Accounting Analysis Paper
RSM221. Issue Analysis Papers
IAP No.1, Financial reporting issues of Plant, page, Bonham & Jones (PPBJ)
Overview
PPBJ is a privately-owned company and their main operating activity is to build theatres and concert halls. On Jan 1st, 2010 they signed a contract of an amphitheatre, which will be finished at the end of 2012. The price of 10.5 million dollars is assigned to the contract. We, as their auditors, are asked by a company partner, to identify and analyze several accounting issues relating to this project.
Issue #1 - Issue Identification
The main issue is when to record the “safety bonus” of 1 million dollars as revenue. This additional condition will be granted only if PPBJ completes the project without safety problems. The PPBJ management will focus on how to avoid any of those problems in order to get the bonus.
Our function, as auditors, is to provide recommendations of how to recognise this “additional revenue” appropriately. The company is privately-owned; therefore, the company can use either PE GAAP or IFRS.
Issue Analysis
Referring to IAS 11, 11, the contract revenue is comprised of the initial amount of the contract and variations in contract incentive payment, whenever it is probable to result in revenue and reliably measured.
To recognise the revenue, the performance has to be substantially complete and the collection is reasonably assured. The collection will be assured, because the contract itself is a legal obligation for the purchaser to pay the price negotiated.
PPBJ has a strong record of safety, which can be a reasonable argument to the performance, which is achieved when the risks and rewards are transferred and/or the earnings process is substantially complete.
The company has never signed a project with similar clause of an additional bonus, which means there is not historical record of how to record this item in their financial statements.
Percentage of completion method
IAP No.1, Financial reporting issues of Plant, page, Bonham & Jones (PPBJ)
Overview
PPBJ is a privately-owned company and their main operating activity is to build theatres and concert halls. On Jan 1st, 2010 they signed a contract of an amphitheatre, which will be finished at the end of 2012. The price of 10.5 million dollars is assigned to the contract. We, as their auditors, are asked by a company partner, to identify and analyze several accounting issues relating to this project.
Issue #1 - Issue Identification
The main issue is when to record the “safety bonus” of 1 million dollars as revenue. This additional condition will be granted only if PPBJ completes the project without safety problems. The PPBJ management will focus on how to avoid any of those problems in order to get the bonus.
Our function, as auditors, is to provide recommendations of how to recognise this “additional revenue” appropriately. The company is privately-owned; therefore, the company can use either PE GAAP or IFRS.
Issue Analysis
Referring to IAS 11, 11, the contract revenue is comprised of the initial amount of the contract and variations in contract incentive payment, whenever it is probable to result in revenue and reliably measured.
To recognise the revenue, the performance has to be substantially complete and the collection is reasonably assured. The collection will be assured, because the contract itself is a legal obligation for the purchaser to pay the price negotiated.
PPBJ has a strong record of safety, which can be a reasonable argument to the performance, which is achieved when the risks and rewards are transferred and/or the earnings process is substantially complete.
The company has never signed a project with similar clause of an additional bonus, which means there is not historical record of how to record this item in their financial statements.
Percentage of completion method