In income statement, cost of sales and sales revenue must be offset by the amount of estimated returns.

Sales

The financial statements that are prepared under normal Sales should be presented as follow.

a)      Income Statements

 

Description

200x

200x-1

Sales/Revenue

 

 

Less: Sales Returns/Allowance of Sales returns

 

 

Net Sales

 

 

                   b)      Balance Sheets

 

Description

200x

200x-1

Current Asset

 

 

Accounts Receivables

 

 

Less: Allowance for Doubtful Debt

 

 

Net Accounts Receivables

 

 

 Percentage-of-Completion Method

The financial statements that are prepared under the percentage-of-completion method, should be presented as follow.

a)      Income Statements

Description

200x

200x-1

Revenue from long-term construction contracts

 

 

Cost of construction

 

 

Gross profit

 

 

 

b)      Balance Sheets

Description

200x

200x-1

Current Asset

 

 

                Accounts Receivables

 

 

                Inventory/Other current asset

 

 

                     Construction in Process1

 

 

                     Less: Billings

 

 

                        Unbilled Revenue

 

 

 

 

 

Current Liabilities

 

 

Billings in excess of costs and recognized profit2

 

 

 

 

 

1 Current period Revenue (Current cost + current period gross profit)

2 Total cumulated billings to date – total cumulated recognized revenue to date

c)       Disclosure

In the summary of significant accounting policies, the disclosure will be as follow:

Long-term Construction contracts.

The company recognizes revenues and reports profits from long-term contracts, its principal business, under the percentage-of-completion method of accounting. These contracts generally extend for periods in excess of one year. The amounts of revenues and profits recognized each year are based on the ratio of costs incurred to the total estimated costs. Costs included in construction in process include direct materials, direct labor, and project related overhead. Corporate general and administrative expenses are charged to the periods as incurred and are not allocated to construction contracts.

And                        “1) Revenue

                                                1.1) Goods sold and services rendered

Revenue from the sale of goods is recognised in the income statement when the significant risks and rewards of ownership have been transferred to the buyer. Revenue from services rendered is recognised in the income statement in proportion to the stage of completion of the transaction at the balance sheet date. The stage of completion is assessed by reference to surveys of work performed. No revenue is recognised if there are significant uncertainties regarding recovery of the consideration due, associated costs or the possible return of goods.

1.3) Construction contracts

As soon as the outcome of a construction contract can be estimated reliably, contract revenue and expenses are recognised in the income statement in proportion to the stage of completion of the contact. The stage of completion is assessed by reference to surveys of work performed. An expected loss on a contract is recognised immediately in the income statement.

1.4) Rental income

Rental income from investment property is recognised in the income statement on a straight-line basis over the term of the lease. Lease incentives granted are recognised as an integral part of the total rental income to be received.

1.5) Government grants

A government grant is recognised in the balance sheet initially as deferred income when there is reasonable assurance that it will be received and that the Group will comply with the conditions attaching to it. Grants that compensate the Group for expenses incurred are recognised as revenue in the income statement on a systematic basis in the same periods in which the expenses are incurred. Grants that compensate the Group for the cost of an asset are recognised in the income statement as revenue on a systematic basis over the useful life of the asset.

2) Inventories or Other current assets

2.1) Construction work in progress

Construction work in progress is stated at cost plus profit recognised to date (refer accounting policy t) less a provision for foreseeable losses and less progress billings. Cost includes all expenditure related directly to specific projects and an allocation of fixed and variable overheads incurred in the Group’s contract activities.

 Completed Contracts Method

The financial statements that are prepared under the completed-contract method, should be presented as follow.

a)      Income Statements

Description

200x

200x-1

Revenue from construction contracts

 

0

Cost of construction

 

0

Gross profit

 

0

 

b)      Balance Sheets

Description

200x

200x-1

Current Asset

 

 

                Accounts Receivables

 

 

                Inventory/Other current asset

 

 

                     Construction in Process1

 

 

                     Less: Billings

 

 

                        Unbilled Contract Costs

 

 

 

 

 

Current Liabilities

 

 

Billings in excess of contract costs2

 

 

 

 

 

1 Current period Revenue (Current cost)

2 Total cumulated billings to date – total cumulated cost to date

c)       Disclosure

In the summary of significant accounting policies, the disclosure will be as follow:

Long-term Construction contracts.

