FAR 1.3 & 1.4 - Revenue Recognition Flashcards
In order to properly apply the revenue recognition standard, the 5 step approach should be implemented. What are the 5 steps?
- Identify the contract
- Identify the separate performance obligations
- Determine the transaction price
- Allocate the transaction price to separate performance obligations
- Recognize revenue when or as the entity satisfies each performance obligation
A modification to a contract is treated as a new contract when
Both the scope increases
And
The price increases
No cash considerations in contracts should be measured at what?
Fair value at inception date (date signed)
Revenue is recognized over time if any one of the criteria below is met:
- Entity’s performance creates of enhances an asset that the customer controls
- Customer receives and consumes the benefits of the entity’s performance as the entity peforms
- Entity’s performance does not create an asset with alternative use
Revenue should be recognized at a point in time when the below criteria are met:
- Entity has right to payment
- Customer has legal title to the asset
- Entity has transferred physical possession of the asset
- Customer has the significant rewards and risks of ownership
- Customer has accepted the asset
Costs incurred that would not have been incurred if the contract had not been obtained. These costs are recognized as an asset if the entity expects that it will recover these costs.
Incremental costs
If the entity controls the good or service before it is transferred to the customer, is it an agent or principal?
Principal
If the entity arranges fir the other party to provide the good or service to the customer, is it an agent or principal?
Agent
The 3 main forms of repurchase agreements include
- An entity’s obligation to repurchase the asset (forward)
- An entity’s right to repurchase the asset (call)
- And an entity’s obligation to repurchase the asset at the customers request (put)
Under a forward or call option, the entity had the right or obligation to repurchase the asset, the entity’s accounting for the contract can be what 2 options?
- Lease - if purchased for LESS than the selling price
- Financing arrangement - if purchased for MORE than the selling price
Under a put option, the entity’s obligation to repurchase the asset at the customers request, the entity’s accounting for the contract can be what 3 options?
If repurchased for less than the original selling price:
1. Lease - customer has economic incentive
2. Sale with right of return - customer does not have economic incentive
If purchased for more than the original selling price:
3. Financing arrangement - repurchase price more than market value
4. Sale with right of return - repurchase price less than market value
It is appropriate to use the percentage of completion method if the entity’s accounting system can:
- Reasonably estimate profitability
And - Provide a reliable measure of progress toward completion
Under the percentage of completion method, construction costs and estimated gross profit earned are accumulated in what account?
Construction in progress (an inventory account)
Under the percentage of completion method, billings on construction are accumulated in what account?
Progress billings account (a contra-inventory account)