Accounting Seminar Assigment

Accounting Departement, Faculty of Economic, Andalas University

Student Identities
1. Doni Rahmad

1110534009

2. Facriza Mizafin

1110534021

A. Description Of The Case And Related Problem

The case provide us information about a chinas company that expand the business by
creating a franchise agreements, it inform about number of franchisee ,agreements and
information about the latest data available on revenue.
As accounting student we ask to solve several problem about revenue. From the case
mentioned, there are several problems that to solve. First, to find the general principles
that should be applied in the recognition. We asked to use the standard to explain the
circumstance based on accounting standard. Second, we need to calculate the transaction
for each franchisee, calculate the amount of revenue and profit that should be reported for
the year ending 31 December 2005,using the latest information available on revenue.
This is the important summarization of the case:
During the year ending 31 December 2005, JML entered into a number of franchise
agreements. These agreements were entered into by a wholly owned subsidiary of JML,
JML (china) which was newly set up in the PRC. JML (China) has recruited of view local
employees to run of small office in Shanghai. Most of the franchisee-serving work is done
by Hongkong head office staff, although they travel frequently to mainland. JML (China)
will not keep any inventory. Any goods ordered by the franchisees will be shipped directly
from JMLs workshops.
franchise agreements,
1. JML (china) will initially provide the assist the franchise to set up their operation in
china. These include finding suitable outlet location, outlet image design, staff
training, information system sourcing and testing.

2. The provision of these initial services is normally complete when the franchises start
retailing JMLs product in the outlets.
3. The agreement usually requires a franchise to pay an initial fee of $1.8 million upon
signing the franchise agreement, though JML (china) in one case accepted installment
from the franchises.
4. The initial fee is refundable, after the deduction of the cost incurred by JML (china),
when substantial performance has been complete.
5.

After setup is completed, JML (china) will start to charge the

franchises an annual fee to cover the cost of continuing services, such as staff training
consultancies, with a reasonable profit
In this case, there are 3 franchisees that included. They are Shanghai franchisee,
Beijing franchisee and Guangzhou franchisee.
B. Arguments
This case set the calculation revenue and profit as the main issues in francise business
to be solved by the student,
Based on Our group accounting point of view, it will ussualy solve by using 2 standard.
revenue is regulated on IAS 18 in generally and PSAK 23 for implenmentation in
indonesia ( PSAK 23 is used to explain implementation that not mentioned by IAS 18),
But we are tring to chane the IAS 18 with IFRS 15 that replaces the previous revenue
Standards:
1. IAS 18 Revenue
2. IAS 11 Construction Contracts,

About IFRS 15

IFRS 15 Revenue from Contracts with Customers issued in May 2014. IFRS 15 sets out
the requirements for recognising revenue that apply to all contracts with customers
(except for contracts that are within the scope of the Standards on leases, insurance
contracts and financial instruments). Though IFRS 15 is effective from 1 January 2017
,trying to use this standart will let us to know earlier about this standart
Recognizing
IFRS 15 establishes a comprehensive framework for determining when to recognise
revenue and how much revenue to recognise. The core principle in that framework is
that a company should recognise revenue to depict the transfer of promised goods or
services to the customer in an amount that refl ects the consideration to which the
company expects to be entitled in exchange for those goods or services.

To recognise revenue, a company would apply the following fi ve steps:

1. Identify the contract(s) with the customer
A contract is an agreement between two or more parties that creates enforceable
rights and obligations. A company would apply IFRS 15 to each contract with a
customer that has commercial substance and meets other specifi ed criteria.
One criterion requires a company to assess whether it is probable that the company
will collect the consideration to which it will be entitled in exchange for the promised
goods or services. In some cases, IFRS 15 requires a company to combine contracts and
account for them as one contract. IFRS 15 also specifi es how a company would
account for contract modifi cations.

2. Identify the performance obligations in the contract

In determining whether a good or service is distinct, a company considers if the
customer can benefi t from the good or service on its own or together with other
resources that are readily available to the customer. A company also considers whether
the companys promise to transfer the good or service is separately identifi able from
other promises in the contract.