The company recognizes revenues and reports profits from long-term contracts, its principal business, under the completed-contract method of accounting. These contracts generally extend for periods in excess of one year. Contract costs and billings are accumulated during the periods of construction, but no revenues or profits are recognized until completion of the contract. Costs included in construction in process include direct materials, direct labor, and project related overhead. Corporate general and administrative expenses are charged to the periods as incurred and are not allocated to construction contracts.

 

In the financial statements of the company that generate its revenue from construction contracts, the following additional disclosure is required:

a)      Method of recognizing revenue.

b)      The basis used to classify assets and liabilities as current.

c)       The basis for recording inventory

d)      The effects of any revision of estimates,

e)      The amount of backlog or uncompleted contracts

f)       Details of receivables (billed, unbilled, maturity, interest rates, retainage provision, and significant individual or group concentrations of credit risk)

 Installment-Sales & Cost-Recovery Method

For Company that its sales represent the significant part of the total sales and installment sales in minor part of total sales, it is preferred to have adequate disclosures and present “realize gross profit on installment sales” in the income statements.

a)      Income Statements

Description

200x

200x-1

Sales

 

 

Cost of goods sold

 

 

Gross Profit

 

 

Realized Gross Profit on Installment Sales

 

 

Total Gross Profit on Sales

 

 

 

b)      Disclosure of realized gross profit on installment Sales

 

200x

 

Installment Sales

Other Sales

Total

Sales

 

 

 

Cost of goods sold

 

 

 

Gross Profit

 

 

 

Less: Deferred Gross Profit on Installment Sales of this year

 

 

 

Realized Gross Profit on Installment Sales of this year

 

 

 

Add: Gross profit realized on installment sales in prior years

 

 

 

Total Gross Profit on Sales

 

 

 

 

c)       Balance Sheets

Description

200x

200x-1

Current Asset

 

 

         Notes and Accounts Receivables

 

 

         Inventory

 

 

 

 

 

Current Liabilities

 

 

Deferred Gross Profit

 

 

 

 

 

 

d)      Disclosure of notes and accounts receivables and Inventory

Description

200x

200x-1

Accounts Receivables

 

 

  Trade Receivables

 

 

    Less: Allowance for doubtful debts

 

 

 

 

 

  Installments Accounts Receivables, 200x

 

 

  Installments Accounts Receivables, 200x-1

 

 

Total Accounts Receivables

 

 

 

Description

200x

200x-1

Inventory

 

 

  Inventory

 

 

  Repossessed Goods

 

 

Total Inventory

 

 

 

 Deposit Method

Under deposit method, customer advance or refundable deposit account is presented in the financial statements as current liability.

 Franchisors’ disclosures:

Franchisor should disclose about the following;

a.       Description of services that have not yet been substantially performed.

b.      Disclosure on any resolution of uncertainties regarding the collectability of franchise fees.

 

One free unit sales for Advertising should not be credit sales because it overstates the revenue, such practice must credit inventory by costs of free unit sales and debiting advertising expenses.

 Related Parties

Related party receivables include an entity that its equity-based investee should be disclosed separately and fully in investor’s financial statements.

In consolidated financial statements, reciprocal balances, such as receivables and payables between parent and consolidated subsidiary should be eliminated in their entirety regardless of the portion of subsidiary’s stock held by the parent. However, the intercompany transactions should not be eliminated from the separate financial statements of the entities.

The presentation of notes receivables or accounts receivables form officers, employees and affiliated companies is preferred to be presented separately from other receivables.

 IFRS and U.S GAAP determine factors to be considered for business and geographical segment reporting purpose. And those factors that determine the business segment are as follow:

1-      Nature of product or services

2-      Nature Production Process

3-      Type of market and majority of customer which products or services are sold.

4-      Method of marketing channels for distributing the products.

5-      Regulatory environment.

If there are no internal indicators for determining the geographical segment, the following factors should be used for geographical segment purpose

1-      Proximity of operations

2-      Similarity of economic and political situations

3-      The relationship between operations in different areas

4-      Currency risks

For external segment reporting purpose, the following segment information should be disclosed in the financial statements by segment.

1-      Segment Revenue from external customers

2-      Total carrying costs of segment assets

3-      Capital expenditures

4-      Reconciliation

The above factors for determining the business and geographical segment reporting is not enough, there is quantitative threshold that help financial accountant to take a decision for either to report for segment or not. Segment can be reportable if segment is significant and meet the following three quantitative criteria.

