Chapter 6 Flashcards
(28 cards)
Revenue recognition
- Goods/services are transferred to customers
- For the amount the company expects to be entitled to for these goods/services
Why is Revenue recognition one of the most important topics?
- Fundamental measure of performance
- Requires judgement
- Heightened risk of fraud
- Large account, used to quantify materiality
5 Steps of Revenue Recognition
- Identify contract
- Identify performance obligations
- Determine the transaction price
- Allocate the transition price across PO’s
- Recognize revenue as each obligation is satisfied
Contract
Outlines legal rights and obligations
All parties must be committed and collectability is probable
Performance obligation
- Capable of being distinct
- Separately identifiable from other goods or services in the contract
Transaction price
Amount expected to receive from customer
When the customer has these they are more likely to control a good/service?
- An obligation to pay the seller
- Legal title to the asset
- Physical Possession of the asset
- Accepted the asset
- Assumed the risk/reward of ownership
When is the revenue recognized over time?
- Customer consumes the benefit as it is performed
- Customer controls the asset as it is being created
- Seller has no alternative use and has legal right to payment for progress date for good/service
Quality-assurance warranties
Not a performance obligation, no amount allocated to specific item.
Allocation method
(Specific item/sum of obligations)xtotal sum of obligation
Variable consideration
Part of Transaction price hat depends on the outcome of some future event
Most likely to happen
Use the highest probability outcome
Expected value
take a weighted average based on probability
Don’t recognize revenue if:
- inadequate evidence on base estimate
- Dependence of estimate on factors outside of the sellers control
- Broad range of outcomes
- Long delay before uncertainty resolves
Agent
Get a portion of the revenue (commission)
Adjusted market assessment
Price if the product/service were sol in the market
Expected cost plus margin
Estimate cost to complete, plus an appropriate profit margin
Residual
Subtract the stand alone selling prices of other goods/services in the total transaction price
Functional Intellectual Property
- Transfers a right of use
- Has significant standalone functionality
- Unless seller has more obligation revenue can be recognized almost immediately
Symbolic Intellectual Property
- Transfers a right of access
- Lacks significant standalone functionality
- Seller undertake ongoing activities to benefit customer
- Recognize over the license period
Bill-and-Hold Sales
Customer purchases goods, but seller does not ship the product until later. Revenue should not be recognized until good/service has been delivered.
Gift cards
Categorized as Deffered revenue. Recognized when redeemed
Financial Statement Disclosures of Revenue
- Nature, amount, timing, and uncertainty of revenue
- Unfinished POs and how they are typically satisfied
- Contractual Provisions
- Policies for significant estimates
Billings on Construction Contract
Contra asset. Track what was billed to the customer
