FAR-F1-M3-Revenue Recognition Part 1 Flashcards
What are the criteria to treat each service as a distinct obligation?
- The promise to deliver each service is separately identifiable from the other services.
- The buyer can benefit from each service when combined with their other available resources.
- The buyer is able to benefit from each service independently.
`What are the conditions in order for a contract modification to be accounted for as a separate contract?
- A contract modification represents a change in the price or scope or BOTH of a contract approved by both parties. The modification is treated as a new contract if the scope increases because of the addition of distinct goods or services and the change in contract price presents stand-alone prices.
What are the 5 steps behind the ASC 606 for Revenue Recognition?
- Identify the contract with the customer.
- Identify performance obligations in the contract. If there are different performance obligations, these are accounted for separately.
- Determine the transaction price
- Allocate the transaction price to the performance obligations in the contract, based on the standalone prices of the goods or services promised.
- Recognize revenue when (or as) the entity satisfies the performance obligation.
With respect to the ASC 606 process of revenue recognition, what is the transaction price and what does it include or exclude?
The transaction price is the final amount expected to be exchanged for providing goods or services to a customer and it excludes amounts collected for third parties such as taxes. Also sales discounts or volume discounts are subtracted from the transaction price.
What are the 2 different type of methods used for recognizing revenue over time?
When recognizing revenue over time, there is the input method and the output method. The input method is similar to the % of completion approach and is used when the costs being tracked are things like costs incurred, labor hours, machine hours etc.
The output method recognizes revenue based on the value transferred to the customer relative to the total value to be transferred. These are things such as units produced or delivered, milestones reached etc.
What is the difference between a forward and a call option?
With a forward, the company MUST partake in the transaction. With a Call option, the company CAN partake in the transaction.
When a company cannot reasonably estimate returns on products and services it sells, can it still book revenue?
No. The entity cannot book revenue if entity cannot reasonably estimate returns.
Briefly state the formulas for percentage of completion method?
Step 1: Compute the gross profit of completed contract:
Contract Price
(Estimated total cost)
=Gross Profit (loss)
Step 2: Compute the % of completion:
Total cost to date / Total estimated cost of contract
Step 3: Compute gross profit earned (profit to date)
Gross profit to date = Step 1 * Step 2
Step 4: Compute gross profit earned for the current year
Profit to date at Fiscal Year End (Step 3)
(Profit previously recognized)
=Groff profit earned for the current year
In relation to the percentage of completion method, the % of completion is calculated as Total Cost to date / Total estimated cost of contract. How is the total estimated cost of contract different from estimated costs to complete?
Total estimated cost of contract is the total costs for a long term contract from inception to completion. The estimated cost to complete must be added to costs incurred to date to arrive at total estimated cost of contract.
With respect to the percentage of completion approach, how is an estimated loss on a total contract treated?
An estimated loss on the total contract is recognized immediately in the year it is discovered.
A Not for Profit (NFP) can recognize revenue from donated services if:
A NFP can recognize revenue from donated services IF:
1. The services provided require special skills.
2. The services are provided by someone who has the skills.
3. Such skills would be paid for if they hadn’t been donated.
