Revenue Recognition

Question 1

5 steps revenue recognition

Answer 1

1) identify contract with the customer
2) identify separate performance obligations in the contract
3) determine transaction price
4) allocate transaction price to performance obligations
5) recognize revenue when each performance obligation is satified

Question 2

Identify contract with the customer main conditions

Answer 2

• approved by both parties
• each party’s rights with respect to goods/services to be transferred can be identified
• payment terms can be identified
• contract has commercial substance
• collection of consideration is probable

Question 3

Performance obligation

Answer 3

promise in a contract with a customer to transfer to the customer either
- a single good or service that is distinct
- series of distinct goods or services that are substantially the same and have the same pattern of transfer to the customer

Question 4

good or service is distinct if

Answer 4

• customer can benefit from the good or service on its own OR customer can use the good or service with other resources readily available to the customer
• entity’s promise to transfer the good or service to the customer is separately identifiable from other promises in the contract

Question 5

allocate transaction price to performance obligations

Answer 5

allocation to performance obligations based on relative stand-alone selling prices

Question 6

recognize revenue when each performance obligation is satisfied (over time conditions)

Answer 6

over time if
- customer receives benefits as the entity performs
- entity creates an asset that the customer already controls
- asset does not have alternative use to the entity and enforceable right to receive payment already exists

Question 7

Contract modification - contract modification approved by both parties?

Answer 7

YES - does the scope of contract increase due to the addition of promised goods or services that are distinct?
NO - no contract modification exists

Question 8

Contract modification - Does the scope of contract increase due to the addition of promised goods or services that are distinct?

Answer 8

YES - Does the price of the contract increase by an amount of consideration that is reflective of the stand-alone selling prices of these additional goods and services?
NO - Are the remaining goods or services distinct from goods or services transferred on or before the date of the contract modification?

Question 9

Contract modification - does the price of the contract increase by an amount of consideration that is reflective of the stand-alone selling prices of these additional goods and services?

Answer 9

YES - Contract modification is a separate contract
NO - are the remaining goods or services distinct from goods or services transferred on or before the date of the contract modification?

Question 10

Are the remaining goods or services distinct from goods or services transferred on or before the date of the contract modification?

Answer 10

YES - Termination of existing contract and creation of a new contract
NO - forms part of existing contract and a single performance obligation

Question 11

When combination of contracts?

Answer 11

• contracts are negotiated as a package with the intent of meeting a singular business purpose
• consideration that customer has to pay in one contract is impacted by the price or performance of the other contract
• some or all of the goods or services promised in the individual contracts form a single performance obligation

Question 12

assurance type warranty

Answer 12

product works as intended - recognition of revenue when goods are delivered to the customer and simultaneously recognition of a provision

Question 13

Service type warranty

Answer 13

additional service - separate performance obligation (allocate a proportion of the transaction price to the performance obligation)

Question 14

right of return

Answer 14

entity’s promise to stand ready to accept a returned product for reasons other than a defect (NOT a separate performance obligation)

Question 15

when customer option a material right

Answer 15

• customer would not receive the option to acquire additional goods or services without entering into that contract; AND
• the price for the additional goods or services does not reflect the stand-alone selling price
  (If the option provides a material right to the customer, it gives rise to a performance obligation)

Question 16

Entity acts as a principal

Answer 16

entity controls goods or services before the transfer to the customer => Gross revenue recognition

Question 17

Entity acts as an agent

Answer 17

Entity arranges for the provision of goods or services by another party => Net revenue recognition

Question 18

Indicators entity acts as an agent

Answer 18

• Another party is primarly responsible for fulfilling the contract
• Entity does not have inventory risk
• Entity does not have price discretion
• Entity’s consideration is in the form of a commission
• Entity is not exposed to credit risk

Question 19

Variable consideration

Answer 19

• most likely outcome (best estimate - recommended in scenarios with only two possible outcomes)
• expected value (probability weighted - recommended in scenarios of multiple contracts with similar characteristics and a large number of possible outcomes)

Question 20

When/when not include variable consideration

Answer 20

Only be included in the transaction price to the extent that it is highly probable that a significant revenue reversal will not occur

Question 21

Different approaches when stand-alone selling price is not directly observable

Answer 21

• Adjusted market assessment approach = Estimate the price that a customer in the market would be willing to pay
• Expected cost plus a margin approach = Forecast the expected cost of satisfying the PO and then add an appropriate margin for that G/S
• Residual approach = estimate the stand-alone selling price by reference to the total transaction price less the sum of the observable stand-alone selling prices

Question 22

conditions residual approach

Answer 22

• entity sells the same good or service to different customers for a broad range of amounts
• entity has not yet established a price for that good or service and the good or service has not previously been sold on a stand-alone basis

Question 23

Discounts allocation

Answer 23

generally allocated to all PO, only is criteria are met to separate performance obligation

Question 24

Criteria discount allocation

Answer 24

• each distinct good or service is regularly sold on a stand-alone basis
• a bundle of some of those distinct goods or services is regularly sold at a discount
• this discount is substantially the same as the discount in the contract

Question 25

contract assets unconditional

Answer 25

right to receive consideration because the company has satisfied its performance obligation with a customer (AR ; Revenue)

Question 26

contract assets conditional

Answer 26

rights to receive consideration because the company has satisfied one performance obligation but must satisfy another performance obligation in the contract before it can bill the customer (contract asset; Revenue)

Question 27

Contract liabilities

Answer 27

the client prepays so the entity has the obligation to deliver G/S (cash; unearned revenue)

Question 28

conditions Costs to fulfill the contract to recognize as asset

Answer 28

• the costs relate directly to a specific contract with a customer
• the costs generate resources that will be used in satisfying performance obligations in the future
• the costs are expected to be recovered

Question 29

onerous contract

Answer 29

contract in which the unavoidable costs exceed the economic benefits expected to be received under the contract (at each reporting date reassessed)