ACCOUNTING PROJECT Question 1: HKAS 18- Revenue Recognition sets out revenue recognition criteria for transactions including

sale of goods and rendering of services. Revenue from sale of goods should be recognised when all of the following criteria have been satisfied: The enterprise has transferred to the buyer the significant risks and rewards of ownership of the goods; The enterprise retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold; The amount of revenue can be measured reliably; It is probable that the economic benefits associated with the transaction will flow to the enterprise; and The costs incurred or to be incurred in respect of the transaction can be measured reliably. When the outcome of a transaction involving the rendering of services can be estimated reliably, revenue associated with the transaction should be recognised by reference to the stage of completion of the transaction at the end of the reporting period.The outcome of a transaction can be estimated reliably when all the following conditions are satisfied: the amount of revenue can be measured reliably; it is probable that the economic benefits associated with the transaction will flow to the enterprise; the stage of completion of the transaction at the end of the reporting period can be measured reliably; and the costs incurred for the transaction and the costs to complete the transaction can be measured reliably.

In a situation where sales and services are bundled into one contract, revenue recognition criteria should be applied to the separately identifiable components of each single transaction in order to reflect the substance of the transaction. In particular, Oriental Network Limited enters the contract including two separately identifiable components - sale of network equipment and provision of related infrastructure development services. Sale of equipment The revenue from sale of equipment should be recognised in the financial statements for the year ended 31 December 2010 because all conditions for recognition of revenue from sale of goods are met. 1. The customer acknowledged receipt on the companys delivery note after Oriental Network Limited delivered and installed the equipment during the year ended 31 December 2010. Oriental Network Limited had completely transferred to its customer the significant risks and rewards of ownership of the equipment. 2. Oriental Network Limited did not retain any control over the network equipment as the customer subsequently integrated the network equipment into its management information systems. 3. The fair value of the equipment sold can be estimated from the contract value based on the historical information. 4. All costs for sale of equipment, including installation costs, were incurred during the year ended 31 December 2010 Provision of development services Revenue from provision of services can also be recognised during the year ended 31 December 2010 because 1. The fair value of the services can be estimated based on past experience (50% of contract price) 2. The stage of completion at 31 December 2003 can be determined reliably (50% completed). 3. Costs incurred at the year ended 31 December 2003 and total project costs can be estimated. 4. The customer can enjoy the economic benefits the system generated when it was completed on 30 June 2011. ( Oriental Network Limited obtained the customers acceptance certificate on the entire project on 30 June 2011) As historical information indicated workload and relevant costs of the services were evenly spread over the development period and 50% of the work was completed as at 31 December 2010, half of the service revenue together with half of the total estimated project cost should be recognised in the profit and loss account for the year ended 31 December 2010.

HKAS Sales of goods Revenue is recognized only if it is probable that the economic benefits associated with the transaction will flow to the entity; and The amount of revenue can be measured reliably

US GAAP The general guidance is that revenue is recognized when it is earned and realized or realisable. However, US GAAP includes specific revenue recognition criteria for different types of revenuegenerating transactions. Eg: Under US GAAP, the determination of whether a software transaction is accounted for as a sale versus a services depends on whether the customer has or can take physical possesion of the software. If the customer can take physical posession of the software, the accounting follows a sales model. Otherwise, the services accounting model applies.

Based mainly on a single standards that contains general principles that are applied to different types of transactions.

There is extensive guidance on revenue recognition specific to the industry and type of contract.

For example, Oriental Network Limited has two business model ( applied to two classs of customers). As part of revenue recognition policy, the firm requires different kinds of agreements and must follow different revenue recognition for each type, for instance, written sales agreements for larger customers and a purchase order from its smaller

customers. Rendering of services Revenue may be recognized in accordance with long-term contract accounting, including considering the stage of completion, whenever revenues and costs can be measured reliably, and it is probable that economic benefits will flow to the company. US GAAP prohibits use of the percentage-of-completion method (unless the transaction explicitly qualifies as a particular type of construction or production contract). Most service transactions that do not qualify for these types of construction contracts are accounted for by using a proportional-performance model. Revenue arrangement with multiple deliverables are divided into seperate units of accounting if the deliverables in the arrangement meet all of the specified criteria outlined in the guidance, with revenue recognition criteria then evaluated indepenentlyfor each separate unit of accounting

Multiple Elements

Two or more transactions may need to be grouped together when they are linked in such a way that the whole commercial effect cannot be understood without reference to the series of transactions as a whole