Class 5 - Revenue Recognition and Receivables Flashcards
IASB Definition of Revenue?
increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liability that result in increases in equity.
Intuitive definition of Revenue?
A gross increase in shareholder equity due to the creation of a new asset or settlement of an existing liability.
What does the SAB 104 state?
It outlines 4 criteria that indicate revenue is earned and realised. The 4 criteria are:
- There is persuasive evidence that an agreement exists
- Delivery of goods or services has occurred.
- The vendor’s fee is fixed or determinable; and
- Collectibility is probable.
T or F: Whilst the criteria for revenue recognition has been set, it can often be a vague process determining whether revenue should be recognised?
True - because there is an almost infinite number of ways to structure sales agreements.
What are the 3 intuitive criteria a firm should meet to record revenue?
1 - the critical event in the earning process has taken place
2 - the amount of revenue can be measured with a reasonable degree of reliability
3 - the amount that will be collected is reasonably assured.
When is Revenue recognised when an item or service is delivered in a series of steps?
Generally, the last major step is the critical event because it is that last step the ultimately signifies transfer of ownership.
When can recognising revenue with a degree of reliability not be a straight forward task?
This can become difficult when a product or service has cancellation or termination clauses. Similarly, the buyer and seller may have side agreements (returns/refunds, customer acceptance terms).
In these situations, accountants have to make a judgement call to whether revenue can be measured with a reasonable degree of reliability.
T or F: If a contract is bundled and yields a lower price than the individual selling price for each time, then the revenue breakdown of each component is pro-rated.
True - IBM example
What are typical line names for Impairment of AR?
Allowance for Doubtful Accounts or Allowance for Bad Debt
What is a “contra-asset account”
An account that reduces the value of an asset account; typically through mechanisms such as impairment.
It purpose is to partially offset an asset account so that the NET balance of the two accounts reflects the expected future service potential of AR
T or F: the balance of a contra-asset account is a general estimate of the dollar amount of the probable impairment of receivables; the balance in this account typically does not reflect specific customer invoices.
True
What is it necessary to use a valuation allowance account to account for probable impairments?
It is necessary because the AR account is comprised of a AR Subsidiary Ledger. This Ledger is a detailed listing of invoice amount still owed to the company by each customer. AR is the sum of this Ledger. Typically, at the time the company estimates an impairment it cannot determine which AR customers will not pay and hence cannot directly deduct the amount of the AR.
What are the 3 issues considered when making an allowance for a Bad Debt?
1 - it is probable that the existing receivables is impaired
2 - the company deems invoice collection improbable
3 - when the company determines that the estimate of the valuation allowance in incorrect.
Where is Bad Debt or Impairment captured on the Income Statement?
Bad Debt Expense account
What happens when a company deems an customer invoice noncollectable?
It reduces the AR Subsidiary Ledger to match the value of the impaired invoice, and then decreases the Bad Debt account balance.
