258 Accounting: Business Reporting for Decision Making
• Timing — where contracts have not been finalised before the start of the contract period, over-
ride and commission earnings may have to be estimated until agreement has been reached; and
• Renegotiations — periodic renegotiations of terms and contractual arrangements with suppliers
may result in additional volume/incentives, rebates or other bonuses being received. These pay-
ments may not be specified in existing contracts.
Other revenue recognition policies
Lease income: Lease income from operating leases is recognised as income on a straight-line basis
over the lease term.
Interest income: Interest income is recognised on a time proportion basis using the effective
interest method. When a receivable is impaired, the group reduces the carrying amount to its
recoverable amount, being the estimated future cash flow discounted at the instrument’s original
effective interest rate, and continues unwinding the discount as interest income. Interest income on
impaired loans is recognised using the original effective interest rate.
Dividends: Dividends are recognised as revenue when the right to receive payment is estab-
lished. This applies even if they are paid out of pre-acquisition profits. However, the investment
may need to be tested for impairment as a consequence.
Royalties: Royalty revenue is recognised on an accrual basis in accordance with the substance
of the relevant agreement.
Source: Flight Centre Ltd 2014, annual report, pp. 39 and 82.Required
a. Identify Flight Centre Ltd’s sources of revenue.
b. In your own words, reconcile the revenue recognition criteria applied by Flight Centre for travel
services to the definition and recognition criteria in the Conceptual Framework.6.35 Recognising and classifying revenue LO5, 7
On 31 December 2015, Narvey Horman sold whitegood appliances to a customer for $20 000. The
customer paid cash for the whitegoods. Narvey Horman includes a three-year warranty service
with the sale of all its whitegoods.
Required
a. Explain Narvey Horman’s obligations arising from the sale.
b. Narvey Horman records this transaction by increasing revenue by $20 000 and increasing cash
at bank by $20 000. With due consideration to the Conceptual Framework, examine the appro-
priateness of recording the transaction and recognising the revenue in this manner. Justify an
alternative way of recording the transaction.6.36 Adjusting income, expense, asset and/or liability accounts LO2, 4
Generate the adjustments needed to the income, expense, asset and/or liability accounts for Games
Pty Ltd to reflect the following transactions in the entity’s financial statements for the 12-month
reporting period ended 31 December 2015 using the accrual system:
a. The fortnightly salaries and wages bill of $6900 for December 2015 is due to be paid on
1 January 2016.
b. The entity has $30 000 of office furniture and equipment with a $10 000 residual value that it
depreciates over five years on a straight-line basis.
c. A client owes $5000 for services rendered in December 2015.
d. Games Pty Ltd utility services bill (water, telephone, electricity) for the quarter ended December 2015
has not yet been received. Based on previous bills, the quarterly expense is expected to be $1200.
e. Games Pty Ltd has a two-year subscription to a trade magazine at a cost of $2400. The sub-
scription was paid on 1 March 2015.
f. A customer had commissioned work and paid $5000. As at 31 December 2015, the work had
not been performed.
g. Games Pty Ltd expects to lose a court case over a breach of contract. If it loses, the damages
awarded could be in the range of $20 000 to $80 000.