Ch 18 Flashcards Preview

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Flashcards in Ch 18 Deck (107):
1

FASB and IASB indicated that reporting for revenue

Was unsatisfactory

2

IASB and FASB issued a diverged standard on revenue recognition called

Revenue from contracts with customers

3

Boards believe new standard will improve GAAP and IFRS BY

Providing a more robust framework for addressing revenue recognition issues

Improving comparability of revenue recognition practices across entities, industries, jurisdiction, and capital markets

Simplifying prepapartion of financial statements by reducing # of requirements to which companies must refer

Required enhanced disclosures to help financial statement users better understand amount, timing and uncertainty of revenue that is recognized

4

Asset liability approach is the basis for

Revenue recognition

5

Asset liability approach recognized and measures revenue based

On changes in assets and liabilities

6

Board decided that focusing on

Recognition and measurement of assets and liabilities

And changes in assets or liabilities over life of contract brings more discipline to measurement of revenue COMPARED TO EARNED AND REALIZED STANDARDS

7

The process of key concept of revenue recognition is the REVENUE RECOGNITION PRINCIPLE which

States that revenue is recognized when performance obligation is satisfied

8

Contract

Is an agreement between two or more parties that creates enforceable rights or obligations

9

Contract Can be?

Written, oral or implied from customary business practice

10

When is revenue recognized only?

When a valid contract exists

11

On entering contract with customer, a company obtains rights to

Receive consideration from customer and assumes obligations to transfer goods and services to customer (performance obligation)


The combination of those rights and performance obligation give rise to an net asset or net liability

12

The contract must meet 5 conditions:

(Company applies revenue guidance to contract according to following criteria)

1. Contract must have commercial substance

2. Parties approve contract

3. Identification of rights of parties established

4. Payment terms are identified

5. It is probable that consideration will be collected

13

A key feature of revenue arrangement is that the contract between two parties is not recorded until when?

Until one or both of parties perform under contract

14

Until performance occurs

No net asset or net liability occurs

15

Performance obligation

Is the promises to provide a product or service to the customer

16

To determine whether a performance obligation exists, the company must provide what?

A distinct product or service to the customer

17

When is a product or service distinct?

&I when does this typically occur?

When the customer is able to benefit from good or service on its own or together with other readily available resources


This typically occurs when a company can sell a good or service on a standalone basis (sold separately)

18

To determine whether a company has to account for multiple performance obligations is

The company promise to sell good or service to customer must be separately identifiable from other promises within contract

19

What is the objective of separating performance obligations

Is to determine whether the nature of company's promise is to transfer individual goods and services to customer or to transfer a combined item or items for which individual goods or services are inputs

20

When the service is distinct and not interdependent

Can be sold separately as two performance obligations

21

When a service is distinct but interdependent then it should be accounted for

As one performance obligations

22

Transaction price is

Amount of consideration a company expects to receive from a customer in exchange for transferring goods and services

23

Why is the transaction price contract often easily determined?

Because the customer agreed to pay a fixed amount to company over short period of time

24

In other contracts companies must consider the following factors

Variable consideration

TVM

No cash consideration

Consideration paid or payable to customer

25

In variable consideration, the price of good or service is dependent on what?

Future events

26

The future events may include?

Price increases, volume discounts, rebates, performance bonuses or royalties

27

Company estimates the amount of consideration it will receive from contract because?

It will determine the amount of revenue to recognize

28

What do companies use to estimate variable consideration?

Pg. 988

Expected value
- probability weighted amount in range of possible consideration amounts

OR

Most likely amount: the single most likely amount in a range of possible consideration outcomes

29

A company only allocates variable consideration of it is

Reasonably assured that it will be entered to that amount

30

Companies therefore may only recognize variable consideration if

1. They have experience with similar contracts and are able to estimate cumulative amount of revenue

2. Based on experience highly probable there will not be significant reversal of revenue previously recognized

31

What happens when the two criteria of recognizing variable consideration is not met?

Revenue recognition is constrained

32

Companies account for time value of money if involved

Significant financing component

33

When sales transaction involves significant financing component ( interest is accrued on consideration to be paid over time) the fair value is determined by?

