Learning unit 3: Revenue and Leases

3.1 Purpose of learning unit

Students should be able to treat specific types of contracts following the correct accounting
processing method. These contracts include:

• Revenue from contracts with customers

• Leases (since lessee accounting has already been covered in the second year, this learning unit
will focus on lessor accounting)

3.2 Assessment criteria

• Recognise an item that meets the definition of an asset, a liability, equity, income or expense for
inclusion in the statement of financial position or performance
• Derecognise from the financial statements an item that no longer meets the definition of an
asset and a liability.
• Evaluate the recognition and/or derecognition of an asset, a liability, equity, income or expense
in a given scenario against the applicable IFRS standard
• Indicate the measurement basis for an asset and a liability based on the applicable IFRS standard
• Evaluate the measurement basis for an asset or a liability in a given scenario against the
requirements of the applicable IFRS standard
• Present and disclose a selected framework and reporting boundary
• Communicate clearly and concisely in a professional manner appropriate to the audience and
situation
• Apply word-processing software skills (Word, Spreadsheets, PowerPoint) and contemporary
communication channels (social media) within an accounting and related services context
• Communicate and collaborate with others using a wide range of digital devices, technologies
and platforms (e.g., Teams, discussion forums)
• Apply effective listening and discussion techniques to obtain and clarify relevant information
• Describe threats to ethical principles and appropriate safeguards to facilitate ethical behaviour
in a given scenario
• Share an ethics-based reasoning process (based on professional values and attitudes and an
organisational code of ethics) to solve ethical dilemmas within an accounting and related
services context

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A general discussion forum has been set up for Learning unit 3 on your main module site as well as on
the e-tutor site. It is strongly recommended that you post your questions and comments on the forum
on the e-tutor site as you work through the learning unit. Your allocated e-tutor is more than happy to
assist you on your learning journey.

Please click HERE to go the forum for Revenue from contracts with customers and leases (lessor only).

3.3 Introduction

Within learning unit 3, we will discuss and study IFRS standards applicable to contracts. This
learning unit will therefore focus on the following standards:

• IFRS 15, Revenue from contracts with customers

• IFRS 16, Leases (Since lessee accounting has already been covered in the second year, this
learning unit will focus on lessor accounting)

Each of the above standards will be discussed individually within this learning unit.

Communication skills learned from the successful completion of both CBC1501

(Communication in Business Context) and CAS1501 (Perspectives on Accountancy) are
assumed prior knowledge and are applicable to all your future studies. Communication forms an
integral part of the role of the accounting practitioner within business contexts; therefore, good
communication skills are essential. As a result, communication skills will form part of your
FAC3764 journey.

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Source: https://www.shutterstock.com/image-photo/increase-revenue-concept-businessman-
plan-growth-276496592
Topic 3.1 of Learning unit 3 deals with IFRS 15, Revenue.
Take note: This does not apply to all revenue, only revenue arising from contracts with
customers and where the contract does not fall within the scope of another IFRS standard. For
example, IFRS 15 does not apply to lease contracts, insurance contracts or financial instruments.

IFRS 15 provides detailed explanations of the 5-step process (see Figure 3.1) to determine when
to recognise revenue and how to measure it. The standard also provides guidance on the
presentation and disclosure of revenue.

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 • Identify the contract/s with a customer.
Step 1

• Identify the performance obligations in the contract.

Step 2

• Determine the transaction price.

Step 3

• Allocate the transaction price to the performance obligations in

Step 4 the contract.

• Recognise revenue when/as the entity satisfies a performance

Step 5 obligation.

Figure 3.1: The 5 steps for revenue recognition and measurement (Els, 2022)
Study

Refer to Chapter 4 of your prescribed Gripping GAAP textbook to study the concepts and
principles relating to IFRS 15.
IFRS 15 is a very long and detailed standard and deals with the recognition, measurement and
presentation of revenue from contracts with customers. To assist you in getting a better
understanding of the chapter, we will provide short summaries of each of the 5 steps to recognise
and measure revenue. However, you need to take note that the chapter does not only deal with
the 5 steps, and you need to study the full chapter as indicated above.
Step 1 discusses the requirements that must be met for a contract with a customer to exist and
how to deal with combining contracts and any contract modifications.

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 Figure 3.2: Summary of step 1 (Els, 2022)
Step 2 defines a performance obligation.

Step 2: Identify the

performance
obligation

Distinct in Definition
context of Capable of
contract being distinct

Figure 3.3: Summary of step 2 (Els, 2022)

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Step 3 discusses the transaction price of a contract and the factors that should be considered
when determining the transaction price.

Figure 3.4: Summary of step 3 (Els, 2022)

Step 4 describes how the transaction price should be allocated to the different performance
obligations.

Figure 3.5: Summary of step 4 (Els, 2022)

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Step 5 discusses when a performance obligation is satisfied and how to measure the progress
towards the completion of the performance obligation.

