On November 15, 2024, ABC Company Limited placed an order with Alpha Company Ltd for 20 metric tons (MT) of sodium carbonate, intended as a raw detergent powder material, at a BDT 24000 per MT. However, Alpha Company Ltd delivered only 15 MT of Sodium Carbonate to ABC Company Limited on December 1, 2024
Requirement:
1. A detailed explanation of the accounting treatment in the context of IAS 2.
2. If IFRS 15 does not apply to ABC Company Limited, what criteria and legal documents should be maintained for recognizing revenue for Alpha Company Ltd?
3. Prepare the report on the financial statements of ABC Company Limited under IAS- 1.
Requirement:- 01: Detailed Explanation of Accounting Treatment under IAS 2 (Inventories)
IAS 2 focuses on the recognition, measurement, and presentation of inventories, which are assets:
· Held for sale,
· In the process of production, or
· Held for consumption in the production process.
Since sodium carbonate is purchased as a raw material for manufacturing detergent powder, the following treatment applies:
[a] Recognition of Inventory at Cost
Inventory costs include:
1. Purchase price: BDT 24,000 × Quantity delivered (15 MT)
2. Direct costs: Costs related to bringing the inventory to its current condition and location (e.g., transport, freight, duties, etc., if applicable).
In this case:
· Delivered inventory: 15 MT × BDT 24,000 = BDT 360,000
· The remaining inventory of 5 MT is undelivered, so no recognition for it.
[b] Journal Entry in the Books of ABC Company Limited (as of December 1, 2024):
|
Date |
Accounting Head |
Type |
DR-Amount |
CR-Amount |
|
01-12-2024 |
Inventory -Sodium Carbonate |
DR |
360,000 |
|
|
TO Accounts Payable -Alpha |
CR |
|
360,000 |
[c] Financial Impact
· Inventory is recognized as a current asset in the Statement of Financial Position.
· Accounts payable (liability) is also recognized, reflecting the obligation to pay Alpha Company Ltd.
Requirement:- 02: Revenue Recognition for Alpha Company Ltd (If IFRS 15 Does Not Apply)
ABC Company Limited is not subject to IFRS 15 (Revenue from Contracts with Customers). However, it still adheres to specific procedures and provides relevant documents to Alpha Company Limited to ensure that Alpha accurately recognizes revenue in compliance with the required standards.
[a] Criteria for Revenue Recognition Without IFRS 15
1. Transfer of Control or Ownership: Revenue is recognized when control, risks, and rewards of ownership have transferred to the buyer (ABC Company Ltd).
2. Legal Right to Payment: Alpha Company Ltd must have a legal right to demand payment for the delivered goods.
3. Delivery Confirmation: Proof that the goods (15 MT) have been delivered to ABC Company Ltd.
[b] Key Legal Documents Required for Revenue Recognition:
· Purchase Order (PO): A formal document issued by ABC Company Ltd detailing the order for 20 MT at BDT 24,000 per MT.
· Delivery Note: Signed confirmation by ABC Company Ltd acknowledging the delivery of 15 MT of sodium carbonate.
· Invoice: Issued by Alpha Company Ltd for the delivered quantity (15 MT × BDT 24,000 = BDT 360,000).
· Goods Receipt Note (GRN): A document prepared by ABC Company Ltd verifying the received goods (15 MT).
· Payment Terms Agreement: Contractual terms specifying payment schedules for delivered goods.
Requirement: - 03: Preparation of the Financial Report for ABC Company Limited under IAS 1
IAS 1 focuses on the presentation of financial statements, ensuring that financial information is clear, comparable, and useful to stakeholders.
Report on Financial Statements
The following line items and notes must be presented in ABC Company Limited’s financial statements:
A. Statement of Financial Position (As of December 1, 2024)
|
Assets |
Amount |
|
Current Assets: Inventory Account – Raw Materials |Sodium Carbonate
|
360,000 |
|
Total Current Assets |
360,000 |
|
Liabilities & Equity |
Amount |
|
Current Liabilities: Accounts Payable – Alpha Company Ltd |
360,000 |
|
Total Current Liabilities |
360,000 |
B. Notes to the Financial Statements
1. Inventory:
o ABC Company Limited received 15 MT of sodium carbonate on December 1, 2024, valued at BDT 360,000.
o The undelivered portion (5 MT) remains pending as per the purchase order.
2. Accounts Payable:
o The amount of BDT 360,000 is payable to Alpha Company Ltd for the delivered quantity of sodium carbonate.
3. Commitments and Contingencies:
o There is a pending obligation to receive the remaining 5 MT of sodium carbonate under the original purchase order.
Conclusion:
1. IAS 2: Recognize inventory (15 MT) at cost (BDT 360,000) and accounts payable (liability) for the same amount.
2. IFRS 15 Not Applicable: Maintain proper legal documents to prove delivery, transfer of risks, and rights to payment for Alpha Company Ltd.
3. IAS 1: Present inventory as a current asset and accounts payable as a current liability, with appropriate disclosures in the notes to the financial statements.