Section D (Total: 20 marks) Amway (Malaysia) Holdings Berhad, an investment holding company, started its operations in Malaysia in 1976 with a single storefront and has progressively become one of the nation's leading direct selling brands through its subsidiaries. As of December 2018, it has a nationwide network of more than 20 shops and retails more than 450 high-quality products. The Group offers a wide range of consumer goods ranging from health supplements to skincare, personal care, home care and durables, and has expanded its market reach via ecommerce and mobile tools. For FY2018, the Group adopted the new accounting standard for revenue recognition, MFRS 15 which came into effect on 1 January 2018. The effects of MFRS 15 on the financial statements of Amway (M) Holdings Bhd for the financial year 2018 are presented below: Consolidated statement of comprehensive income For the financial year ended 31 December 2018 Before MFRS 15 MFRS 15 After MFRS 15 Adjustments Adjustments CRM'000) CRM'000) Adjustments CRM'000) Reference Revenue (a), (b) (a) 996,017 (748,179) (23,745) 16,195 972,272 (731,984) Cost of sales (a) Gross profit Selling and administrative expenses Profit before tax Income tax expense Profit net of tax, representing profit attributable to owners of the parent 247,838 (133,023) 70,855 (15.843) (7,550) 6,876 (674) 240,288 (126,147) 70,181 (15,671) (c) 172 55,012 (502) 54,510 Total comprehensive income for the year, attributable to owners of the parent 55,016 (502) 54,514 Earnings per share attributable to owners of the parent (sen per share) - Basic 33.47 (0.31) 33.16 Consolidated statement of financial position As at 31 December 2018 MFRS 15 After MFRS 15 Before MFRS 15 Adjustments CRM'000) Adjustments CRM'000) Adjustments CRM'000) Reference Assets Deferred tax assets (c) 10,487 74,742 2.299 2,299 12,786 77,041 Total non-current assets Total assets 400,842 2.299 403,141 Equity Retained earnings Total equity attributable to owners of the parent (a) (b),(c) 56,827 223,884 (7,280) (7.280) 49,547 216,604 16,643 Liabilities Contract liabilities Trade and other payables Total current liabilities (b), (c) (a), (b), (c) 176,675 176,958 16,643 (7,064) 9,579 169,611 186,537 Total liabilities 176,958 9,579 186,537 Total equity and liabilities 400,842 2.299 403,141 Extract of Notes to the Financial Statements is given below: 104 Amway (Malaysia) Holdings Berhad Notes to the Financial Statements For the financial year ended 31 December 2018 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTD.) 2.2 Standards and Interpretations issued and adopted (cont.) MFRS 15 Revenue from Contracts with Customers (contd.) (a) Sales of goods with variable consideration Under MFRS 15, revenue will be recognised when a customer obtains control of the goods. The overall revenue recognition requirements are captured in the steps of the five-step method. Before adopting MFRS 15, the Group recognised revenue from the sales of goods measured at fair value of consideration received or receivable, net of returns and discounts. The Group regards most of the sales transactions consist of a single performance obligation to transfer promised goods. This includes the sales under Purchase With Purchase ("PWP") and Gift With Purchase ("GWP") promotion. These transactions have the same characteristic of bundled sales. As the sales transactions are expected to be the only performance obligation, no allocation of the transaction price is required. The Group expects the revenue recognition to occur at a point in time when the customers take control of the goods, generally on delivery of the goods. As such, the Group concludes that there is no impact on the timing of revenue recognition for these sales. However, the transaction price of the premium products which was previously treated as subsidies element in the promotion expenses has been reclassified to revenue and increased the revenue by RM14.452,000 for financial year ended 31 December 2018. The cost of premium products has also been reclassified from promotion expenses to cost of sales and increased the cost of sales by RM21,328,000 for financial year ended 31 December 2018 Under MFRS 15, the Group must determine whether there is a significant financing component in its contracts. The Group is using the practical expedient in MFRS 15 for not adjusting any financing component for the sales on credit term of less than one year. As the Group's sales of goods are either on cash term or on credit term of up to 90 days, no adjustment is made for any financing component. The contracts with customers provide a right of return, option to acquire future goods at discounted price and ABO incentives. ( Rights of return Previously, the Group recorded the sales returns when the goods were returned by the customers. Under MFRS 15, because the contract allows the customer to return the goods, the consideration received from the customer is variable. The Group used the most likely