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Hi,

I'm studying for the CPA and I faced this problem. could you please explain it to me? I will be thankful if you do.

I'm sorry I don't have an Arabic keyboard.

 

On June 1, 2016, Linli Property Management entered into a 2-year contract to oversee leasing and maintenance for an apartment building.  The contract starts on July 1, 2016.  Under the terms of the contract, Linli will be paid a fixed fee of $50,000 per year and will receive an additional 15% of the fixed fee at the end of each year provided that building occupancy exceeds 90%.  Linli estimates a 30% chance it will exceed the occupancy threshold, and concludes the revenue recognition over time is appropriate for this contract. 

 

1.     Assume Linli estimates variable consideration as the expected value.  How much revenue should Linli recognize on this contract in 2016? Explain Plz

2.     Assume Linli estimates variable consideration as the most likely amount.  How much revenue should Linli recognize on this contract in 2016?Explain Plz

 

3.     Assume that Linli accrues revenue each month, and estimates variable consideration as the most likely amount.  On November 1, Linli revises its estimate of the chance the building will exceed the 90% occupancy threshold to a 70% chance.  What is the total amount of revenue Linli should recognize on this contract in November of 2016? Explain Plz .

 

Thanks,

Muhannad

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Hi Muhannad,

Usually when the revenue recognition is related to possibilities we are (as accountants) using two IFRS approved statistical approaches (i.e. expected value or most likely amount).

In particular, IFRS 15 contains new requirements for identifying and measuring variable consideration – amounts of consideration that can vary due to the effect of discounts, rebates, refunds, returns, penalties, or other items. These factors may be specifically identified in the contract, or may arise when the customer has a valid expectation arising from an entity’s customary business practices, published policies or specific statements that it will offer a price concession. Before an entity can recognize any revenue on a contract, the standard requires estimating the amount of consideration to which it will be entitled, taking all of this into account, in exchange for transferring the promised goods or services to a customer

The entity makes the estimate by using either of the following methods, depending on which method it expects to better predict the amount of consideration to which it’ll be entitled:

  • (a) The expected value— the sum of probability-weighted amounts in a range of possible consideration amounts. An expected value may be an appropriate estimate of the amount of variable consideration if an entity has a large number of contracts with similar characters.    
  • (b) The most likely amount—the single most likely amount in a range of possible consideration amounts (i.e. the single most likely outcome of the contract). This may be an appropriate estimate of the amount of variable consideration if the contract has only two possible outcomes (for example, an entity either achieves a performance bonus or doesn’t).

Using the above approach you can easily solve the question as follows:

 

1- The revenue 2016 = Fixed fees + the expected value of the variable consideration = 50,000 + (50,000 * .15 * .30) = 50,000 + 2,250 = 52,250/2 = 26,125

2- The revenue = Fixed fees + the most likely amount of the variable consideration = 50,000 + 0 = 50,000/2 = 25,000

3- Do it by yourself :)

 

All my best wishes for your CPA studying.

  

تم تعديل بواسطه mismael

Mohamed Ismael, CPA, CMA, SOCPA, CertIFR

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