misstatements under IFRS: Australian evidence.
Picker, R., Clark, K., Dunn, J., Kolitz, D., Livne, G., Loftus, J. and Van der Tas, L.,
2016. Applying international financial reporting standards. John Wiley & Sons.
Sinclair, R.N. and Keller, K.L., 2014. A case for brands as assets: Acquired and internally
developed. Journal of Brand Management, 21(4), pp.286-302.
Tysiac, K., 2015. FASB delays revenue recognition effective date by one year. Journal of
Accountancy.
Wagenhofer, A., 2014. The role of revenue recognition in performance reporting. Accounting
and Business Research, 44(4), pp.349-379.

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20 January 2018
Mr Christopher Sampson