FAQ (Advisory)

FAQ 1 - Immaterial prior period error


If an entity has found a prior period error which is not material, how should it account for, retrospectively or in the current year?


It might be generally acceptable to correct a prior period error which is not material in the current year rather than retrospectively. However, management should take into account whether this treatment would result in a material impact in the current period in terms of both qualitative and quantitative factors. If it is, management should restate comparative amounts.

FAQ 3 - Customer rebates

XYZ Co., Ltd sells shampoo to retailers for $ 5 per unit. A rebate coupon is included inside the shampoo packing that can be redeemed by the end customers for $1 per unit.

The company estimates that 20% to 25% of eligible rebates will be redeemed, based on its experience with similar past programs. The company concludes that the transaction price should take an assumption of 25% rebate redemption, as this is the amount for which it is highly probable that a significant reversal of cumulative revenue will not occur if estimates of the rebates change.


How should XYZ Co., Ltd determine the transaction price?


Entity K records sales to the retailer at a transaction price of $4.75 ($50 less 25% x $1). The difference between the per unit cash selling price to the retailers and the transaction price is recorded as a liability for cash consideration expected to be paid to the end customer. The company will update its estimate of the rebate and the transaction price at each reporting date if estimates of redemption rates change.

FAQ 5 - Can start-up costs be capitalised?

Start-up costs and similar pre-trading costs cannot be recognized as part of the asset. Initial operating losses incurred in the introduction stage are recognised as an expense, and are not capitalised. All costs incurred in that period (such as rents and wages) would be expensed as incurred, because they would not form part of the cost of improvements of the asset.

FAQ 2 - Free trial period 

A service company offers to provide two months of free service on a trial basis to all potential customers to attract them to sign up for a reasonable paid subscription. At the end of the two-month trial period, a customer signs up for a non-cancellable paid subscription to continue the service for an additional 12 months.


Should the service provider record revenue be related to the two-month free trial period?


No. There is no contractual agreement between customer and company at the time of trial period. The rights and obligations of the contract only include in the contract for the future 12 months of paid subscription services, not the free trial period. Therefore, the service provider should not record revenue related to the two-month free trial period that is, none of the transaction price should be allocated to the two months already delivered.

FAQ 4 - Can initial operating losses be capitalised?

Initial operating losses in the introduction stage of a new business cannot be capitalized because there must be future economic benefit to be asset. Similarly, marketing and similar costs associated with generating demand for the services of the item of property, plant and equipment cannot be capitalised as part of the asset.