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ACCO 310 > Chapter 6 > Flashcards

Chapter 6 Flashcards

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1
Q

We can sum up this chapter with

A

Risk (uncertainty)

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2
Q

attempt to address

A

when, what and how much to be recognized

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3
Q

In case writing you should always show

A

2 weak arguments as well, why your argument is better

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4
Q

recognition of losses and profits

A

losses quickly and profits slowly

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5
Q

the greater the risk of something going wrong

A

the slower you will recognize

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6
Q

major risks

A
  1. a MAJOR portion of the performance won’t be achieved
  2. big risk of not collecting some or all of purchase price (being paid)
  3. measurability (cost/revenues/profit/returns/degree of completion)
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7
Q

suggested approach to examine any scenario

A

Performance (all, some or none)
Measurability (revenues, costs and performance done)
Collectability (issue?)

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8
Q

revenue recognition does not coincide with

A

cash flows. Don’t need for all to occur at one point in time

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9
Q

PMC is used with

A

IFRS and ASPE

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10
Q

Focus with ASPE

A

earnings (income statement)

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11
Q

Focus with IFRS

A

rights and obligations (increase in assets or liabilities on balance sheet will mean recognizing revenue)

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12
Q

never forget the concept

A

MATCHING concept. Once you’ve decided what to recognize and when in a case scenario or mini question, briefly mention the costs that must be matched to the revenues

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13
Q

Multiple deliverables

A

when you can sell one item without the other

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14
Q

Split of revenues recognized

A

relative fair value of each if available or relative cost of providing the service: CASE MATERIAL

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15
Q

when to recognize revenue for production

A

before the sale: when there is no risk to seller (fuel, commodities)

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16
Q

when to recognize revenue for performance

A

most common: could be at one point or several in time

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17
Q

when to recognize revenue for collection

A

rare- applied in cases where collection is uncertain

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18
Q

collecting interest revenue on notes receivable/payable

A

the most determinable of these:

  1. prevailing rate for similar instrument of issuer with similar credit rating
  2. a rate of interest that discounts the nominal amount of instrument to current cash sales
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19
Q

Fair value method

A

IFRS/ASPE: when the FV of both elements of multiple deliverable are known –> prorate the total amount according to the proportion of fair value of each to their total separately

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20
Q

incremental method

A

ASPE: if the FV of only one is known –> use that and the balance will be deferred as the price of the other item

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21
Q

ethical issue with multiple deliverable methods

A

managers may try to over estimate the revenues they recognize up front and underestimate future liability

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22
Q

Loan provided to a customer with no interest to the cx

A

ABC company will recognize the full amount as performance is completed but part as service revenue and part as interest revenue
*do not forget to expense costs incurred

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23
Q

Barter transactions

A

non-monetary: little or no monetary assets are received as consideration when goods and services are sold –> recorded at fair value of assets received, unless fair value of those given up is easier to determine
–> if no commercial substance then record at book value

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24
Q

commercial substance

A

significant change in timing, amount or risk of expected future cash flows

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25
Legal issue and contract law
a sale is a contract, shipping may determine when title passes
26
risk
increase in the risk that inbound cash flow will not occur as a result of transaction: business accepts junior secured status on a debt in exchange for larger repayment amount
27
timing
business agrees to a delayed payment in exchange for larger amount
28
amount
business receives cash sooner in exchange for receiving a smaller amount
29
if no commercial substance
transaction should not be recognized: sale of asset to owner of sole proprietorship, leases back to the business,
30
agent vs. principal
ask who is bearing the risk? agent: record revenues net principal: sales expense gross
31
cash discount
discount offered by seller for paying cash early on credit sales
32
cash discount can be recognized two ways
1. gross method | 2. net method
33
gross method
initially record sale at gross price (full price no discount) 1. if customer pays within discount period: dr cash & sale discount (contra sales) and cr. AR 2. if customer pays after discount period: dr. cash and cr. AR
34
net method
company would initially record at net price = gross price - sales discount dr. AR cr. Sales 1. payment within discount period: dr. cash cr. AR 2. payment after discount period: dr. cash full amount (gross) cr. AR & sales discount forfeited (other revenues)
35
earnings approach
focuses on earnings process and how a company adds value for its customers
36
contract-based approach
focuses on contractual rights and obligations created by sales contracts
37
revenue recognition earnings approach (ASPE)
PMC 1. performance is achieved - -> risks and rewards transferred and/or earnings process is substantially complete - -> measurability is reasonably assured 2. collectability is reasonably assured
38
risks and rewards of ownership
core concept of earnings approach: who has possession and who has legal title
39
shipping terms may
determine when legal title passes
40
buyback agreement
loan with items being transferred held as collateral
41
bill and hold transaction
bona fide business reasons for structuring a sale (lack of space), professional judgement must be exercised to see if classified as a sale
42
Problems with earnings approach
1. multiple and conflicting guidance 2. difficult to apply bc of different views on when to recognize 3. risk and rewards split between buyers and seller, hard to know when transferred 4. a lot of subjectivity 5. omit when receivables should be recorded if revenues not yet earned
43
under contract based approach, contract recognized when
1. entity becomes party to the contract 2. contractual rights are collectible/measurable 3. performance obligation is measurable
44
under contract based approach, revenue recognized when
control passes/performance occurs --> physical control of asset and legal title *net position = net amounts
45
comparing earning and contract based
1. IFRS triggers entries before ASPE, focus on balance sheet --> the difference between contract assets and liabilities in IFRS is profit/loss to be recognized on I/S 2. ASPE's focus on income statement what is earned
46
revenues under _____ may take longer to be recognized
IFRS
47
problems with contract based approach
not been tested, relatively new,
48
measurement uncertainty result from
1. consideration 2. returns 3. collectability
49
consideration
payment relating to goods sold depends on the resale of goods by the buyer, revenue would not be recognized
50
return
right of returns exists; might have to postpone reported sales until the privilege expired
51
collectability
revenue is recognized and any potential uncollectible amount is accrued
52
factors to consider when deciding gross or net income
1. whether company acts as a principal in transaction or as an agent 2. whether the company take titles to goods being sold 3. whether the company has the risks and rewards of ownership of goods being sold
53
revenue from sale of goods shall be recognized when ALL satisfied
1. entity transferred to the buyer risks and rewards of ownership 2. entity retains no continuing managerial involvement to the degree associated with ownership nor effective control over goods sold 3. amount of revenue can be measured reliably 4. probable that economic benefits associated with transaction flow to the entity 5. costs incurred or to be incurred can be measured
54
goods sold with warranty and returns not estimable
Dr. AR Cr. Inventory and Deferred gross profit when uncertainties are resolved (payment received, return expired), recognize revenue dr. COGS and deferred gross profit (liability) and cr. sale when cash is received dr. cash cr. AR
55
revenue recognized for bill and hold sales if
1. probable that delivery will be made 2. item on hand, identified and ready for delivery to the buyer is recognized 3. buyer specifically acknowledges the deferred delivery instructions 4. usual payment terms apply
56
rendering of services recognized if
1. amount of revenue can be measured reliably 2. probable that economic benefits associated with transaction will flow to the entity 3. stage of completion of transaction at the B/S date can be measured reliably 4. cost incurred and cost to complete can be measured
57
advertising commission
only recognize when advertisement appears in front of public
58
recognize interest
effective interest method or other straight line method
59
recognize royalties
accrual basis in accordance with substance of relevant agreement and degree of trust for large companies
60
recognize dividends
right to receive payment is established
61
onerous contract
the cost required to fulfill agreement is higher than the revenue

ACCO 310 (7 decks)

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