amount method to estimate the goods that will be returned because this method better predicts the amount of variable consideration to which the Group will be entitled. MFRS 15 also requires the entity to recognise an asset for its right to recover the goods from customer and it is measured by reference to the former carrying amount less any expected cost to recover the goods and the potential decreases of value to the entity of the returned goods. Based on the historical practice, the Group does not anticipate the returned goods are in saleable condition and will bring any value to the Group. Therefore, no value is estimated for the right of return asset. At the date of initial application, the assessment of refund liabilities reduced the retained earnings as at 1 January 2018 and increased the refund liability by RM564,000 respectively. The refund liability is classified under trade and other payables. As at 31 December 2018, the refund liability has increased to RM581,000 and retained earnings was reduced by RM581,000. It also reduced the revenue by RM17,000 for the financial year ended 31 December 2018. (i) Option to acquire future goods at discounted price The sales and marketing plan of the Group includes offering coupons to the ABOs for their future acquisition of goods at discounted price. Previously, the Group accounted for the sales discount upon the redemption. Under MFRS 15, this gives rise to variable consideration. To estimate the variable consideration to which it will be entitled, the Group applied the most likely amount method that better predicts the amount of variable consideration. At the date of initial application, the Group adjusted the variable consideration of RM265,000 to reduce the retained earnings as at 1 January 2018 and increase the contract liability by RM265,000. As at 31 December 2018, the contract liability has increased by RM385,000 and the retained earnings was reduced by RM385,000. It also reduced the revenue by RM120,000 for the financial year ended 31 December 2018. GiD Incentives to customers Previously, the Group classified ABO incentives paid to its customers in its cost of sales. Under MFRS 15, the Group is required to determine whether the consideration paid or payable to its customers is a payment for a distinct goods or services, a reduction of the transaction price or a combination of both. For the payment to the customers not to be treated as reduction of transaction price, the goods or services provided by the customers must be distinct The ABO incentives paid or payable to the customers are broadly categorised into two types, i.e. group effort related incentives and personal effort related incentives on volume purchase. The Group has carefully evaluated these two types of ABO incentives and has concluded that personal effort related incentives on volume purchase is a reduction of transaction price, whilst group effort related incentives is a consideration paid to or payable to customers for the provision of distinct services. The reclassification of personal effort related incentives on volume purchase from cost of sales to reduction of transaction price did not have any impact on the retained earnings as at 1 January 2018, however, it reduced the revenue and cost of sales for the financial year ended 31 December 2018 by RM37,523,000 respectively. (b) Revenue from sign up and renewals Previously, the Group recognised these revenue upon collection received from the customers. Under MFRS 15, the Group is required to determine whether the performance obligation is satisfied at a point in time or over time. The Group concluded that the annual fees element of sign up and yearly renewal fees is satisfied over time, hence the revenue will be recognised over time. As the Group has elected to use modified retrospective method, the Group has identified the contracts open as at the date of initial application in order to determine the adjustment amount. At the date of initial application, the Group adjusted the revenue from the unsatisfied performance obligation of RM8,076,000 to reduce the retained earnings as at 1 January 2018 and increase the contract liability by RM8,076,000. As at 31 December 2018, the contract liability has increased by RM8,613,000 and the retained earnings was reduced by RM8,613,000. It also reduced the revenue by RM537,000 for the financial year ended 31 December 2018. (c) Other adjustment In addition to the adjustments above, other items of the primary financial statements such as deferred tax assets, trade and other payables and contract liability were adjusted or reclassified as necessary. Required: (a) Describe items contributed to the MFRS 15 adjustment values for net decrease of RM23,745,000 and RM16,195,000 in Revenue and Cost of Sales respectively as presented in the financial statement above. (14 marks) (6) Discuss the impact of MFRS 15 on the financial reporting of Amway (M) Holdings Bhd for FY2018. (6 marks) END OF PAPER