IFRS Flashcards
(39 cards)
5 criteria to meet the definition of a contract
a. Contract is approved and parties committed to their obligations
b. Entity can identify each party’s rights
c. Entity can identify each party’s payment terms
d. Contract has commercial substance
e. Collection of consideration is probable
5 step process for revenue recognition?
- Identify the contract with customers
- Identify the separate PO in the contract
- Determine the transaction price
- Allocate the transaction price to the separate PO
- Recognize revenue when each PO is satisfied
If there is no contract, when are amounts still reocognizable?
amounts are refundable, and either:
- All obligations performed
- Contract terminated & non refundable
What are the 2 criteria to identify PO (determine separate PO)
- Goods/services capable of being distinct (customer can enjoy them separately)
- Distinct in context of the entire contract (no integration, one part does not significantly impact another)
What are the 2 methods to estimate variable consideration?
- Expected value (vast experience, weighted average, better with many comparable contracts)
- Most likely amount (no experience, pick most likely, better with limited outcomes)
How to consider contraint?
Only include amounts that are probable (+50%) to avoid having to reverse revenue in the future
What is the easiest way to determine the distinct criteria?
If a stand-alone selling price exists, if there is none you can look if the item could be used in combination with other items by the customer.
What cost are allowed to be capitalized with contracts?
- Incremental costs to obtain contract (sales commission or bonus)
_ cost incurred to fulfil contract if: (directly related, generate or enhance revenues, expected to be recovered)
What are the 2 criteria to recognize a new contract?
a. Scope increases (not just extension of services)
b. Contract price is stand-alone selling price
What is the definition of control?
an investor controls an investee when the investor is exposed, or has rights, to variable returns form its involvement with the investee and has the ability to effect those returns through its power over the investee.
What are the 3 required elements for control?
Power over the investee
Exposure or rights to variable returns
Ability to use its power over the investee to affect returns
What are the 4 steps in the acquisition method?
- Identify the acquirer
- Determining the acquisition date
- Recognize and measure the identifiable assets, liabilities and NCI
- Recognize and measure goodwill
Explain the key components of ‘core’ goodwill
Core goodwill has two main components: (i) Going concern goodwill: relates to the net assets of the acquiree, in that the acquiree’s net assets together are worth more than the net assets separately, caused by the synergy created by the acquiree’s net assets within the acquiree as a going concern. (ii) Combination goodwill: relates to the extra benefits accruing because of the synergy created by the acquirer and the acquiree combining together eg if the raw materials available to the acquiree are of particular use to the acquirer. These benefits could affect the recorded earnings of the acquirer or the acquiree [or both] depending on the nature of the benefits.
What are the indicators/guidelines to assist in the judgment of how acquires control?
- Form of consideration
- Subsequent management
- Large minority voting interests
- Predator or target
- Relative size of the businesses
How is consideration transferred calculated?
- Measured at FV, determined at acquisition date, and
- Calculated as the sum of the FV of the assets transferred by the acquirer, the liabilities incurred by the acquirer, and the equity interests issued by the acquirer.
What should be reassessed in the event of a gain on bargain purchase?
- Identification and measurement of the identifiable assets acquired and liabilities assumed
- Measurement of the consideration transferred.
This review is to ensure that the measurements are appropriate.
How should be accounted for a business combination where there acquirer already held part of the shares in the acquiree before?
Remeasure to FV at acquisition date, difference to P/L.
If it was measured at FV with increments in equity, transfer amounts to P/L.
What journal entry should be made to recognize a liability for contingent consideration?
Dr Goodwill
Cr Liability (provision) for contingent consideration
If the targets for the contingent consideration are not met, what journal entry should be made?
Dr Liability (provision) for contingent consideration
Cr Other income
What are the 2 parts of the substance over form test?
Part A: EI no obligation to: deliver FA or unfavorable exchange FA/FL
Part B: if settled in own EI:
- non derivative: no variable shares
- Derivative: only fixed FA for fixed EI
What is the fair value definition?
The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
How are transportation and transaction costs used in FV determination?
Only transportation used in FV measurement
But both used to determine most advantageous market
What are the 4 steps in FV measurement?
- Determine the asset or liability that is to be measured
- Determine the principal or most advantageous market
- Determine the market participants
- Determine the appropriate valuation technique
How does IFRS 15 require an entity to determine what goods and services should be treated as separate POs?
If they are distinct (either themselves or as part of a bundle) or they are part of a series of distinct goods and services that are substantially the same and have the same pattern of transfer to the customer.
