7. Revenue Recognition

Question 1

What are the 5 steps determining how revenue should be recongised?

Answer 1

COPAR

1. Contract with customer in place
2. Identify the performance obligations
3. Determine the transaction price
4. Allocate the transaction price to the obligations
5. Recognise revenue as obligations are satisfied

Question 2

What are the 4 contract requirements set out in IFRS 15?

Answer 2

• Contracts approved
• Rights and payment terms identifiable
• Contract has commercial substance
• It is probable that consideration will be transferred

Question 3

What are performance obligations?

Answer 3

Promises in the contract to provide goods or services

Question 4

When are obligations accounted for separately?

Answer 4

The good/service can be sold separately and the promise to supply is separately identifiable in the contract

Question 5

What are the 3 major considerations in determining the transaction price?

Answer 5

1. Discount future amounts to PV
2. Estimate variable consideration using probabilities and weighted averages
3. Measure non cash consideration at fair value

Question 6

When we sell goods but anticipate a certain R% to be returned, what are the two additional double entries that are made?

Answer 6

Dr Rev, Cr Refund Liability (Sales value x R%)

Dr Right to Receive Asset, Cr COS (Goods cost x R%)

Question 7

What is the performance obligation(s) when a car is sold on finance?

Answer 7

The sale of the car and the provision of finance, separately recognised

Question 8

How is revenue recognised for goods sold on finance?

Answer 8

The PV of payments for the goods, and the interest payments under finance provided

Question 9

When do we define a performance obligation as being satisfied?

Answer 9

When the customer obtains control over the promised good or service

Question 10

What are the two methods for reconigising revenue when control passes over time?

Answer 10

Output method (% work completed to date) or input method (% cost incurred to date)

Question 11

What are the 3 criteria of which a performance obligation satisfied over time must meet 1?

Answer 11

1. Customer simultaneously receives and consumes the benefits (e.g. cleaning contract)
2. Entity’s performance is enhanced as the asset is enhanced, and the entity has control (e.g. construction WIP)
3. No alternative use to the asset (e.g. development of a website)

Question 12

What are the 2 types of warranties?

Answer 12

1. Warranty provides with assurance of compliance to specifications
2. Warranty also provides additional service

Question 13

What are the 2 ways a warranty might be recognised, and when?

Answer 13

1. As a separate performance obligation (if can be sold separately)
2. As a provision for a contingent asset based on estimated future repair costs (Dr Expense, Cr Prov)

Question 14

What is the difference between a principle and an agent in terms of revenue recognition?

Answer 14

Principle = provides obligation = recognise gross amount expected to receive
Agent = arranges provision but doesn't control = recognise only fee or commission

Question 15

What is a repurchase agreement?

Answer 15

A contract in which an entity sells an asset but retains the right to repurchase in the future

Question 16

What is the substance of a repurchase agreement?

Answer 16

A secured loan - the customer does not obtain control of the asset

Question 17

How must the seller recognise a repurchase agreement transaction?

Answer 17

Continue to recognise the asset, recognise a financial liability for consideration from the customer, difference is interest

Question 18

What are consignment inventories?

Answer 18

When a seller delivers a product to another party for sale to end customers but control remains with the original seller (e.g. car dealership)

Question 19

When is revenue recognised for inventories held on consingment?

Answer 19

When the product is sold to the final customer