Ch4_Revenus

Question 1

Five steps for revenue recognition

Answer 1

1. Identify the contract
2. Identify the separate performance obligations within a contract
3. Determine the transaction price
4. Allocate the transaction price to the performance obligations in the contract
5. Recognise revenue when (or as) performance obligations is satisfied

Question 2

Identify contract

Answer 2

1. Parties have approved the contract and each parties rights can be identified
2. Payment terms can be identified
3. The contract has commercial substance
4. It is probably that the contract will be paid

Question 3

Performance obligations

Answer 3

1. The customer can benefit from the good or service on its own or by using resources that are readily available
2. The promise to provide the good or service is separately identifiable from other promises in the contract

Question 4

When not distinct obligation

Answer 4

If contracted to significantly integrate separate obligations into an identified output ( a school)

Question 5

3. Determining transaction price

Answer 5

Following must be considered when determining transaction price
1. Variable consideration - entityust estimate the amount it will be entitled to, it can only be included in the TP if it is highly probable that significant reversal will not occur when the uncertainty is resolved
2. Significant financing component
3. Noncash consideration
Consideration payable to he customer

Question 6

Product is sold with a right to return

Answer 6

Variable consideration. Entity must decide VC and dedicde whether to include it in TP

Question 7

Financing component

Answer 7

1. Discount = selling price - promised consideration
2. Time difference bn transfer of the promised g/s and payment date

Question 8

4. Allocate transaction price

Answer 8

Total TP should be allocated to each performance obligation in proportion to stand alone selling prices
Discount should be allocated across all performance obligations

Question 9

Performance obligation over time

Answer 9

Satisfied performance obligation over time of one of the following criteria is met:

1. The customer simultaneously received and consumes the benefits provided by entity’s performance ( payroll processing services) if customer changes provider they can continue no need to reperform
2. The entity’s performance creates or enhances an asset ( WiP) that the customer controls
3. Performance does not create an asset with an alternative use to the entity and entity can enforce to pay for things done to date

Question 10

Overtime recognition

Answer 10

1. Is it specialised - asset being created has no alternative use to it
   Only refundable is company fails to perform full contract. Company has enforceable right to the deposit received and does not have a right to payment for work completed to date
   So, it is point in time. Revenue will most likely be recognised when the customer takes possession of the factory

Question 11

Point in time

Answer 11

Determine the point in time at which a customers mer obtains control of a promised asset - direct it’s use and obtain most of its remaining benefit

Question 12

Transfer of control indicators

Answer 12

1. Right to payment for the asset
2. Customer has legal title to help asset
3. Entity has transferred physical possession of the asset
4. Customer has significant risks and rewards of ownership of the asset
5. Customer has accepted the asset

Question 13

Consignment arrangement

Answer 13

If control of the foods has not passed to he dealer, revenue should not be recognised
1. The product is controlled by entity until a specified event happens , e.g dealer selling them product to a customer or expiration of specified period
2. The entity can require return of the product
3. The dealer has no unconditional obligation to pay for the product

Question 14

Repurchase agreement

Answer 14

Entity sells an asset and retains right to repurchase at some point in the future.
1. Obligation to repurchase ( a froward)
2. Right to repurchase ( a call option)
3. Obligation to repurchase at customers request ( a put option)

Question 15

Forward or call options

Answer 15

Such a call option= customer has limited ability to direct the use of the asset and doesn’t obtain all of remaining benefits . No real sales occur. It is either
1. A loan - if the repurchase price ( the exercise price) is equal to o greater than original selling price
2. A lease ( using lessor accounting) - if the repurchase price is less than original

Question 16

Put option

Answer 16

an option to force the seller to buy the asset at a set price
Obligation is created if there is fin incentive for buyer - put option price is higher than the expected market value
if no obligation to repurchase exists the transaction is recorded by the seller as a sale with right to return

Question 17

Treat as loan

Answer 17

if repurchase price is equal to or greater original selling price = loan (seller receives cash, which is paid back to the customer) - transaction =financing arrangement

Question 18

treat as lease

Answer 18

if the repurchase price is less than the original selling price - treat as lease - customer is effectively paying the selling entity to use specified asset for a period of time, Lessor accounting

Question 19

Repurchase - how lentil should account for

Answer 19

Lentil cannot recognize revenue from the sale of apartment block until control of it has transferred to Bran. The transfer of control will depend on repurchase clause, and whether Bran has a significant economic incentive to exercise the repurchase right.