For example, a customer could benefi separately from the supply of bricks and the
supply of construction labour. However, those items would not be distinct if the
company is providing the bricks and construction labour to the customer as part of its
promise in the contract to construct a brick wall for the customer. In that case, the
company has a single performance obligation to construct a brick wall. The bricks and
construction labour would not be distinct goods or services because those items are
used as inputs to produce the output for which the customer has contracted.
3. Determine the transaction price
The transaction price is the amount of consideration to which a company expects to
be entitled in exchange for transferring promised goods or services to a
customer.Usually, the transaction price is a fi xed amount of customer consideration.
Sometimes, the transaction price includes estimates of consideration that is variable or
consideration in a form other than cash. Some or all of the estimated amount of variable
consideration is included in the transaction price only to the extent that it is highly
probable that a signifi cant reversal in the amount of cumulative revenue recognised
will not occur when the uncertainty associated with the variable consideration is
subsequently resolved. Adjustments to the transaction price are also made for the
effects of fi nancing (if signifi cant to the contract) and for any consideration payable to
the customer.
4. Allocate the transaction price
A company would typically allocate the transaction price to each performance
obligation on the basis of the relative stand-alone selling prices of each distinct good or
service. If a stand-alone selling price is not observable, the company would estimate it.
Sometimes, the transaction price may include a discount or a variable amount of
consideration that relates entirely to a specifi c part of the contract. The requirements
specify when a company should allocate the discount or variable consideration to a
specifi c part of the contract rather than to all performance obligations in the contract.
5. Recognise revenue when a performance obligation is satisfied
A company would recognise revenue when (or as) it satisfi es a performance
obligation by transferring a promised good or service to a customer (which is
when the customer obtains control of that good or service). A performance
obligation may be satisfi ed at a point in time (typically for promises to transfer goods
to a customer) or over time (typically for promises to transfer services to a customer).

For a performance obligation satisfi ed over time, a company would select an

appropriate measure of progress to determine how much revenue should be recognised
as the performance obligation is satisfied.

About PSAK 23

Between IAS 18 and PSAK 23 is consistenly similiar, PSAK 23 Based on the purpose,
the entity that established by the owners of capital can be categorized into two parts:
1. Profit oriented : entities that have the primary purpose of improving the company's
growth by producing optimum results.
2. Non-profit oriented : entities that have the primary purpose is not looking for optimum
profit, but rather to provide service to the community through the products and services
provided.

Revenue is the main goal of every business activity both trading business, industry and
services. So companies competed to increase revenue because with the increases in
revenue, the company will increase the profit, which is used for the purposes of
company.

Profit is the additional of income, property, objects and money that can be used for the
company's survival, especially in implementing their activities. If not, the company's
survival will threatened. The main purpose of reporting income is that income must be
the result of applying the logic and consistent rules or procedures.

The interest parties in the business entity at the end of each period, the accounting can
assess the performance of management based on published financial statements. The
interested parties can be classified into two parts, namely: The internal and external
parties. Internal party can include employees, directors and owners of the company.
External parties such as creditors, the government and the Bank. If the income is not
recognized at the right time, profit information presented in the financial statements
would otherwise be too large or too small. So this, especially financial statement
income statement does not reflect the actual situation that occurred during the report
period. Thus these financial statements will result in the user would be wrong predicted

report corporate earnings. When reporting income depends by the condition and the
type of work done. In principle, revenue may be recognized when realized.

Based on explanation above, the IFRS 15 and PSAK 23 is applicable to solve the case
in order to calculate the revenue based on accounting calcutation.
Solution
No 1
1 explain the general principle that should be applied in the recognition
As i explained in argument sections, the general principle that should be applied in the
recognition is IFRS 15 and PSAK 23 it will guide us to determine which one is revenue
or not based on accounting purpose.
Based on IFRS 15
Recognise revenue when a performance obligation is satisfied
A company would recognise revenue when (or as) it satisfies a performance
obligation by transferring a promised good or service to a customer (which is when the
customer obtains control of that good or service). A performance obligation may be
satisfied at a point in time (typically for promises to transfer goods to a customer) or
over time (typically for promises to transfer services to a customer).
Based on PSAK 23
Jika hasil transaksi penjualan jasa dapat diestimasi secara andal maka penjualan dapat diakui
dengan acuan tingkat penyelesaian transaksi pada akhir periode pelaporan.
Dapat diestimasi dengan andal jika memenuhi kriteria berikut:
1. Jumlah pendapatan dapat diukur secara andal.
2. Kemungkinan besar manfaat ekonomi sehubungan dengan transaksi tersebut akan
mengalir ke entitas;
3. Tingkat penyelesaian dari suatu transaksi pada akhir periode pelaporan dapat diukur
secara andal; dan
4. Biaya yang timbul untuk transaksi dan biaya untuk menyelesaikan transaksi tersebut
dapat diukur secara andal
5. Jika hasil transaksi tidak dapat diestimasi secara andal maka pendapatan diakui hanya
yang berkaitan dengan beban yang telah diakui yang dapat dipulihkan.

No 2
for each the franchises,calculate the amout of revenue and profit that should be reported
for the year ending 31 December 2005,using the latest information available on
revenue.

