Lec 4 Flashcards
(25 cards)
IFRS15
Revenue from contracts with customers
recognising revenue
Agency problems - incentive to manipulate revenues upwards
Replaces previous standards
Ias 18 revenue
IAS 11 contracts
Objective of revenue recognition
Recognise revenue to depict the transfer of goods or services to customers
Scope -!lall contracts to deliver goods or services to a customer
A customer is a party who has contracted an entity to obtain G/S that are output of the entity’s ordinary activity
5 step process
Identify the contract with customers
Identify the separate peformance obligations in the contract
Determine the transaction price
Allocate the transaction Price to the separate performance obligations
Recognise revenue when each performance obligation is satisfied
Revenue recognition principle
Recognise revenue is the accounting period when the performance obligation is satisfied
Step 1 identify the contract with a customer
Contracts exists if enforceable rights and obligations exist
Written oral or implied by an entity’s customer business practices
Main conditions of contracts:
1) collection of considerations is probable
2) commercial substance
3) each party’s right G/S are identifiable
4) approved by parties
5) terms of payment are identified
Revenue cannot be recognised until all 5 conditions are met
Example:
Satisfies performance obligation - rev recognised
Acc Rec. 5000
Sales rev 5000
Cogs. 3000
Inventory. 3000
When sale complete
Cash. 5000
Acc rec. 5000
Product or service is distinct when
Customer is able to benefit from G/S on its own
Or together with other resources
Entity’s promise to transfer G/S is desperately identifiable from other promises in the contract
Step 2: identify separate performance obligations in the contract
Example: sells car with gps that lasts 6 months
It has 2 performance obligations: the car and the gps as the customer can benefit from both
Step 3: determines the transaction Price
Transaction price is the amount of consideration that the entity expects to receive from a customer excluding amount collected by a third party (e.g. tax)
If fixed = easy to determine
But entities must consider: Variable considerations Time value of money Non cash consideration Consideration paid or payable to customers
Step 3: determine the transaction price
Variable consideration:
Variable consideration is the price dependant on future events
Entity’s estimate amount of revenue to recognise:
Expected value; probability weighted amount in the range of possible considerations
Most likely amount: a single amount which is most likely in the range of possible considerations
Step 3: determine the transaction price
Variable consideration example;
A sells 1000 units to x at 500 a unit. A provides Price protection between 500 and lowest price for product x.
Price reduction in 6 months
0 - prob 70%
50 - 20%
100 - 10%
What’s the rev recognised?
Multiple outcomes = expected value method=
Revenue recognised = 50070% + 500-5020% + 500-100*10% = 480
Step 3: determine the transaction price
Time value of money
If contact has a significant financing component (deferred payment or prepayment)
Entity adjusts the amount of consideration for the time value of money
Entity reports interest expense or interest revenue separately from sale transaction
Step 3: determine transaction price
Time value of money example;
A sells to b for 900k but b extends a 4 year 0 interest note with a face value of 1332000. So company a is financing company b. (Significant is the financing component so take into account time value of money)
At g/S delivery - recognise revenue
Note receivable 900k
Sales revenue. 900k
For each year 1-4 recognise interest revenue (@12% yearly)
Note receivable 900k x 12%. 108k
Interest revenue. 108k
0
Step 3: determine the transaction price
Non cash consideration
Customers sometimes pay for g/S in form of equipment or labour hours
Recognise revenue = fair value of what is received
If fair value is not available then use the estimated selling price of the non cash item
Step 3: determine the transaction price
Consideration paid or payable to customers
A offers 3% volume discount if b buys 2mil of products during calendar year. On March 31, has sales of over 700k to b. In previous 2 years a sold 3 mil
To b in April 1 to dec 1
How much revenue the company recognises for the first quarter?
Reasonable expectations; that’s the customer will
Meet discount threshold
Revenue = 700k *97% =679k
Acc receivable. 679k
Revenue. 679k
If they reach threshold or if it not
If
Cash 679k
Acc rec. 679k
If not
Cash 700k
Acc rec. 679k
Sales discounts forfeited (income). 21k
Step 4: allocate transaction price to a seperate obligation
Companies often need to allocate transaction price to +1 PO ina contract
If allocation needed: price allocated to POS based on relative fair values
Best measure of fair value is observable selling prince at what the company could sell the G/S On a stand alone basis
If not available- use best estimate
Step 4: allocate transaction price to a seperate obligation
Best estimate:
Adjusted market Assessment approach: evaluate the market in which similar G/S are sold and estimate price customers would pay
Expected cost + margin approach : forecast the expected cost of satisfying the PO and then add an appropriate margin
Residual approach:(lim circumstances)
Standalone price of the PO = total transaction price of all contract - observable PO prices
Step 4: allocate transaction price to a seperate obligation:
Residual approach
Appropriate only if for one PO the transaction price is uncertain whereas for other PO is not
If + PO under the contract does not have observable stand alone prices - combination of approach is appropriate
Step 4: allocate transaction price to a seperate obligation
Residual approach example:
A enters into contact with b to use licence x and y for 3 years. The contact is 100k. Stand alone princes for supports is observable at 12500. The price of each license is not available. What is the transaction price of 2 licences?
Allocated to technical services = 12500*2 = 25k
Allocate the residual to licences = 100k -25k =75k
Step 5: recognising revenue
An entity recognises revenue when it satisfies each performance obligation
Transferring occurs when a customers obtains control of G/S
Control takes place when a customer has the ability to direct the use and obtain the remaining benefits from the G/S
Revenue can be recognised over time if the client enjoys the POs as the seller performs. It controls the asset, and does not have an alternative use
Specific case: POs are delivered throughout a period:
A contact asset or a contract liability arise
If the right to collect money is unconditional on further POs being satisfied- acc rec to sales rev
If right to collect money is conditional on further POs being satisfied - contact asset to sr
Y
Disclose qualitive and quantitative info:
Contacts with customers: diaggregation of rev into contacts
Significant judgements: judgements in determining transaction prices it’s allocation to POs and timing of rev recognition
Assets recognised from costs to fulfill a contact: closing balances of assets recognised to deliver a contact + amortisation methods
