11. Revenue Flashcards
(38 cards)
What are the five steps of revenue recognition?
1 - Identify the contract
2 - Identify the separate performance obligations within a contract
3 - Determine the transaction price
4 - Allocate the transaction price to the performance obligations
5 - Recognise revenue when (or as) a performance obligation is satisfied
Define a contract
An agreement between two or more parties that creates enforceable rights and obligations
What are the 5 criteria for an entity to recognise revenue?
- The parties have approved the contract and are committed to perform obligations
- Can identify each party’s rights and obligations regarding goods or services
- Can identify payment terms
- Contract has commercial substance
- It is probable that the entity will collect the consideration
If an entity is an agent then what is revenue recognised based on?
The fee or commission to which it is entitled
What is described below?
The amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer
The transaction price
How should discounts be allocated in a transaction?
Allocated across each component of a transaction
Only apply discount to a single component if that component is regularly sold separately at a discount
According to IFRS 15, when is revenue recognised?
When (or as) the entity satisfies a performance obligation by transferring a promised good or service to a customer
Give 5 indicators of transferring control to an entity
- Customer has a present right to payment for the asset
- Customer has legal title to the asset
- The entity has transferred physical possession of the asset
- The customer has the significant risks and rewards of ownership of the asset
- The customer has accepted the asset
What are performance obligations?
Promises to transfer distinct goods or services to a customer.
Give an example of a contract that has more than one performance obligation.
Agreement to sell a car, that also includes a year of servicing.
Are amounts collected on behalf of third parties such as sales tax included in revenue?
Nope
What are the four things that effect the transaction price in revenue?
- Variable consideration
- Significant financing component
- Non-cash consideration
- Consideration payable to customers
How do we account for revenue when we pay discunted consideration in two years?
Recognise discounted revenue now (Cr Revenue Dr receivable)
Each year unwind the difference in finance income (Dr Receivable Cr finance income)
If consideration is paid to a customer e.g
You pay a customer 1m and they promise to purchase 20m of products
At year end 4m of products have been sold to the customer
How much revenue is recognised from the 4m?
Recognise the percentage of transaction that is revenue e.g 19/20*20=3.8m
What is consignment inventory?
When one party legally owns the inventory but the other keeps it on their premises
What is a repurchase agreement?
Where an entity sells an asset but retains a right to repurchase the asset.
How do we often recognise a Repurchase agreement?
As a sale, but as a secured loan against the asset.
What are 5 indications that a repurchase agreement should not be recognised as a sale?
- Sale is below fair value
- Option to repurchase is below the expected fair value
- Entity continues to use the asset
- Entity continues to hold the majority of risks and rewards associated with ownership of the asset
- Sale is to a bank or financing company
What is a bill and hold arrangement?
An entity bills a customer for a product but the entity holds onto the product
How is revenue recognised with a bill and hold arrangement?
Over time
What are the four criteria for a bill and hold arrangement to exist?
- The customer must have requested the arrangement
- The product must be identified as belonging to the customer
- The product must be ready for physical transfer to the customer
- The entity cannot have the ability to use the product or sell it to someone else.
An entity transfers control of a good or service over time and, therefore, satisfies a performance obligation and recognises revenue over time, if one of the following criteria is met:
Number 1
The customer receives and consumes the benefits provided by the entity performance as they perform
An entity transfers control of a good or service over time and, therefore, satisfies a performance obligation and recognises revenue over time, if one of the following criteria is met:
Number 2
The entity’s performance creates or enhances an asset
An entity transfers control of a good or service over time and, therefore, satisfies a performance obligation and recognises revenue over time, if one of the following criteria is met:
Number 3
The entity’s performance does not create an asset with an alternative use to the entity and the entity has an enforceable right to payment for performance completed to date
