ACCT7102 FINANCIAL ACCOUNTING

Posted: August 25th, 2021

ACCT7102 FINANCIAL ACCOUNTING

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ACCT7102 Financial Accounting

Question 1: Accountingfor Revenue Relating To ‘In-App’ Purchases in Accordance with AASB 15

To account for ‘in-app’ purchases or revenues from the sales, Australian Accounting Standards Board (AASB) has established a new method under AASB 15 that particularly applies for-profit organization beginning or after 1^st January 2018 and for the non-profit organization beginning January 2019. In this case, Diamond Games Ltd. is a for-profit entity that is recognized under AASB 15 (AASB 15, 2019). According to this provision, revenues are recognized according to how they are reflected in the transfer of the promised goods or services to the consumers at a price reflecting receivable consideration based as to when the company expects pay from the exchange of goods or services. The subsequent discussion examines step-by-step details on how Diamond Gaming Ltd. will account for its revenues from the customer purchases based on the AASB 15 revenue accounting model.

Step 1: Identifying the Contract with Its Customers

In this case, it is not necessary that a contract should be a formal document. Depending on theexisting arrangement, a contract can be implied or verbal. According to AASB 15 model, a contract is deemed to exist if it is possible to identify the rights of each party in the arrangement, their agreement and commitment to execute their respective obligations. Lastly, the terms of payment should be identifiable. In respect to Diamond Games Ltd.’s relationship with its customers, a contract is implied to exist (AASB 15, 2019). Its terms of reference include a customer’s commitment of $30.00 upfront payment that is non-refundable once a customer agrees to download its gaming application. Equally, the company is obligated to provide 15 plants, 5,000 seeds and 10 exclusive levels as its services to the consumer. Further, when a customer wants to upgrade, one has to commit a fee of $6, which is valid for three (3) months after which the agreement to enjoy the service expires. The company is also responsible for periodically updating the application once the customer makes the payment(AASB 15, 2019). The examination of these details fulfills the qualities of a contract following AASB 15 revenue accounting provisions. Notably, each of the contracts is separately accounted for. However, the model also allows one to combine or separate numerous agreements based on the contents in the arrangement.

Step 2: Identifying the Contracts Performance Obligations

The AASB 15 requires that the performance obligations are identified at the contract’s inception. If the goods or services are distinct, then promises made during the agreement are the performance obligation. In the Diamond Games Ltd., these obligations on the side of the customer are a commitment to pay after the agreed period while for the company, providing periodically updated applications without fail, and other technical support. The interaction also enables the customer to exclusively benefit from the gaming application using the readily available resources at their disposal.

Step 3: Determining Transaction Price

According to AASB 15 model, the price considered in the transaction should be established to complete the exchange of goods or services between the seller and customer. In the “in-app” purchase case, the prices are usually fixed(AASB 15, 2019). However, it is possible to experience variation in prices due to factors such as the existence of rebates, discounts, refunds or bonuses. In this case, Diamond Games Ltd., the price is $40 per every unit of the ‘apprentice gardener package’ purchased by the customer. Variation in the transaction is exhibited in the discounts offered during the promotion. Further, extra charges are applied during upgrades where a customer has to pay $6 on top of the initial price every three months.

Step 4: Allocating the Purchase Price to Performance Obligations

AASB 15 provides that once the transaction price is determined, it should be allocated to the particular performance obligation. Diamond Gaming Ltd. services are offered at multiple price levels. According to the model, these prices should be assigned to a particular obligation. For instance, the upgrade price should be assigned specifically to the upgrade services offered to the client. Similarly, the purchase price for the new package should equally be assigned to sales made for every application bought from the Appstore. 

Step 5: Recognize the Revenues When Performance Obligations Have Been Satisfied

Finally, revenues attained from the sales are recognized only when the performance obligations have been fully met. This occurs when goods or services are transferred as promised to the consumer and the customer has required control for the goods or services bought. In this case, the obligation can be done at a particular time or over an agreed time.

