Part 10 - Revenue

Question 1

What are the 5 steps to Revenue IFRS 15?

Answer 1

1) Identify the contracts with the customers
2) identify separate performance obligation
3) determine the transaction price
4) allocate the transaction price to performance obligation
5) recognize revenue when performance obligation is satisfied

Question 2

When to classify as contracts?

Answer 2

must meet all obligations:

• both parties approve contracts/committed to perform obligation
• can identify each parties’ right
• identify payment terms
• commercial substances
• collection is probable

Question 3

When to account for combination of contracts in a single contract?

Answer 3

when any one of the criteria is met:
- contracts negotiated as a package with a single commercial objective

• amount of consideration to be paid in one contract depends on the price or performance of the other contract
• G/S promised in the contract are a single performance obligation

Question 4

When to account for modification as separate contracts?

Answer 4

if both conditions are met:

• scope of contract increases bc of additional promised G/S that are distinct
• price of contract increases by the amount of consideration that reflects the entity’s stand-alone selling price of the additional G/S

Question 5

How to determine if a good/services is distinct?

Answer 5

if the following both criteria are met:

• customer can benefit from g/s either on its own or with other readily resources
• entity’s promise to transfer the g/s to the customer is separately identifiable from other promises in the contracts

Question 6

How to determine a performance obligation?

Answer 6

• a g/s (or bundle) that is distinct or:

- a series of distinct g/s that are substantially the same and have the same pattern of transfer to the customer

Question 7

How to account for refunds/sales with a right of return?

Answer 7

expected amount set up when sales recognize as a reduction in revenue with an offsetting liability

Question 8

how to record if there is an existence of significant financing component?

Answer 8

if period of time between payment and date of transfer of g/s is more than 1 yr, discount and recognize interest revenue separately

Question 9

how to account for consideration payable to customers?

Answer 9

reduce transaction price by consideration payable

Question 10

What are stand-alone selling price?

Answer 10

price at which the g/s would be sold separattely to the customer

Question 11

How to allocate transaction price when a customer purchases a bundle of g/s at a lower price than the individual stand-alone price?

Answer 11

allocate discount proportionately to all performance obligation

Question 12

When to recognize revenue?

Answer 12

when a performance obligation is satisfied when control of the g/s is transferred to the customer

Question 13

How to account for a repurchase asset obligation when the repurchase price is less than the original selling price

Answer 13

lease

Question 14

how to account for a repurchase obligation when the repurchase price is more than the original selling price

Answer 14

financing arrangement

Question 15

how to account for a repurchase asset right but no significant incentive to exercise

Answer 15

agreement of sale with right to return

Question 16

The performance obligation are satisfied over time if one of the following criteria is met:

Answer 16

• customer simultaneously receives and consumes the benefits provided by the entity as the entity performs
• entity’s performance creates or enhances an asset (WIP) that customer controls as the asset is created or enhanced
• entity’s performance doesn’t create a asset with an alternative use to the entity and entity has an enforceable right to payment for performance completed to date

Question 17

How to recognize revenue when performance obligation are satisfied over time?

Answer 17

measuring progress towards satisfaction of performance obligation. choice of 2 methods:

• output methods - recognize revenue on the basis of direct measurement of the value of g/s transferred to the relative remaining g/s promised
• input method - basis of entity’s efforts or input to the satisfaction of a performance obligation relative to the total expected input

Question 18

How to assess whether a warranty provides is a performance obligation?

Answer 18

• require by law - most likely not a performance obligation
• length of warranty coverage period - longer more likely
• nature of the task the entity promises to perform

Question 19

How to account for assurance-type warranty:

Answer 19

• estimate warranty liability and offsetting warranty expense will be recognize at the time of sale

Question 20

How to account for service-type warranty:

Answer 20

• service type is when entity provide customer with a service in addition to the assurance (type warranty) that the product complies with agreed-upon specification
• account for it as a separate performance obligation
• allocate a portion of the transaction price accordingly. unearned revenue will be set up as a liability on the BS

Question 21

How to determine if the entity is a principal or agent?

Answer 21

agent’s performance obligation is to arrange for the provision of the specified g/s by another party

• agent doesn’t control specified g/s
• recognize net fee or commission earned on transaction
• not primarily responsible for fulfilling the promise to provide the specified g/s
• inventory risk b4/after transfer to customer
• discretion in establishing price

Question 22

How to account for customers options for additional g/s

Answer 22

• treat as performance obligation if the option provides a material right to the customer that it would not receive without entering into that contract
• if stand alone price can’t be estimated - reflect customer would obtain adjust for discount customer would receive without exercising option and likelihood the option will exercise

Question 23

how to recognize customer’s unexercised right?

Answer 23

record as a contract liability
when g/s transferred, transfer from liability to revenue

if non-refundable customer prepayment - expected to be entitled to the breakage - revenue based on past experience
- if not expected to be entitled - recognize when likelihood of customer exercising becomes remote

Question 24

how to recognize non-refundable upfront fee

Answer 24

• does it related to activities that entity is required to take at or near contract inception? - recognize revenue upfront
• advance payment for future g/s? recognize when g/s provided
• is it separate performance obligation?

Question 25

When to recognize a licensing revenue whether it transfer at a point of time or over time

Answer 25

• if recognize overtime if all of the following criteria are met:
• contract requires entity will undertake activities that significantly affect the intellectual property
• right granted by the licence directly expose customer to any position/negative effect of the entity’s activities identified
• no transfer of g/s to customer

Question 26

What is bill-and-hold arrangement?

Answer 26

a contract in which the entity bills a customer for a product but the entity retains physical possession of the product until it is transferred to customer at a point of time
- revaluation when customer obtain control of that product

Question 27

what is obtainment cost and how to recognize?

Answer 27

• cost incurred solely to obtain a customer contract
• capitalize when
• cost are incremental and explicitly chargeable to customer regardless whether contract is obtained

Question 28

Capitalize as an asset if the costs meet all of the following criteria

Answer 28

• cost related directly to a contract/specific anticipated criteria
• cost generate or enhance resources that will be used to satisfying performance obligation in the future
• cost are expected to be recovered

Question 29

When to recognize revenue for ASPE 3400

Answer 29

• performance complete - risk and reward transferred, all significant acts completed
• consideration is measurable
• collection is reasonably assured

Question 30

how to determine when performance is complete?

Answer 30

must meet all criteria:

• persuasive evidence of an arrangement exists
• delivery has occurred or services have been rendered
• Seller price to buyer is fixed and determined

Question 31

How to account for non-refundable fee arrangement in ASPE 3400

Answer 31

unless the upfront fee is in exchange for product delivered or services performed that represent the culminative of separate earning process, revenue shouldn’t be recognize

Question 32

How to measure when there is a cancellable sale arrangement for ASPE 3400

Answer 32

• don’t recognize revenue until cancellation privileges laspe

Question 33

How to account for price protection and inventory credit arrangement/ refundable fee for service arrangement? ASEP 3400

Answer 33

recognize as revenue when initially sold as long as the amount of price protection/inventory credit can be estimated and provided for

Question 34

ASPE 3400 allow for which 2 methods of measurement for long-term contract?

Answer 34

• percentage of completion method or completed contract method

Question 35

How to account for franchise fee revenue?

Answer 35

• recognize as revenue when substantial performance is completed
• if initial franchise fee is large but continuing franchise fee are small - part of initial franchise fee should be deferred and amortized over the life of the franchise