Revenue Recognition Introduction

Question 1

Revenue Recognition

Answer 1

Occurs when an entity satisfies a performance obligation by transferring either a good or a service to a customer.
*All entities are subject the revenue recognition standard except under certain contracts like leases, insurance, non-warranty guarantees and financial instruments which are covered by other standards

Question 2

Five Step Approach for Revenue Recognition

Answer 2

I STAR
Step 1: Identify the contract with the customer
Step 2: Identify the separate performance obligations in the contract
Step 3: Determine the transaction price
Step 4: Allocate the transaction price to the separate performance obligation
Step 5: Recognize revenue when or as the entity satisfies each performance obligation

Question 3

Contract modification

Answer 3

represents a change in the price or scope (or both) of a contract approved by both parties.
**The modification is treated as a new contract if the scope increases because of the addition of distinct goods or services and the change in contract price represents stand-alone prices.

Question 4

What happens on the balance sheet when billed to customers is more or less than revenue recognized?

Answer 4

If billed to customers > revenue recognized → Record a liability (called progress billings in excess of costs or unearned revenue).
**This means that we billed the customer more than what we should have (more than we recognized during the year as revenue) so we need to record a liability because we haven’t really earned the money
If revenue recognized > billed to customers → Record an asset (called costs and estimated earnings in excess of billings or Construction in Progress).
**we recognized more revenue than what we billed so the customer owe us more and we record an asset

Question 5

when is a repurchase agreement considered a financing arrangement?

Answer 5

It’s a financing arrangement when the repurchase price is higher than both the original sale price and the expected market value. This means the buyer will want to sell the asset back to the seller because they can get more than what it’s worth in the market, so it’s like the seller is lending money rather than making a real sale