Question 2

According to the item-Based revenue model, the focus is placed on the type of the virtual commodity sold, the durability and the assumed delivery period to the customer. Depending on the virtual good’s category, there are frequent variations in the delivery period. However, the period only starts once a good is purchased (Chartered Accounts Australia and New Zealand, 2019). At the same time, the virtual currency is also recognized as deferred revenue because the user has to convert the virtual currency into the virtual goods purchased.For a company to apply the IBRM model, it is required to track each of the virtual goods separately and categorize them as either a durable or consumable good. Similarly, a company should be capable of making reasonable estimates about the assumed delivery period for every type of virtual good. Hence, extensive data about the customer usage patterns besides every feature and functionality of the user should be considered. As well, patterns have to be established based on game-by-game, using considerable judgment.

Based on this background, the IBRM revenue recognition model would not have been the appropriate one for Diamond Games Ltd. This is because of the wide the extensive market size which would have been a costly method when it comes to collecting data about consumers to ascertain their usage pattern before recognizing the revenues. Moreover, the model is bound to failures because of the difficulties in establishing every feature and functionalities preferred by the customer. Tracking each customer delivery period, which is bound to variation could be time and resources consuming, ultimately contributing to losses due to high costs incurred in customer service.

Question 3

The Diamond Games Ltd. would be in favor of the AASB 15 revenue recognition method rather than the IBRM model. First, this is because the AASB 15 aligns with the company contract provisions. Based on the details in the transaction, it is easy to recognize the company revenues on a rational and systematic basis over a given period under which the consumer is anticipated to the consumer the package(AASB 15, 2019). For instance, the company has estimated that after three months, the consumer would have already exhausted his package and is ready to upgrade. Purchases made over these periods should be recognized as revenue. The cost of a transaction is also clearly explained when the consumer incurs $40 on every virtual package bought and upgrades for $6. Similarly, some offers serve to sustain the customer on the company’s goods or services. Additionally, the model is appropriate since the company considers that the customer’s gaming experience is the ultimate deliverable based on the arrangement and the delivery of the benefits associated with the gaming package within the period of usage (Chartered Accounts Australia and New Zealand, 2019). Further, the virtual package provided by the company is deliverable and capable of offering an enduring benefit to the consumer over the interaction period with the gaming application. This is unlike the IBRM which will demand recognition of revenue only when the period over which the customer is expected to access and enjoy the benefits inherent in the product (Henderson et al., 2014, p. 142). At the same time, the Diamond Games Ltd. virtual package is not a separate deliverable according to the arrangement and does not offer particular benefits that a customer would enjoy over a certain period, hence to the best one.

Question 4: When Diamond Games Ltd. Should Recognize the revenues

Diamond Games Ltd. should recognize its revenues based on the life of the customer. This is a period under which the game is anticipated to continue using its ‘apprentice gardener package’. For instance, revenues should be recognized, first, when the customer downloads and makes an upfront of $30 cash payment, which implies that the customer has agreed to commit to the contract. Secondly, when the customer completes the promotion first five exclusive levels and receives a complimentary garden upgrade tool for $6. Subsequently, once the three months is done, and a purchase is made, revenue should be recognized at this period. In this case, the only appropriate model to accommodate these transactions is the AASB 15 revenue recognition model.

Bibliography

AASB 15: Assessing transfer of control – KPMG Australia. [online]. Available from: https://home.kpmg/au/en/home/insights/2019/06/aasb-15-assessing-transfer-control-revenue-recognition-timing.html.

Chartered Accounts Australia and New Zealand. (2019). Financial reporting handbook 2019 Australia. Australia: Wiley.

Henderson, S., Peirson, G., Herbohn, K., Artiach, T. & Howieson, B. (2014). Issues in financial accounting. Frenchs Forest, N.S.W: Pearson Australia.