Measuring consideration received or by discounting the payment using an imputed interest rate

34

Imputed interest rate is can be more determined when

Prevailing rate for similar instrustment of issuer with similar credit rating


Rate of interest that discounts minimal amount of instrument to current sale price of good or services

35

Companies do not have to reflect time value of money to determine transaction price if the time period payment is less than

Year

36

Companies sometimes receive what? In the form of goods services or other non cash consideration

Considerations

37

Companies generally recognize revenue on basis of what?

FV of what is recieved

38

A contribution is often a type of?

Asset
(Securities, land buildings or use of facilities)

But if could be the forgiveness of debt

39

Customers sometimes contribute goods and services such as

Equipment or labor as consideration for goods provided or services performed

40

The previous consideration should be recognized as

Revenue based on fair value of consideration recieved

41

Consideration paid or payable to customers include

Discounts , rebates , coupons, free products or services

42

Discount volume rebates coupons free products or services reduce what?

Consideration recieved and revenue recognized

43

In many cases companies provide cash discounts to customers for

A short period of time

44

In most cases companies record the revenue at

And sales discount if

Full price

If payment is made within discount period

45

Companies often have to allocate transaction price to

More than one performance obligation in contract

46

If the allocation is needed, transaction price allocated to performance obligations is based on

Relative fair values

47

The best measure of fair value is when a company

Could sell the good service for a standalone basis referred as standalone selling price

48

If info not available impatiens should use

Best estimate of what good or service might sell for a sandalone unit

49

A company satisfies its performance obligation when

A customer obtains control of good or service

50

The concept control is a deciding factor in determining?

When a performance obligation is satisfied

51

The customer controls product or service when

It has the ability to direct use of and obtain substantially all the remaining benefits from asset or service

52

Control also includes customers ability to

Prevent other companies from directing the use of or receiving benefits from asset or service

53

What are the change in control indicatiors?

1. Company has the right to payment for asset

2. The company has transferred legal title to asset

3. Company has transferred physical possession of asset

4. Customer has significant risks and rewards of ownership

5. Customer has accepted asset

54

The change in control indicators are list of indicators not

Requirement or criteria

55

All of the indicators need to be met for management to conclude control has been transferred

FALSE!!!

All indicators do not need to be met

56

Companies recognize revenue if one of the following 3 criteria are met

Customer recieved and consumes benefits

The customer control asset as it created

Company does not have alternative use for asset created or enhanced

57

A company recognized revenue from performance obligation over time by measuring

Progress toward completion

58

Method for measuring progress should depict what?

The transfer of control from company to customer

59

For many service arrangements revenue is recognized on

Straight line basis BBC performance obligation is being satisfied over contract period

60

What methods do companies use to determine extent of progress toward completion?

Cost to cost and units of delivery methods

61

What r the objectives of methods

To measure extent of progress in terms of costs units or value added

62

Input measures

Cost incurred and labor hours worked

63

Output measures

Units of delivery measured as tons produced, floors of building completed

64

The most popular input measure used to determine progress toward completeioj is

Cost to cost basis

65

What are the accounting for revenue recognition issues?

Sales and returns and allowances
Repurchase agreements
Bill and hold
Principal agent relationships
Consignments
Warranties
No refundable upfront fees

66

Sales returns and allowances

Customers granted right to return product for various reasons (dissatisfaction of product)

67

Customers granted right to return product and receive any combination of the following

1. Full or partial refund of any consideration paid

2. Credit can be applied against amounts Owed or that will be owed

3. Another product in exchange

68

Repurchase agreements

Allows them to transfer an asset to a customer but have unconditional (forward) obligation or unconditional right (call option) to repurchase asset at a later date

69

If the company has forward obligation or call option to repurchase asset for an amount greater than or equal to selling price, the transaction is what type of transaction by company?

