Week 3 - Revenue Recognition Flashcards
(22 cards)
What is a warraty?
A warranty is basically a promise from a seller that if the product they sell has any problems (like a defect) we’ll fix or replace it — for free — during a certain time period.
How is a warranty usually sold?
A company might sell a product + extra services, like warranties. - For all of these we call each promise a performance obligation - some separate and some are not
What are the two types of warranties
Assurance type warranty
Service type warranty
What is a assuance type warranty?
A warranty included in the sale price that guarantees the product is free from defects and its gona work.
Wjay is a serive type warranty?
A: An optional, extra warranty that covers things like accidental damage or extends the coverage period.
Is an assurance type warranty a separate performance obligation?
No – it is part of delivering a quality product.
Is an service type warranty a separate performance obligation?
Yes – it’s a distinct service provided after the sale.
How do you tell if a warranty is a separate performance obligation?
Can the customer buy the warranty separately?
Yes → It’s a service-type warranty and a separate performance obligation.
No → It’s an assurance-type warranty and not separate.
How do we recongize revenue for a service type of warranty?
Allocate part of the price to it.
Record as deferred revenue, then recognize revenue over time as services are performed.
Decrease deferred revenue when recongizing revenue
What does revenue recognition based on?
“Based on whether control is transferred at a point in time or over time, there are specific requirements to determine if the goods are being transferred over time or at once.”
if none meet than it’s the point of time
What is the criteria for revenue recongition over time?
(a) Customer receives & uses the benefit as it’s provided (e.g., cleaning service).
(b) Company is creating/improving an asset the customer controls during production.- ex: building on customer’s land
(c) The asset being created can’t be sold to someone else (customized product), and company has the right to be paid for work done so far (needs to be stated in contract).
For the first criteria of revenue recongition what is soemthing helpful in terms of seeing the Customer receives & uses the benefit as it’s provided (e.g., cleaning service).
If unclear, test: Would another company need to redo the work to finish the job?
If yes → it was being consumed as it was done → revenue over time.
How does a company measure progress for revenue recognition over time?
A company measures progress toward completing the performance obligation using one consistent method:
Output method: Based on value delivered (e.g., units delivered, milestones).
Input method: Based on effort used (e.g supplies, materials, work hours)
How is revenue recognized for long-term contracts and services under ASPE?
Two methods:
Percentage-of-completion – Used when the work has multiple parts or stages.
Measure progress using input/output (e.g., hours worked, milestones).
Can use straight-line if work is done evenly.
Completed contract – Used when it’s a one-time job or when progress can’t be reliably measured.
How are warranties treated under ASPE?
ASPE does not treat warranties as contingencies.
Revenue Section 3400 may apply if the warranty includes multiple deliverables, like extra service beyond defects.
What is a provision under IFRS!
A provision is recorded when:
There is a present obligation (legal or constructive) from a past event.
It is probable (>50%) that there will be an outflow of economic resources.
The amount can be reliably estimated.
Its recognizd on the financial statements
What happens if its not a provision
1) Note disclosure
2) No recognition in the financial statements
HOW DO you define the range of probable
An event is probable if its more likely than note so its greater than happening than not
WHat makes a contingent liability
A contingent liability is:
Possible but not probable → disclose in the notes.
Remote (very unlikely) → no recognition or disclosure.
If it becomes probable and measurable, it becomes a provision and must be recognized.
How are contingencies handled under ASPE 3290
If the loss is likely and measurable → recognize.
If not likely or not measurable → disclose.
If unlikely → no disclosure
What happens if the oblgiation is nit present or possible and does fit the criteria of a provision or contigent liabilityÉ
Do nothing
How to do the input method when recongizing revenue over time?