At the inception to assess whether Bran has economic incentive to exercise the repurchase right Lentil should assess whether Bran should compare repurchase price to the original selling price, and the expected market value at the repurchase date.

State the conditions here - the repurchase price of 5 mil is higher than original sellling price of 4 . It is also higher than the expected market value of 4.5, which indicates that B would have significant economic incentive to exercise repurchase right.

Therefore control of apartment block has not been transferred to Bran and has been retained by L

Lentil should not record a sale on 1 Jan 20X3 and should instead record a financial liability of $4m. This fin liability should be measured at amortised cost for the year ended 31 Dec 20x3, with a finance cost based upon the effective interest rate being recognised at PL

Question 20

When Separate contract

Answer 20

if 1. scope of contract changes by addition of distinct goods or services
2. increase in price really reflects price of the additional goods or services

Question 21

when not separate contract - termination of the existing contract and creation of a new contract

Answer 21

1.if remaining goods are different from those transferred before modification. TP is the total of
a. original consideration unrecognised
b. additional consid-n promised from modif-n

Question 22

when part of original

Answer 22

if remaining goods are similar to those transferred before modification. This modification will impact the contract price and the stage of contract completion - adjust the amount of cumulative revenue recognised at the modification date
ex. remaining g and s are not distinct from the services transferred before modification - bc contract still contains 1 performance obligation - to construct a building

Question 23

additional items

Answer 23

the contract modification is accounted for as separate contract because the products are distinct, and the price increase reflects the product’s SSP. By the reporting date, control over 900 products under the original contract has transferred. Revenue of 900*60 shoould be recognised

Question 24

when separate contract

Answer 24

the contract price increase does not reflect SSP, so the modification is not accounted as separate contract. Because the goods are distinct the current contract should be terminated and creation of new contract. Now that hte original contract is deemed cancelled, a transaction price should be determined for the new contract - the unrecognied cons-n from original contract (30060 = 18,000) + additional consider-n promised from the modific-n (20040 =8,000). This amount to price per product of 52 (26,000/500)
After mod-n, a further 200 products were transferred to Sweet. Revenue (200*52 = 10,400) should be recognised. So total revenue for the year is (42+10.4

Question 25

contract costs

Answer 25

1. costs of obtaining a contract excl costs that would be beared regardless of whether contract is won (legal fees, or the costs of travellling to tender) 2. cost of fulfilling the contract if they do not fall within the scope other standard capitalised cost of obtaining and fullfillinf will be amortised to the SPL as revenue is recognised costs of waisted labour and general costs will be expensed Strangers recognise an asset only for sales commission of 15,000. These costs were incurred only because bid was successful and they will be recovered through the fees earned from the contract

Question 26

if revenue is recognised before cons-n received

Answer 26

1. recognise AR if the right to cash is unconditional - only passage of time is required 2. or contract asset

Question 27

signif judgement

Answer 27

1. may be not writte, must uscertain constructive obligation to deliver good or service 2. accounted only if payments are probable 3. distinct perfr obligations - jusdgemnt based on past behaviour 4. VC should be included in transaction price if it is highly probable that significant reversal of cumulative revenue recognised will not occur - judgements about whether perfr related targets will be met 5. the transaction price must be allocated to distinct performance obligation, based on observable stand alone selling price. However, estimation techniques must be used if observable prices are not available 6. if PO is satisfied over time, revenue must be recognised based on progress towards the completion of the performance obligation. There are various ways to measure completion using either input or output methods, and entity must determine which one most faithfully represents the transaction 7. if satisfied at a point in time, the entity must use judgemetn to ascertain date at which control of the asset passes to the customer