Financing

70

Bill and hold arrangements

Contract under which an entity bills a customer for a product but the entity still retains physical possession of product until it is transferred to customer at a point in time in future

71

Bill and hold sales results when the buyer is

Not ready to take delivery but does take title and accepts billing

72

Principal agent relationships

Principals performance obligation is to provide goods or perform services for a customer

73

Examples include

Travel company facilitates booking of cruise excursions by finding customers

Priceline agent facilitates the sale of various services such as car rentals

74

Amounts that are collected on behalf of principle are not

Revenue of agent

75

Revenue of agent is the amount

Of commission it receives

76

Consignments

Manufacturers or wholesales deliver goods but retain title to goods until sold

77

Specialized method of marketing certain types of products makes use of agreement known as

Consignment

78

Consignor is

Manufacturer or wholesaler

79

Consignee is the

Dealer who is to act as an agent for consignor in selling merchandise

80

Consignor recognizes revenue only

After receiving notification of sale

81

Consignor makes a profit on

Sale

Carries merch as inventory

82

Consignor makes commission on

Sale

83

Consignee does not record merchandise as an

Asset, upon sale of merch , consignee has liability for net amount due to consignor

84

Consignor periodically receives from consignee a report called

Account sales that shows merchandise received, sold and expenses chargeable to consignment and cash remitted

85

Consignees only recognize

Commission revenue

86

What are the two types of warranties?

1. Warranties that product meets agreed upon specifications in contract at time product is sold
•assurance type warranty (included in sales
price)


2. Warranties that provide additional service beyond assurance type warranty
•service type warranty (not included in sales
price)
• recorded as separate performance
obligation

87

Companies sometimes receive payments (upfront fees) from customers before

They deliver product or perform good or service

88

Upfront fees generally relate to what?

Initiation, activation or set up of good or service to be provided or performed in the future

89

In most cases upfront payments are not


Examples include

Refundable

Examples include membership in health club or buying club, activation fees for phone

90

In most situations these payments are for future delivery of products and services and therefore should not be

Recorded as revenue at the time of payment

91

Companies use what to recognize revenue

Asset liability approach

92

Contract assets are two types

1. Unconditional rights to receive consideration bc the company has satisfied its performance obligation with customer


2. Conditional rights to receive consideration because company satisfied one performance obligation but must satisfy another performance obligation in contract before it can bill customer

93

Companies should report unconditional rights to receive

Consideration as a receivable on the balance sheet

94

Conditional rights on balance sheet should be reported separately as

Contract assets

95

Contact liability

Company obligation to transfer goods or services to customer for which company has recieved consideration from customer

96

Contract liability is referred as

Unearned sales revenue , unearned service revenue etc

97

Contract modification

Companies sometimes change contract terms while it is onfoing

98

When a contract modification occurs companies determine

Whether a new contract results or whether it's a modification of existing contract

99

Separate performance obligation

A company accounts for contract modification as a new contract if both of the following conditions are satisfied

Promised goods or services are distinct (sold separately and not interdependent)


Company has right to receive amount of consideration that reflects standalone selling price of goods or services

100

Prospective modification

Company should

Account for effect of change in period of change as well as future periods of change affects both


Not change previously reported results

101

Costs to fulfill contact

Companies divide fulfillment costs in two categories

1. Those that give rise to an asset

2. Those that are expense as incurred

102

Companies only capitalize costs that are

Direct incremental and recoverable

103

Collectibility

Refers to customers credit risk, risk that a customer will be unable to pay the amount of consideration in accordance with contract

104

Under revenue guidance- as long as contract exists the amount recognized as revenue is not

Adjusted for customer credit risk

105

Whether a company gets paid for satisfying performance obligation is not

Consideration in determine revenue recognition.

106

Disclosure requirements for revenue recognition are designed to help financial statement users understand

Nature, amount timing and uncertainties of revenue

107

Companies disclose qualitative and quantitiative info about the following

Contract with customers
Disaggregatjon of revenue
Presentation of open and close balances in contract assets and liabilities

Significant judgments
Determine transaction price,allocation of transaction price and determine time of revenue

Assets recognize from costs incurred to fulfill contract
Close balance of asset recognized to obtain or fulfill contract , amount of amortization recognition