CFA CFA Level 1 Question of the Week – Financial Reporting and Analysis

Question of the Week – Financial Reporting and Analysis

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    • Avatar of roverfanclubroverfanclub
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        • CFA Level 1
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        6
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        I get $80k as well. $2MM contract price * $1MM total estimated costs/ 24 months = $83k –> $80k.

      • Avatar of AdaptPrepAdaptPrep
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          • Undecided
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          Since costs are reasonably estimated, IFRS allows revenue
          recognition up to the point of costs (then the profit is recognized upon
          completion). In the first month, Medialink is expected to incur $1.0 million /
          24 = $42,000.

          If the project proceeds as expected, Medialink
          will incur $42,000 of revenue and $42,000 of costs (for $0 profit) each month
          until the last month.

        • Avatar of roverfanclubroverfanclub
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            • CFA Level 1
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            Just for the sake of debate:

            You are correct – the costs are reasonably estimated. However all other criteria are also met: revenue is reliably measured @$2MM and stage of completion can be estimated each month reliably as the costs, since they are expected to be incurred evenly. Both IAS 18 & IAS 11 would require the revenue to be recognized using % of completion method. 

            If these criteria were not met, the method of deferring all profit until completion would be appropriate. 

          • Avatar of AdaptPrepAdaptPrep
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              • Undecided
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              That’s a good point. Perhaps the question should be clearer about whether revenue is reliably measured as well.

            • Avatar of ThomasWThomasW
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                • CFA Level 2
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                Why is the correct answer 40.000? Costs are spread out evenly – thats makes 40K per month. Revenue is spread out as well – that makes 80K per month. So we have a profit of 40K per month, right?

              • Avatar of shanerfleuryshanerfleury
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                  • CFA Level 1
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                  Maybe it doesn’t bother anyone else, but “$1,000,000 / 24” definitely does NOT equal $42,000… It’s close, I suppose. 

                • Up
                  1
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                  $40,000

                  Ya this question is wrong and possibly outdated due to new standards. From the CFA curriculum “The transaction price is what the seller estimates will be received in exchange for transferring the good(s) or service(s) identified in the contract. The transaction price is then allocated to each identified performance obligation.” An estimate is a reliable way to measure revenue if it is “more likely than not” to be collected. there is no indication that the estimate is unreliable or that the counter-party is not likely to pay.. Correct answer is 80,000

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