Section D (Total: 20 marks) Amway (Malaysia) Holdings Berhad, an investment holding company, started its operations in Malaysia in 1976 with a single storefront and has progressively become one of the nation's leading direct selling brands through its subsidiaries. As of December 2018, it has a nationwide network of more than 20 shops and retails more than 450 high-quality products. The Group offers a wide range of consumer goods ranging from health supplements to skincare, personal care, home care and durables, and has expanded its market reach via ecommerce and mobile tools. For FY2018, the Group adopted the new accounting standard for revenue recognition, MFRS 15 which came into effect on 1 January 2018. The effects of MFRS 15 on the financial statements of Amway (M) Holdings Bhd for the financial year 2018 are presented below: Consolidated statement of comprehensive income For the financial year ended 31 December 2018 Before MFRS 15 MFRS 15 After MFRS 15 Adjustments Adjustments CRM'000) CRM'000) Adjustments CRM'000) Reference Revenue (a), (b) (a) 996,017 (748,179) (23,745) 16,195 972,272 (731,984) Cost of sales (a) Gross profit Selling and administrative expenses Profit before tax Income tax expense Profit net of tax, representing profit attributable to owners of the parent 247,838 (133,023) 70,855 (15.843) (7,550) 6,876 (674) 240,288 (126,147) 70,181 (15,671) (c) 172 55,012 (502) 54,510 Total comprehensive income for the year, attributable to owners of the parent 55,016 (502) 54,514 Earnings per share attributable to owners of the parent (sen per share) - Basic 33.47 (0.31) 33.16 Consolidated statement of financial position As at 31 December 2018 MFRS 15 After MFRS 15 Before MFRS 15 Adjustments CRM'000) Adjustments CRM'000) Adjustments CRM'000) Reference Assets Deferred tax assets (c) 10,487 74,742 2.299 2,299 12,786 77,041 Total non-current assets Total assets 400,842 2.299 403,141 Equity Retained earnings Total equity attributable to owners of the parent (a) (b),(c) 56,827 223,884 (7,280) (7.280) 49,547 216,604 16,643 Liabilities Contract liabilities Trade and other payables Total current liabilities (b), (c) (a), (b), (c) 176,675 176,958 16,643 (7,064) 9,579 169,611 186,537 Total liabilities 176,958 9,579 186,537 Total equity and liabilities 400,842 2.299 403,141 Extract of Notes to the Financial Statements is given below: 104 Amway (Malaysia) Holdings Berhad Notes to the Financial Statements For the financial year ended 31 December 2018 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTD.) 2.2 Standards and Interpretations issued and adopted (cont.) MFRS 15 Revenue from Contracts with Customers (contd.) (a) Sales of goods with variable consideration Under MFRS 15, revenue will be recognised when a customer obtains control of the goods. The overall revenue recognition requirements are captured in the steps of the five-step method. Before adopting MFRS 15, the Group recognised revenue from the sales of goods measured at fair value of consideration received or receivable, net of returns and discounts. The Group regards most of the sales transactions consist of a single performance obligation to transfer promised goods. This includes the sales under Purchase With Purchase ("PWP") and Gift With Purchase ("GWP") promotion. These transactions have the same characteristic of bundled sales. As the sales transactions are expected to be the only performance obligation, no allocation of the transaction price is required. The Group expects the revenue recognition to occur at a point in time when the customers take control of the goods, generally on delivery of the goods. As such, the Group concludes that there is no impact on the timing of revenue recognition for these sales. However, the transaction price of the premium products which was previously treated as subsidies element in the promotion expenses has been reclassified to revenue and increased the revenue by RM14.452,000 for financial year ended 31 December 2018. The cost of premium products has also been reclassified from promotion expenses to cost of sales and increased the cost of sales by RM21,328,000 for financial year ended 31 December 2018 Under MFRS 15, the Group must determine whether there is a significant financing component in its contracts. The Group is using the practical expedient in MFRS 15 for not adjusting any financing component for the sales on credit term of less than one year. As the Group's sales of goods are either on cash term or on credit term of up to 90 days, no adjustment is made for any financing component. The contracts with customers provide a right of return, option to acquire future goods at discounted price and ABO incentives. ( Rights of return Previously, the Group recorded the sales returns when the goods were returned by the customers. Under MFRS 15, because the contract allows the customer to return the goods, the consideration received from the customer is variable. The Group used the most likely