2 Tyre, a public limited company, operates in the vehicle retailing sector. The company is

Question

2 Tyre, a public limited company, operates in the vehicle retailing sector. The company is currently preparing its financial

statements for the year ended 31 May 2006 and has asked for advice on how to deal with the following items:

(i) Tyre requires customers to pay a deposit of 20% of the purchase price when placing an order for a vehicle. If the

customer cancels the order, the deposit is not refundable and Tyre retains it. If the order cannot be fulfilled by

Tyre, the company repays the full amount of the deposit to the customer. The balance of the purchase price

becomes payable on the delivery of the vehicle when the title to the goods passes. Tyre proposes to recognise

the revenue from the deposits immediately and the balance of the purchase price when the goods are delivered

to the customer. The cost of sales for the vehicle is recognised when the balance of the purchase price is paid.

Additionally, Tyre had sold a fleet of cars to Hub and gave Hub a discount of 30% of the retail price on the

transaction. The discount given is normal for this type of transaction. Tyre has given Hub a buyback option which

entitles Hub to require Tyre to repurchase the vehicles after three years for 40% of the purchase price. The normal

economic life of the vehicles is five years and the buyback option is expected to be exercised. (8 marks)

Required:

Advise the directors of Tyre on how to treat the above items in the financial statements for the year ended

31 May 2006.

(The mark allocation is shown against each of the above items)

Answer 1

正确答案：
2 Advice on sundry accounting issues: year ended 31 May 2006
The following details the nature of the advice relevant to the accounting issues.
Revenue recognition
(i) Sale to customers
IAS18 ‘Revenue’ requires that revenue relating to the sale of goods is recognised when the significant risks and rewards are
transferred to the buyer. Also the company should not retain any continuing managerial involvement associated with
ownership or control of the goods. Additionally the revenue and costs must be capable of reliable measurement and it should
be probable that the economic benefits of the transaction will go to the company.
Although the deposit is non refundable on cancellation of the order by the customer, there is a valid expectation that the
deposit will be repaid where the company does not fulfil its contractual obligation in supplying the vehicle. The deposit should,
therefore, only be recognised in revenue when the vehicle has been delivered and accepted by the customer. It should be
treated as a liability up to this point. At this point also, the balance of the sale proceeds will be recognised. If the customer
does cancel the order, then the deposit would be recognised in revenue at the date of the cancellation of the order.
The appendix to IAS18, although not part of the standard, agrees that revenue is recognised when goods of this nature are
delivered to the buyer.
Sale of Fleet cars
The company has not transferred the significant risks and rewards of ownership as required by IAS18 as the buyback option
is expected to occur. The reason for this conclusion is that the company has retained the risk associated with the residual
value of the vehicles. Therefore, the transaction should not be treated as a sale. The vehicles should be treated as an operating
lease as essentially only 60% of the purchase price will be received by Tyre. Ownership of the assets are not expected to be
transferred to Hub, the lease term is arguably not for the major part of the assets’ life, and the present value of the minimum
lease payments will not be substantially equivalent to the fair value of the asset. Therefore it is an operating lease (IAS17).
No ‘outright sale profit’ will be recognised as the risks and rewards of ownership have been retained and no sale has occurred.
The vehicles will be shown in property, plant and equipment at their carrying amount. The lease income should be recognised
on a straight line basis over the lease term of three years unless some other basis is more representative. The vehicles will
be depreciated in accordance with IAS16, ‘Property, Plant and Equipment’. If there is any indication of impairment then the
company will apply IAS36 ‘Impairment of Assets’. As the discount given is normal for this type of transaction, it will not be
taken into account in estimating the fair value of the assets.
The buyback option will probably meet the definition of a financial liability and will be accounted for under IAS39 ‘Financial
Instruments: recognition and measurement’. The liability should be measured at ‘fair value’ and subsequently at amortisedcost unless designated at the outset as being at fair value through profit or loss.