As per AASB118 guidelines, revenue is defined as an income-generating unit as associated with such activities. Under sales receipt, for instance, a lot guidelines are there as stated by the AASB118 which unless fulfill the requirements, will not acknowledge the recorded revenue. In keeping with the above guidelines, we can spot the possible occasions within sales processes that a sale is able to be successfully recognized and revenue earned.
Bearing the above in mind, the following suggestions can be offered to 'Creative Computer Packages Pvt Ltd (CCP)'.
Firstly, according to the guidelines, a sale is recorded or recognized when the ownership of the asset is transferred from the developer to the client. Although you enter into a business contract with the client, it will not be considered as a sale. It is only upon final delivery of the product inclusive of every installation and features as per the customer's request, will the sale be recorded.
This apart, privileges of sales return also govern the recording of a sale. Besides, a sale cannot be recorded until the expiry of the sale return condition. Thus, in case of a CCP, a sale can only be recorded only after the elapse of 30 day right of return period. Another alternative which the CCP might choose is recording of the sale while maintaining a reserve for certain percentage of sales return.
Sale can be booked following receipt of payments in full and the product (custom-made computer in this case) is delivered to the client.
The AASB118 guidelines also stated that although after receipt of cash payment, it will be entered into the books as revenue, only when it matches with the value of goods or services. This means that the receipt of payment is required to be earned. In case this does not happen, then the payment received in advance will be regarded as a liability as the responsibility to provide equivalent products or services to the client in future will be on you.
Some guidelines have been stipulated by the AASB to categorize accounting in case of construction projects, since more than one financial year is involved for completion. The rules for AASB 111 "construction Contracts" guidelines recommend that:
Contractors must employ the percentage-of-completion method to account for construction related contracts. This implies that related to the amount of work done, matching profit or revenue can be shown.
During the progress of construction, every earning and profit should be shown as accumulated in an inventory account.
But the aforesaid pointers possess a single determining factor. These can only be used in case the percentage-of-completion procedure permits for an estimable result of the contract. In situations where the condition is not fulfilled, the profits and earnings will not be accepted until the final completion of the project.
Although the company in question, Solderbone Construction Ltd has complied suitably with the above stated stipulations, it would require itself to change its accounting procedure when the new guidelines or the new modifications to the present set of guidelines take effect. During June 2010, IASB suggested a draft with the name "Revenue from Contracts with Customer" aiming at improving the financial accounting from contracts. The suggested new guidelines have ushered in a small change which will impact the accounting cycle. It is proposed under the new guidelines that the revenue will now be recognized for contractors in situations when the CONTROL of the property is transferred to the customer. (Pearson, 71). This is different from the earlier guideline which permitted revenue to be recognized the moment the ownership got transferred to the customer. Whereas the modifications which Solderbone Constructions will be required to bring about in their accounting cycle are not significant, it is a fact that the new principles stated is surly impact the accounting for the long-term construction projects. The novel method of accounting will have a delaying effect on revenue recognition, eventually delaying the whole revenue cycle.
Since it is readily stated within the assignment that only employees having served for 10 years or more are liable for getting their Long Service Leave or LSL of 13 weeks. Employees having served for minimum of 7 years will get LSL on their accumulated leaves. However, employees having served for lesser duration will not be entitled for any accumulated leave. On the above grounds, only two employees meet the criteria. They are Yi Lu having work experience of 7 years and Hajime Yaumachi having work experience of 11 years. In case of Yi Lu, he is entitled for LSL based on his accumulated leaves and Hajime Yaumachi is entitled for 13 week LSL.
Therefore, on June 30, 2010 ending, the companies LSL liability will be:
1) LSL for Mr. Yaumachi = (120,000 * 13/52) * 1.175
Where, 120,000 = His annual salary
13= No. of weeks worth LSL
52 = Total no. of weeks in an year
1.175 = Leave Loading
= 30,000 * 1.175 = $35,250 or ($678 approx per week)
2) LSL for Mr. Lu depends on his accumulated leaves. Considering his accumulated leaves to be 7 weeks (assumption basis). In such a scenario, where his salary is $78,000, his LSL would come to
= (78000*7/52) *1.175 = 10500*1.175 = $12,334 (or $237 per week).
From the above calculations, we get a figure of $47,584 (Adding LSL due to both Yaumachi and Lu).
But just mere calculation, the above figures will not be enough. It is required to be inflation adjusted to arrive at the exact amount. Therefore assuming the long term inflation to be 3%, the LSL due to Yaumachi comes to 3% added to $35,250 = $36,308 and for Lu it is 3% of $12,334 = $12,704.
Now we have arrived at the exact figure of $49,012 which is the amount that Yaumachi Motors Pvt. Ltd must keep as provision for LSL.