F2 Module 1

Question 1

revenue recognition definition

Answer 1

occurs when an entity satisfies a performance obligation by transferring a good or service to a customer

Question 2

five-step approach for revenue recognition

Answer 2

1) Identify the contract with the customer
2) Identify the separate performance obligations in the contract
3) Determine the transaction price
4) Allocate the transaction price to separate performance obligations
5) Recognize revenue when or as entity satisfies each performance obligation

Question 3

contract

Answer 3

an agreement between two or more parties that creates enforceable rights and obligations
can be written, verbal or implied

Question 4

customer

Answer 4

have a contract with business to pay for their services or goods

Question 5

five criteria for identifying a contract

Answer 5

1) all parties approved contract and committed to performance obligations
2) rights of each party for contracted goods/services identified
3) payment terms identified
4) contract will generate cash flows
5) probable entity will receive all consideration
-assessment made at inception of contract
-if criteria met= only reassess if significant changes
-if all not met = regular reassessments
-if not all met and paid = recognize revenue if payment nonrefundable and no remaining obligations; if not recognized as revenue, book as a liability

Question 6

combination of contracts

Answer 6

-if two or more with the same customer of related parties of the customer:
1) contracts treated as a single contract for one objective
2) payment for one contract is tied to performance or price of another contract
3) goods/services promised represent as single performance obligation

Question 7

contract modification

Answer 7

-change in price or scope of contract agreed by both parties
-modification occurs, either treated as new contract or change to existing contract

Question 8

when modification creates a new contract

Answer 8

1) scope increases due to addition of individual goods or services
2) price increase reflects stand-alone selling prices of additional goods/services

Question 9

performance obligation

Answer 9

-promise to transfer a good or service to customer (either bundle or individual and distinct)
-or series of goods substantially the same and transferred in same manner
-if goods/services not distinct, combined into a single performance obligation

Question 10

criteria for goods/services to be distinct

Answer 10

1) good to be transferred separately identifiable from other goods or services in contract
2) customer can benefit from good on their own or combined with resources customer already has

Question 11

when a good is separately identifiable

Answer 11

1) entity does not integrate good or service with other goods of services in the contract
2) good/service does not modify another good/service in another contract
3) good or service not depend on other goods or services in contract

Question 12

when goods not separately identifiable

Answer 12

1) goods dependent or interrelated
2) entity provides service to integrate the goods/services into a bundle of goods or services

Question 13

determine the transaction price

Answer 13

-amt the business expects to be entitled to for transferring goods or services to customer
-should consider transaction price based on variable consideration, significant financing or noncash consideration and any consideration owed to the customer

Question 14

variable consideration

Answer 14

-estimated by taking a range of possible amts and using either the expected value (sum of probability weighted amts) OR most likely amt, whichever is better predictor
-only included in price if it is probable significant revenue reversal not be required once any uncertainty of receiving consideration resolved

Question 15

significant financing

Answer 15

-revenue recognized based on price that would have been paid in cash by the customer at time of transfer
-if time of transfer of goods/service and payment by customer anticipated to be less than one year, do not discount transaction price

Question 16

noncash consideration

Answer 16

measure at FV at contract inception

Question 17

consideration payable to a customer

Answer 17

treated as a reduction in the transaction price and revenue recognized by entity unless entity receiving goods or services transferred by customer

Question 18

if more than one performance obligation

Answer 18

-transaction price should be allocated to each separate performance obligation based on amount of consideration expected to satisfy each unique obligation
-stand-alone selling price, and any discount or variable consideration must be determined at contract inception

Question 19

stand-alone selling price

Answer 19

the price entity would sell promised good or service to a customer on a stand-along basis,
-once price determined for each obligation within contract the total transaction price should be allocated in proportion to stand-alone selling prices

Question 20

discounts

Answer 20

exists when sum of stand-alone prices for each obligation within a contract > total consideration for contract
-discounted allocated proportionally to all obligations within the contract

Question 21

variable consideration

Answer 21

-may be attributable to the entire contract
-individual performance obligations within a contract or distinct goods or services within a single performance obligation

Question 22

transaction price changes

Answer 22

if it changes after contract inception, change should be allocated to performance obligations in the contract on same basis used at inception
-changes in stand-alone prices after inception should not be reallocated

Question 23

stand-alone selling price calculation

Answer 23

= (perf. obligation amt/total obligations)*contract price