Revenue Recognition Flashcards
What is a revenue
A type of income arising in the course of an entity ordinary activities
What it revenue recognition
-process to determine how much revenue should be recognized and when it should be recognized
-based on accrual accounting
When should we recognize revenue?
-performance is substantially complete
*transferred the risk and reward of ownership
*all significant acts have been completed
-amount of revenue is measurable
*price is know or determinable
-collection is reasonable assured
*we think the customer will pay us
Revenue recognition ifrs five steps
1) identify the contract with the customer
2)identify the performance obligations in the contract
3)determine the transaction price
4) allocate transaction price to each PO
5) recognize revenue for each PO
Explain identifying the contract
-agreement between two parties
*creates enforceable rights and obligations
*can be formal, informal, written, implied or verbal
-contract sets out the expectations for the transaction
*each party rights regarding goods or services to be transferred
*payment terms
*collectability is accessed at this stage
Explain identify the performance obligations
-contract can contain one or multiple performance obligations
-pos are separate promises to the customer
-for a good or service to be a PO, it must be distinct:
*customer can benefit from the good or service on its own
*could i sell it seperately?
*does it have standalone value?
*good or service is separately identified from other promised in the contract
-contracts with multiple performance obligations are common
*each PO is accounted for separately
*number and nature of PO affects timing and measurement of revenue
Explain determine the transaction price
-consideration to which seller expects to be entitled
*often fixed and easily determinable
*$ paid to the seller over the contract
*in some cases can ba variable:
•discount, refunds, credit, incentives
•right of return
*if transaction price is variable: management needs to make estimates
What is the right of return
-refunds are not expensed but instead, affect revenue
-when products are sold with a right of return:
1) recognize a refund liability at the time of sale in revenue representing the consideration not expected to be received
2) if selling a good, reverse cost of sales (and inventory)
3) periodically update measurement of refund liability
Explain allocate transaction price to POs
-transaction price often different than the combined stand-alone value of the promises
-need ti figure out how to allocate contract $ to POs:
•determine the stand alone selling price of each PO
•allocate transaction price to each PO on a pro-rata basis(%)
What proves that the performance has been satisfied
-The seller has a present right to payment
-the customer has legal title
-the seller has transferred physical possession
-the customer has the significant risk of ownership
-the customer has accepted the asset
What decide if a PO os satisfied over time?
-1) the customer simultaneously received and consumes the benefits provided by the sellers performance
-2) sellers performance creates or enhances an asset that the customer controls as the assets is created or enhanced
-3) sellers performance does not create an asset with an alternative use to the seller and the entity has an enforceable right to payment for performance completed to date