amount method to estimate the goods that will be returned because this method better predicts the amount of variable consideration to which the Group will be entitled. MFRS 15 also requires the entity to recognise an asset for its right to recover the goods from customer and it is measured by reference to the former carrying amount less any expected cost to recover the goods and the potential decreases of value to the entity of the returned goods. Based on the historical practice, the Group does not anticipate the returned goods are in saleable condition and will bring any value to the Group. Therefore, no value is estimated for the right of return asset. At the date of initial application, the assessment of refund liabilities reduced the retained earnings as at 1 January 2018 and increased the refund liability by RM564,000 respectively. The refund liability is classified under trade and other payables. As at 31 December 2018, the refund liability has increased to RM581,000 and retained earnings was reduced by RM581,000. It also reduced the revenue by RM17,000 for the financial year ended 31 December 2018. (i) Option to acquire future goods at discounted price The sales and marketing plan of the Group includes offering coupons to the ABOs for their future acquisition of goods at discounted price. Previously, the Group accounted for the sales discount upon the redemption. Under MFRS 15, this gives rise to variable consideration. To estimate the variable consideration to which it will be entitled, the Group applied the most likely amount method that better predicts the amount of variable consideration. At the date of initial application, the Group adjusted the variable consideration of RM265,000 to reduce the retained earnings as at 1 January 2018 and increase the contract liability by RM265,000. As at 31 December 2018, the contract liability has increased by RM385,000 and the retained earnings was reduced by RM385,000. It also reduced the revenue by RM120,000 for the financial year ended 31 December 2018. GiD Incentives to customers Previously, the Group classified ABO incentives paid to its customers in its cost of sales. Under MFRS 15, the Group is required to determine whether the consideration paid or payable to its customers is a payment for a distinct goods or services, a reduction of the transaction price or a combination of both. For the payment to the customers not to be treated as reduction of transaction price, the goods or services provided by the customers must be distinct The ABO incentives paid or payable to the customers are broadly categorised into two types, i.e. group effort related incentives and personal effort related incentives on volume purchase. The Group has carefully evaluated these two types of ABO incentives and has concluded that personal effort related incentives on volume purchase is a reduction of transaction price, whilst group effort related incentives is a consideration paid to or payable to customers for the provision of distinct services. The reclassification of personal effort related incentives on volume purchase from cost of sales to reduction of transaction price did not have any impact on the retained earnings as at 1 January 2018, however, it reduced the revenue and cost of sales for the financial year ended 31 December 2018 by RM37,523,000 respectively. (b) Revenue from sign up and renewals Previously, the Group recognised these revenue upon collection received from the customers. Under MFRS 15, the Group is required to determine whether the performance obligation is satisfied at a point in time or over time. The Group concluded that the annual fees element of sign up and yearly renewal fees is satisfied over time, hence the revenue will be recognised over time. As the Group has elected to use modified retrospective method, the Group has identified the contracts open as at the date of initial application in order to determine the adjustment amount. At the date of initial application, the Group adjusted the revenue from the unsatisfied performance obligation of RM8,076,000 to reduce the retained earnings as at 1 January 2018 and increase the contract liability by RM8,076,000. As at 31 December 2018, the contract liability has increased by RM8,613,000 and the retained earnings was reduced by RM8,613,000. It also reduced the revenue by RM537,000 for the financial year ended 31 December 2018. (c) Other adjustment In addition to the adjustments above, other items of the primary financial statements such as deferred tax assets, trade and other payables and contract liability were adjusted or reclassified as necessary. Required: (a) Describe items contributed to the MFRS 15 adjustment values for net decrease of RM23,745,000 and RM16,195,000 in Revenue and Cost of Sales respectively as presented in the financial statement above. (14 marks) (6) Discuss the impact of MFRS 15 on the financial reporting of Amway (M) Holdings Bhd for FY2018. (6 marks) END OF PAPER