Question of the Week - Financial Reporting and Analysis

AdaptPrep

Medialink is an American company specializing in business intelligence consulting. One of Medialink's current project is a 2-year commitment with Isotics, with a total estimated revenue of $2.0 million and estimated cost of $1.0 million. Costs are expected to be spread out evenly over each month. After the first month, under IFRS, Medialink's recognized revenue is expected to be closest to:

ThomasW

$80,000

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?

roverfanclub

$80,000

I get $80k as well. $2MM contract price * $1MM total estimated costs/ 24 months = $83k --> $80k.

AdaptPrep

$40,000

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.

roverfanclub

$80,000

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. 

AdaptPrep

$40,000

That's a good point. Perhaps the question should be clearer about whether revenue is reliably measured as well.

shanerfleury

Maybe it doesn't bother anyone else, but "$1,000,000 / 24" definitely does NOT equal $42,000... It's close, I suppose. 

mjlr

$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Ya this question is wrong and possibly outdated due to new standards.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