M4: Revenue Flashcards
(22 cards)
What is the IFRS 15 five-step approach to revenue recognition?
Step 1: Identify the contract with a customer
Step 2: Identify the performance obligations in the contract
Step 3: Identify the transaction price
Step 4: Allocate the transaction price to the performance obligation
Step 5: Recognise revenue when (or as) performance obligations are
What is a performance obligation?
A promise in a contract with a customer to transfer to the customer either:
A good or service (or bundle of goods or services) that is distinct, or
A series of distinct goods or services that are substantially the same and have the same pattern of transfer to the customer
What is Revenue?
Income arising in the ordinary course of business activities
Do we recognise interest and dividends received within revenue?
NO. This would be Finance Income.
What is the journal for recognising revenue?
Dr Bank/Receivable
Cr Revenue
What is important to remember when recognising revenue?
WE DO NOT INCLUDE VAT, THIS GOES TO VAT CONTROL ACCOUNT
How do we determine the transaction price in a contract with a customer?
The amount of consideration to which an entity expects to be entitled in exchange for
transferring promised goods or services to a customer, excluding amounts collected on behalf
of a third party
What is a significant financing component in a transaction?
When the customer pays more than 12 months after performance obligation is satisfied.
This is technically a finance benefit to the customer and thus we recognise time value of money every month. Dr TR Cr Finance Income
When is variable consideration part of transaction price?
When there are variable elements specified within the contract that are likely to be achieved/utilised.
What do we do if the customer is not going to pay until 2 years later?
We recognise the cash price on initial recognition and then in subsequent months we recognise the difference between cash and the total price within finance income every month of the unwinding part.
E.g. 200k total. 175k cash price.
25k unwound every month/year to recognise within finance income.
When do we recognise contract asset in a journal?
Where we have accrued income but not yet received it e.g. if there is a bonus payable within a sales contract etc.
What is the journal to reverse a contract asset part of a contract when a bonus is not going to be met that we initially recognised in revenue?
Dr Revenue (To reduce our initial recognition)
Cr Contract Asset (Remove Contract asset from our SoFP)
How is the transaction price allocated to performance obligations in a contract when there is more than one performance obligation?
We split them based on dividing Transaction Amount/Total Amount x Contract price
e.g. 5k transaction price car, 500 servicing that is free = 5000/5500 x 5000 and then we do another for 500/5500 x 5000
How do we calculate when there is a bundle and we need to split performance obligations?
We do Transaction Amount for PO / Total Amount it would Cost x Contract Price
When is revenue recognised?
When a customer gets control of a good/service delivered to them.
Control is:
- Direct use of asset
- Stop others from directing the use
- Get all the benefits from it
In what circumstances is revenue recognised over time?
The customer simultaneously receives and consumes the benefits provided by the selling
company’s performance as it is performed. e.g. a cleaning company provides weekly cleaning
services to an office building.
The selling company’s performance creates or enhances an asset that the customer controls
as the asset is created or enhanced. e.g. an extension is built onto the customer’s premises.
The selling company creates an asset for which it has no alternative use and for which it has
an enforceable right to payment for performance completed to date. e.g. an audit is performed
for an specific client and cannot be used by another client.
How is revenue recognised over time?
Where a performance obligation is satisfied over time, revenue is recognised over time based on
progress towards complete satisfaction of the performance obligation.
What are the costs of obtaining a contract and how are they recognised?
Depends if incremental/non-incremental:
Incremental costs can be recognised as an asset if the selling company expects to recover the costs
The journal entry to recognise contract costs as an asset is:
DR Contract costs asset X
CR Bank/payable X
Being contract costs recognised as an asset.
Non-incremental costs should be recognised as an expense unless explicitly chargeable to a customer
The journal entry to recognise contract costs as an expense is:
DR Contract costs SPL X
CR Bank/payable X
Being contract costs recognised as an expense.
What are the costs of fulfilling a contract and how are they recognised?
All costs related to carrying out a contract are deemed to relate to performance obligations already satisfied (or part-satisfied) and are therefore recognised as an
expense by:
DR Contract costs SPL X
CR Bank/payable X
Being contract costs recognised as an expense.
What amounts may be presented in the statement of financial position in respect of a contract with a customer?
Trade receivable
Contract assets
Contract liability
What disclosures should be made in respect of revenue?
Information about contracts with customers
Significant judgements in applying IFRS 15
Assets recognised from costs related to contracts with customers
What ethical issues could arise when there is an estimation of a contract completion?
Could be recognised early and overstate revenue and net assets. This would not affect the total but it could overstate the amount at a given point in time for management if bonus is linked to YE etc.