1. Shanghai franchisee
Provision of initial services was completed during the year. and all the initial fee has
been received. Total costs incurred amount to $1 million. The Shanghai Franchisee
agreed to pay an annual franchise servicing fee of $500.000 to JML (China).
According to the agreement, Shanghai shall purchase from JML (Chinas)s holding
company, JML, or from JMLs subsidiaries, goods of at least $50 million per annum
and a total of $400 million offer a period of 5 years. As of the latest date, the franchisee
had taken delivery of goods with a total invoice price of $40 million only. Shanghai had
already ordered the remaining $10 million in accordance with the agreement but
requested delivery early in 2006.
Initial fees

: 1.800.000 (was completed during the year)

Based On IFRS 15 It not fullfil requirment because it Not satisfies a performance

obligation by transferring a promised good or service to a customer (which is when the
customer obtains control of that good or service). So its not define as revenue

cost

: 1.000.000 ( recognized as JMLsrevenue from providing

Initial service)
Based On IFRS 15 IJML has satisfies a performance obligation by providing set up
(which is when the customer obtains control of that good or service). So its not define
as revenue
Refundable fee

800.000 (refund)

Based on contract the residual fee is refundable, its not a revenue

Annual francise fees

: 500.000 (recognized as

JMLs revenue from francise

charges)
Based On IFRS 15 IJML has satisfies a performance obligation by providing of
continuing services, such as staff training consultancies. So its not define as revenue
Purchase of goods 2005yr

: 40.000.000 (recognized as JMLs revenue from

selling goods )
Based On IFRS 15 it satisfies a performance obligation by transferring a promised good
to a customer (which is when the customer obtains control of that good or service).
Purchase of goods 2006yr

:10.000.000 (is not recognized as JMLs revenue from

selling goods )
Based On IFRS 15 it NOT satisfies a performance obligation by transferring a promised
good to a customer because the product is not delived yet, the costumer not obatain
control of that goods
from the calculation, the total revenue for JML is calculated from:
cost

1.000.000

recognized

as

JMLsrevenue

from

providing service)
Annual francise fees

500.000 (recognized as JMLs revenue from francise

charges)
Selling goon on 2005

40.000.000 (recognized as JMLs revenue from selling

goods )
Totals

41.500.000

2. Beijing Franchise
Provision of intial services started recently.
One-third of initil fee, $600,000, has been received.
JML (China) has assisted the Beijing Franchisee too looked a suitable shopping mall
for each outlet, but Beijing has to sign any concrete agreement with the landlord. JML
(China) has provided some has not started yet.
The cost incurred to that by JML (China) for these initial services is $150,000 and the
total cost is expected to be $1 million.
Initial fees

:1.800.000

(is not recognized as revenue by JMLs )

Based On IFRS 15 It not fullfil requirment because it Not satisfies a performance

obligation by transferring a promised good or service to a customer (which is when the
customer obtains control of that good or service). So its not define as revenue
collected

:600.000

(recognized

as

account

paybleby

JMLs

realized)
Based On IFRS 15 It not fullfil requirment because it Not satisfies a performance
obligation by transferring a promised good or service to a customer (which is when the
customer obtains control of that good or service). So its not define as revenue
Cost

150.000

(JMLsrevenue from providing service )

Based On IFRS 15 IJML has satisfies a performance obligation by providing set up

(which is when the customer obtains control of that good or service). So its not define
as revenue
Annual francise fees

none

( setup is not completed )

Purchase of goods

none

( next year transaction)

Based On IFRS 15 it NOT satisfies a performance obligation by transferring a promised

good to a customer because the product is not delived yet, the costumer not obatain
control of that goods

from the calculation, the total revenue for JML is calculated as:
Cost

150.000 (JMLsrevenue from providing service )

Addition

Totals

150.000

3. Guangzhou Franchisee
Provision of initial services is partly completed, and all they initial fee has been
received.
It is expected that Guangzhou franchise will open its first outlet in march 2006.
The cost incurred to date by JML ( China) for the guangzhou franchise is $ 700.000 and
the total cost is expected to be $ 1 millon.
The Guangzhou franchise has already placed orders for its 2006 sales,and the goods
wil be delivered in early 2006.
Initial fees

1.800.000

(received partially)

Based On IFRS 15 It not fullfil requirment because it Not satisfies a performance

obligation by transferring a promised good or service to a customer (which is when the
customer obtains control of that good or service). So its not define as revenue
cost

700.000

( JMLsrevenue from providing service-realized)

Based On IFRS 15 IJML has satisfies a performance obligation by providing set up

(which is when the customer obtains control of that good or service). So its not define
as revenue
Refundable fee

none

substantial

performance

Annual francise fees

none

( setup is not completed )

Purchase of goods

none

( next year transaction )

complete )

is

not

Based On IFRS 15 it NOT satisfies a performance obligation by transferring a promised

good to a customer because the product is not delived yet, the costumer not obatain
control of that goods

from the calculation, the total revenue for JML is calculated as:
Cost

700.000 (JMLs fee revenue from providing initial service )

Addition

Totals

700.000

Summarization
From all franchise, total revenue is recognized by JMLs for 31 desember 2014
1. Shanghai franchisee
cost

1.000.000(recognized as JMLsrevenue from providing

service)
Annual francise fees

500.000(recognized as JMLs revenue from francise

charges)
Selling goon on 2005

40.000.000(recognized as JMLs revenue from selling

goods )
2. Beijing Franchise
Cost

150.000(JMLsrevenue from providing service )

3. Guangzhou Franchisee
Cost

700.000(JMLs fee revenue from providing initial

service )
Total

42.350.000

(total revenue recognized)