Question
You are a manager at a medium size accounting and auditing firm. One of your clients, Saturn Ltd, have approached you for advice relating to
You are a manager at a medium size accounting and auditing firm. One of your clients, Saturn Ltd, have approached you for advice relating to the implementation of the new revenue standard (AASB 15: Revenue from Contracts with Customers).
Saturn Ltd has entered into a contract with Hunter Hunter which includes upfront advice provided on the first day of the contract, database access for three years and exit advice provided on the last day of the three year contract. In terms of the contract Hunter Hunter pays $ 2 000 on the first day of the contract when the contract is signed (1 July 2020), then $ 1 000 at each of 30 June 2021, 30 June 2022 and 30 June 2023. An additional payment of $ 400 needs to be paid on 30 June 2023.
Previously, Saturn recorded revenue from contracts such as the above based on the dates and amounts of the cash flows. The stand-alone price of the upfront advice is $1 600, the stand-alone price of exit advice is $1 000 and stand-alone price of access to the database for three years has a total price of $ 6 000.
Top managers at Saturn receive bonuses based on performance measures. Key metrics include Return on Assets (net profit after tax / average total assets). A portion of their bonus is paid in shares. Saturn Ltd has debt covenants with their debtholders which include maintaining the debt-to-equity (D/E) ratio (calculated by dividing a company's total liabilities by its shareholder equity) at a level less than or equal to one.
Please note: the financial year end is 30 June. You may ignore the time value of money and tax effects.
Using the 5 steps set out in AASB 15 (Revenue from Contracts with Customers), explain how and when revenue will be recognised in the contract with Hunter Hunter. Please show workings and all journal entries from 1 July 2020 to 30 June 2023. Narrations are required.
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