On 1st October 2020, Halifax sold units with a total sales price of
On 1st October 2020, Halifax sold units with a total sales price of £500,000 to a single large customer. Included in the contract was a two-year service warranty covering all required repairs during this time. The normal selling price of the same merchandise would be £400,000 without the warranty. As of 31st March 2021, Halifax recognised £425,000 of revenue, included in the above accounts.Required:The accountant who posted the sale is now worried that they treated this incorrectly. They come to you asking for help. Prepare a brief note for them both showing the correct treatment, explaining why the correct treatment is consistent with International Financial Reporting Standards.
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Step 1
Revenue recognition refers to the timing and amount of the revenue that is to be recorded in the financial statements as per the accounting standard specifications.
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• As per the accounting standard on revenue recognition, revenue shall be recorded considering the five-step model for revenue recognition as stated below:
Identifying the contract with the customer.
Ascertaining the performance obligation
Determining the price of the transaction
Allocation of the transaction price to the obligations performed
Recognizing the revenue on satisfying the performance obligations by the entity.
• As per the above concept of revenue recognition, revenue from warranty obligations are to be recognized only on satisfaction of performance obligations.
• The given contract consists of the warranty obligations for a two-year service and hence, as per the revenue recognition standard, revenue for warranty obligations shall be recognized up to 31st March 2021, i.e. for six months only, since the service obligations for the warranty amount of the revenue is spread across a period of 2 years.
• At the first instance, on the date of sale i.e. Oct 1, 2020 revenue is recorded for the units sold at standalone price. For the warranty service amount, it is first recorded as unearned revenue, later on, at the end of the year, revenue from warranty service is recognized as revenue for the corresponding period
• So the correct treatment shall be :
Reference:https://i.imgtg.com/2022/04/17/xM9Vb.jpg
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