Question

The text book is: Skills for accounting research 4th edition by Shelby Collins ,chapter 6, case study question 6.6. Question is the following: Arena advertising: Burger Bills, a national fast food restaurant, purchases advertising rights to advertise in-ice during hockey games at Jensen Arena. Recall that Jensen Arena is still owned by the town of Springfield. In exchange for $60,000 per season, Burger Bills's logo will be displayed in the center ice for all games held at the Arena for 2 consecutive seasons. Burger Bill must pay for this rights at the beginning of each season. Four logos are displayed in the center ice at any given time., and Burger Bill's logo will be displayed per the contract in the upper-right location.

1.You will need to decide if the agreement meets the scope of the lease topic before you will decide how it should be recognized. 2. How should Burger Bills account for the advertising rights? 3. How should Jensen Arena account for the advertising rights? Note: This question I asked you before and somebody answered with journal entry back, but this question is an accounting research and is not necessarily required a journal entry, but it is required an appropriate related Codification citation paragraph to support each answer specially, (scope and recognition).

Answer 1

Following are relevant extracts from IFRS16 :

9. At inception of a contract, an entity shall assess whether the contract is, or contains, a lease. A contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration.

B9 To assess whether a contract conveys the right to control the use of an identified asset (see paragraphs B13–B20) for a period of time, an entity shall assess whether, throughout the period of use, the customer has both of the following:

(a) the right to obtain substantially all of the economic benefits from use of the identified asset (as described in paragraphs B21–B23); and

(b) the right to direct the use of the identified asset (as described in paragraphs B24–B30).

B24 A customer has the right to direct the use of an identified asset throughout the period of use only if either:

(a) the customer has the right to direct how and for what purpose the asset is used throughout the period of use (as described in paragraphs B25–B30); or

(b) the relevant decisions about how and for what purpose the asset is used are predetermined and: (i) the customer has the right to operate the asset (or to direct others to operate the asset in a manner that it determines) throughout the period of use, without the supplier having the right to change those operating instructions; or (ii) the customer designed the asset (or specific aspects of the asset) in a way that predetermines how and for what purpose the asset will be used throughout the period of use.

B25 A customer has the right to direct how and for what purpose the asset is used if, within the scope of its right of use defined in the contract, it can change how and for what purpose the asset is used throughout the period of use. In making this assessment, an entity considers the decision-making rights that are most relevant to changing how and for what purpose the asset is used throughout the period of use. Decision-making rights are relevant when they affect the economic benefits to be derived from use. The decision-making rights that are most relevant are likely to be different for different contracts, depending on the nature of the asset and the terms and conditions of the contract.

B26 Examples of decision-making rights that, depending on the circumstances, grant the right to change how and for what purpose the asset is used, within the defined scope of the customer’s right of use, include:

(a) rights to change the type of output that is produced by the asset (for example, to decide whether to use a shipping container to transport goods or for storage, or to decide upon the mix of products sold from retail space);

(b) rights to change when the output is produced (for example, to decide when an item of machinery or a power plant will be used);

(c) rights to change where the output is produced (for example, to decide upon the destination of a truck or a ship, or to decide where an item of equipment is used); and

(d) rights to change whether the output is produced, and the quantity of that output (for example, to decide whether to produce energy from a power plant and how much energy to produce from that power plant)

In view of above following steps needs to be adopted to determine whether arrangement is lease arrangement :

a) whether there is identifiable separate asset : Yes logo display position is fixed at upper right location

b) Whether Burger bills have right to obtain all substantial economic benefit : Yes

c) Does Burger Bill have right to direct use of asset : This right is absent. The Burget bill just have right to display logo in particular position but they do not have further right modifying height of display.

d) Does Burger bill have right to operate the asset without supplier's operating instruction : This is also absent since the logo is displayed in supplier premises hence all changes will happen as per supplier's operating instruction

In view of the above the arrangement is not falling within lease arrangement.

2. How should Burger Bills account for the advertising rights?

Burger Bills will account this as a expense. While making payment initially it will be accounted as prepaid and as the time period elapsed it needs to be recognized as expense

3. How should Jensen Arena account for the advertising rights?

Jensen Arena would recognize initial payment received as Unearned Revenue received and based on time period elapse recognize revenue transferring from unearned revenue received.