KSA Corp case studyKSA Corp Accounting Challenges 1)

1-KSA Corp is contemplating signing a lease dated 1 January 2024:

Terms and provisions of the lease agreement:

The term of the lease is five years.

The lease agreement is non-cancelable, requiring equal rental payments of SAR 20,711.11 at the beginning of each year (annuity-due basis).

The equipment has a fair value at the commencement of the lease of SAR100,000, an estimated economic life of five years, and a guaranteed residual value of SAR5,000. (KSA Corp expects that it is probable that the expected value of the residual value at the end of the lease will be greater than the guaranteed amount of SAR 5,000.)

The lease contains no renewal options.

The equipment reverts to CNH Capital (lessor) at the termination of the lease.

KSA Corps incremental borrowing rate is 5 percent per year.

KSA Corp depreciates its equipment on a straight-line basis.

CNH sets the annual rental rate to earn a rate of return of 4 percent per year; KSA Corp is aware of this rate.

Illustrate the implication of the lease agreement

2- KSA Corp develops again its own software during December 2023:

Total expense for the project: SAR 80,000

90% is wages expense of employees working on the project

10% relates to consumables

Explain the process of an internally created intangible. After 75% of time spent on the project, it turns into an economically feasible intangible asset that still needs development.

Demonstrate the entries for this transaction. The software has limited life of about 3 years. Unfortunately, after 2 years, a major software company releases a more sophisticated and advanced software that impairs the earning ability of the internally created software. What does KSA Corp need to do?

The expected recoverable amount is 80% of the carrying value.

3- KSA Corp is entering a long-term 3 year contract with a customer. The contract is worth SAR 2,000,000, and it includes SAAS analysis and consultancy. The agreement is that payments are made at intervals, on the basis of work of the project completed. If KSA Corp were to offer the SAAS analysis on its own, they would charge SAR 1,500,000 and for the consultancy they would charge SAR 700,000. The contract also includes a workshop that is not explicitly charged for but is a sales tool. On its own, the workshop would be charged at SAR 75,000. The workshop is delivered first in year 1, and the remaining work is delivered in year 2 and 3.

Discuss the revenue recognition challenges and suggest how much revenue to recognise in year 1, 2 and 3.

What would you suggest if the contract included a performance bonus for SAAS work to be delivered in year 2, to be delivered according to tight deadline. If KSA Corp can deliver to the deadline, they will get extra 5% of the SAAS revenue.