Revenue Flashcards
(25 cards)
Definition of Revenue
Increase in economic benefits during the accounting period in the form of inflows or enhancements or assets or deceases of liabilities that result in increase in equity, other than those relating to contributions from equity participants.
However IFRS 15 Does not include all revenues….
Does not recognise interest income, dividend income, gains from revaluation and profit on sale of NCA
What are the 5 recognition steps of IFRS 15 Revenue?
COPAR:
1.Identify the contract(s) with a customer
2.Identify the performance obligation in the contract.
3.Determine the transaction price
4.Allocate the transaction price to the performance obligation in the contract
5.Recognise revenue when the entity satisfies a performance obligation
Identification of contract
Combining contracts, what is it?
If there are multiple contracts entered into with a customer at or near the same time - then IFRS 15 requires these to be treated as a single contract in substance
Identification of contract
Modifications of contracts, what is it about?
If at a later date there is a change to the original contract agreed upon, this may sometimes be treated as a separate contract.
If changes relate to distinct items/services
-> Separate contract
If changes relate to indistinct items/servives
-> modification to the same contract
Identify performance obligation
If goods and services are not distinct how do we treat them?
We can bundle them together as one performance obligation
Determine the transaction price
Non cash considerations, how do we determine the price?
We measure the non-cash consideration at fair value (IFRS 13), and include in transaction price (TP)
Determine the transaction price
Bad debts, how do we treat them in IFRS 15
Bad debt is treated as an expense rather than decrease in revenue. So the TP is not adjusted for likelihood of bad debts
Determine the transaction price
Significant timing component, what is it about?
TP should be adjusted to reflect the time value of money if the timing component is > 1 year.
Reduce revenue and recognise interest income overtime.
Determining transaction price
Variable consideration, when should TP be reduced
TP will need to be reduced to take account of the likelihood of:
Customer discounts
Customer refunds
penalties applied (e.g. clauses in the contract that means a reduced revenue if goods arrive late)
Determining transaction price
Variable consideration continued… When should TP be increased?
TP would need to be increased to take account of the likelihood of the entity receiving:
Bonuses/incentives such as usage royalties
what is the verbal probability threshold for IFRS 15 recognising revenue?
recognise revenue to the extent that it is highly probable that it will not be significantly reversed
Determining TP
Expected Values
Use probability weighted values, this is appropriate where we have a population - such as large number of contracts with similar characteristics.
e.g. a retailer considering the reduction needed for returns might apply probability based on their past experience of the rate of customer returns.
Determining TP
Most Likely amount
This is best used for contracts with different consideration outcomes.
e.g. entity will receive 40k if goods are delivered in 2 months, and 30k if goods delivered in 3 months.
Recognise revenue when the entity satisfies a performance obligation
When is revenue recognised?
Revenue is recognized in the IS when the entity transfers the promised good or service to the customer (by fulfilling the performance obligation). This is when control of the good/service is transferred to the customer
Recognise revenue when the entity satisfies a performance obligation
What are the 2 acocounting treatment scenarios?
1.the performance obligation is satisfied at a point in time ( in one go)
2.the performance obligation is satisfied over time (e.g. cleaning service for 3 months)
How to determine if the performance obligation is likely satisfied?
- Customer has physical possession of the goods, accepted delivery, legal ownership, customer has the majority of risk and rewards of ownership
- The seller has a right to payment for the asset
How to account for when the entity receives consideration, but the performance obligation is not/partially satisfied?
We need to set up contract liability to reflect that the revenue cannot be fully recognised:
Dr Cash
Cr Contract Liability
The contract liability can be discharged as the performance obligation is satisfied
Further IFRS 15 Revenue scenarios:
Warranties, how do we treat an Assurance warranty?
This warranty is related to the quality of the product sold therefore not treated as a separate performance obligation.
However, provision for expected warranty cost should be set up (IAS 37 provisions).
Further IFRS 15 Revenue scenarios:
Service Warranty, how to account for it?
It is perceived as an additional service, and/or can be purchased separately from the good.
IFRS 15 treats this as a separate performance obligation.
Further IFRS 15 Revenue scenarios:
Sales of goods with a right of return how to
account for it?
IFRS 15 treats the transaction as having variable consideration (Step 3 TP)
Expected values used to calculate the TP.
TP should be reduced by the expected return value and a refund liability recognised.
Further IFRS 15 Revenue scenarios:
Sales of goods with a right of return, how does it affect cost of sales and inventory?
Adjustments should be made accordingly (via a ‘right to recover’ asset).
Further IFRS 15 Revenue scenarios:
Loyalty Schemes, how to account for them?
IFRS 15 states these as a separate performance obligation.
It is treated as if the customer has also ‘paid’ for future goods/services they acquire through redeeming reward points.
This scenario also needs to consider for likely level of points that will expire/unused.
Further IFRS 15 Revenue scenarios:
What is a principal revenue
If the contract is for the entity to provide a good/service themselves, then the performance obligation is considered principal
