Lecture 6 - revenue recognition

Question 1

Two ways to account for revenues

Answer 1

Asset-liability approach IFRS (contract based)

Earnings approach ASPE

Question 2

Asset-liability approach (IFRS 15)

Answer 2

Covers all contracts except leases, insurance and financial instruments
Recognize revenue in the period that the performance obligation is satisfied
1. Identify contract
2. Identify separate performance obligations
3. Determine transaction price
4. Allocate transaction price to POs (based on fair value which is stand alone selling price)
5. Recognize revenue when each PO is satisfied

Question 3

Conditions for separate performance obligations

Answer 3

1. Distinct, can be sold separately

2. Not interdependent

Question 4

Earnings approach ASPE

Answer 4

Recognize when:

1. Risk and rewards transfer
2. Seller has no continuing involvement or effective control
3. Measurement is reliable
4. Collection is probable

Question 5

2 ways to recognize long term sale of services

Answer 5

Percentage of completion method IFRS ASPE

Completed contract method ASPE

Question 6

Concessionary terms

Answer 6

Lenient return/payment policy, continued involvement, credit policy
May create additional obligations

Question 7

To recognize as bill and hold

Answer 7

1. Substantial reason to hold
2. Goods are ready for delivery
3. Goods are identified separately and belong to buyer
4. Goods can’t be used to fill other orders

Question 8

Principal agent relationships

Answer 8

Principal = seller
Agent = third party
Don’t recognize revenue when you ship goods to the agent
Amount collected by agent for principal is not the agent’s revenue
Usually commission is paid and that is the agent’s revenue

Question 9

Consignment sales

Answer 9

Recognized by consignor as inventory as consignment
Recognized as revenue by consignor when consignee notifies that goods have been sold
Consignee recognizes commission as revenue

Question 10

Rights of return

Answer 10

If returns are not estimable, don’t record sale until rights of return expire
If returns are estimable but not material in amount, record sale and record returns as they happen
If returns are estimable, record sale but reduce by amount of estimate

Question 11

Two types of warranties

Answer 11

1. Warranty that the product meets agreed-upon specs in the contract at the time the product is sold, included in sales price
2. Warranty that provides additional service, not included in sales price

Question 12

Uncertainty with collectibility IFRS vs ASPE

Answer 12

ASPE: revenues can’t be recorded at time of sale
IFRS: as long as contract exists, amount recognized as revenue is not adjusted for customer credit risk, use allowance for doubtful accounts and bad debt expense