Step 5: Satisfying performance obligations

At a point in time

Goods/Services transferred Customer obtains control

Over a period of time

Output method for
One of 3 criteria to be met Input method for measuring
measuring

Figure 3.6: Summary of step 5 (Els, 2022)

Watch the following video for a summary of IFRS 15, Revenue from contracts with customers:
https://youtu.be/6d8NPrXKkx4

Activity 3.1

After watching the above video, you should be able to answer the following questions:

1. To which contracts/transactions does IFRS 15 not apply?

2. What are the 5 steps for revenue recognition?
3. What happens if no goods/services are transferred to a customer?
4. How is the selling price of the hiking boots and socks allocated to the different performance
obligations?

Discuss this with your fellow students in Forum 3.1.

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Guidelines for participating in forums

• Compile your post offline and keep a record of it.

• Use an academic writing style to reference and cite your sources.
• Post your answer on the forum.

Reply to the contributions of at least two of your fellow students

Activity 3.2

It is now time to test your IFRS 15 Revenue knowledge by completing the LexisNexis PassPlus
online quiz. If you do not obtain 60% for the self-assessment quiz, you lack revenue knowledge
and must spend more time revising the IFRS 15 revenue principles.

Please click HERE to access the online quiz.

Activity 3.3

Now complete the additional comprehensive questions that is included within the orange
link below. We suggest that you answer these integrated questions under assessment
conditions. These integrated questions will help you to identify areas of weakness that you must
pay attention to.
Please note: Solutions will be provided at a later stage to give you an opportunity to attempt
answering the questions first. Your answers to these integrated questions must not be
submitted to your lecturer. You should compare your answers with the suggested solutions.
Self assessment question_Revenue

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 Figure 3.7: IFRS 16 Leases

Source: https://www.shutterstock.com/image-photo/business-legal-document-concept-pen-
glasses-1072039904

Topic 3.2 of Learning unit 3 discusses IFRS 16, Leases: Lessor accounting. IFRS 16 contains
prescriptions for the accounting treatment of leases, both for the lessee and the lessor. Please
note: The accounting treatment for the lessee and the lessor are not mirror images of each other.
In most instances, a lessee will account for all leases “on balance sheet”, meaning they must
recognise a leased asset and a lease liability, but a lessor can account for either an operating or a
finance lease.

The principal issues in accounting for Leases: Lessor accounting are the following:

• Lease classification
• Finance leases
• Initial measurement of lease receivable
• Subsequent measurement
• Tax consequences (both current and deferred tax)
• Disclosure
• Operating leases
• Recognition
• Measurement
• Taxation
• Disclosure

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From an accounting teaching perspective, we build upon knowledge obtained from the
successful completion of first- and second-year accounting modules. Leases: Lessee accounting
was already extensively covered within the FAC2601 module. The Leases: Lessee accounting
learned from completing the FAC2601 module is assumed prior knowledge and applies to all
your future accounting studies. From this perspective, you already acquired knowledge on all the
principal issues in IFRS 16 for Leases: Lessee accounting. Within FAC3764, our focus will be
on the principles of IFRS 16 Leases: Lessor accounting.

Activity 3.4

It is now time to test your IFRS 16 Leases: Lessee accounting knowledge by completing the
LexisNexis PassPlus online quiz. If you do not obtain 80% for the self-assessment quiz, you lack
knowledge about basic Leases: Lessee accounting. You must spend more time revising the
principles as you must master the basic accounting principles before moving on to the Leases:
Lessor accounting principles. The content of FAC2601 that outlines the leases: lessee
accounting principles are uploaded as an additional resource. The content forms part of self-
study and should be accessed to refresh your memory on the property, plant and equipment
principles.
Please click HERE to access the online quiz.

If you need to revise your knowledge of IFRS16 Leases: Lessee accounting, watch the
following video on an example of lessee accounting:
https://youtu.be/9REUq9kVl9k

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Study

Refer to Chapter 17 of your prescribed Gripping GAAP textbook for the concepts and principles
relating to IFRS 16. Read the following sections:

• Section 3.3.3, pages 854-856

• Section 3.4.2, pages 858-862

Study the rest of the chapter thoroughly.

Gross investment
in lease

Net investment in
Finance lease
lease

Unearned finance
income
Leases: Lessor

Operating lease
income
Operating lease
Operating lease
receivable

Figure 3.8: Summary of Leases: Lessor (Els, 2022)

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Activity 3.5

It is now time to test your knowledge of IFRS 16, Leases: Lessor accounting by completing the
LexisNexis PassPlus online quiz. If you do not obtain 60% for the self-assessment quiz, you lack
current tax knowledge and must spend more time revising the current tax principles.
Please click HERE to access the online quiz.
Activity 3.6

Now complete the additional comprehensive questions that is included within the orange
link below. We suggest that you answer these integrated questions under assessment
conditions. These integrated questions will help you to identify areas of weakness that you must
pay attention to.
Please note: Solutions will be provided at a later stage (to give you an opportunity to attempt
answering the questions first). Your answers to these integrated questions must not be
submitted to your lecturer. You should compare your answers with the suggested solutions.
Self assessment questions_Leases
Activity 3.7

Click here to access assessment 01

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