1-      Its sales from unaffiliated Companies (external customers) and affiliated Companies (Intersegment) is greater than or equal 10% of total revenue of all segment.

2-      Its operating profit and loss that include unaffiliated and affiliated companies is greater than or equal to 10% if total profit and loss separately. Means, threshold test of 10% should be applied for profitable segment separately from segments that face loss.

3-      Its assets are greater than or equal to 10% of combined assets of all segments

After 10% threshold tests as explained above, financial accountant must perform 75% threshold test of unaffiliated revenue to ensure if the combined revenue of reportable segment based on 10% test are equal to or more than 75% of combined unaffiliated revenue of all segments. If not, additional segments should be considered to meet 75% threshold test.

 

Operating

Segment

Unaffiliated

Revenue

In billions

Intersegment

Revenue

In billions

Total

Revenue

In billions

Segment

Profit

In millions

Segment

Loss

In millions

Assets

 

In billions

Oil

9

9

18

500

 

20

Gas

0

4

4

 

50

12

LNG

0.5

8

8.5

50

 

20

Condensate

3.3

0

3.3

 

5

1

Total

18.5

11.3

33.8

550

55

53

10% Test

12.8

 

3.34

55

5.5

5.3

75% Test

9.60

 

 

 

 

 

 As per the above table, we can know the following segment based on the following test

-          Revenue Test, Reportable segments are Oil and gas

-          Profit test, Reportable segment is Oil

-          Loss test, Reportable segments are Gas

-          Assets test, reportable segment are Oil, Gas and LNG

The total unaffiliated revenue for segments Oil, gas and LNG is $9.5 billion, therefore, we need to include other segments to meet 75% threshold test of unaffiliated revenue which is $9.6, therefore, condensate should be included to be reportable segment.

There are qualitative test in addition to quantitative which is required all segments process should be reported to one chief operating decision makers in deciding how to allocate resources and in assessing performance.

 1-      Segment revenue with separate disclosure of revenue derived from external and internal customers and the source of revenue and by product or service segment and by geographical location of customers

2-      Segment assets and capital expenditures by business segment and by geographical location.

3-      Interest and dividend income and interest expense, depreciation and amortization, contingencies and commitments that are directly attributed to the segment

4-      Total assets for reportable segments and corporate assets and any adjustments in consolidation

5-      Segment share of profit or loss of associates, joint venture or other investments

6-      Reconciliation for total reportable segment revenue, assets and profits to consolidated financial statements.

 Accounts Receivables are reported as current assets if it normal settlements are within operating cycle, but if they are not, they are reported as noncurrent assets.

Notes receivables that are matured within three months or less are treated as cash equivalent

Any long-term notes receivables should be reported at present value of cash they expect to collect.

The prepaid expenses must be recorded as current assets for the portion of the expenses that are due within the operating cycle, and noncurrent assets for the portion of expenses that are due over the operating cycle.

 Presentation and Disclosure of accounts receivables and Consideration

1.       Accounts/Notes receivables are either presented as current or noncurrent assets based on its period of maturity.

2.       Appropriately offset the valuation accounts against the proper receivable accounts

3.       Disclose any loss contingencies that exist on the receivables.

4.       Disclose any receivables designated or pledged as collateral.

5.       Disclose all significant concentrations of credit risk arising from receivables

6.       There is no off-balance sheet risk results from accounts receivables

7.       Accounts Receivables is classified as current asset when it is expected to be collected within the current operating cycle or 1 year whichever is longer.

8.       Allowance for discount should include an estimate of expected discount on the 100% collectable receivables and considering Company’s experience of collectability.

In the summary of significant accounting policies, the disclosure will be as follow:

 

Trade and other receivables

Trade and other receivables are stated at their cost less impairment losses (refer accounting policy m). The recoverable amount of company’s receivables are calculated as the present value of expected future cash flows, discounted at the original effective interest rate inherent in the asset. Receivables with a short duration are not discounted. An impairment loss in respect of receivable is reversed if the subsequent increase in recoverable amount can be related objectively to an event occurring after the impairment loss was recognized.”

 

Issues

IFRS

U.S GAAP

Segment Reporting

Segment reporting disclosure include the following

-        Segment revenue

-        Segment profit or loss

-        Segment assets

-        segment liabilities , if the liability measure is regularly provided by Chief operating decision maker

Segment reporting disclosure include the following

-        Segment revenue

-        Segment profit or loss

-        Segment assets

 

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