11. Revenue

Question 1

What are the five steps of revenue recognition?

Answer 1

1 - Identify the contract
2 - Identify the separate performance obligations within a contract
3 - Determine the transaction price
4 - Allocate the transaction price to the performance obligations
5 - Recognise revenue when (or as) a performance obligation is satisfied

Question 2

Define a contract

Answer 2

An agreement between two or more parties that creates enforceable rights and obligations

Question 3

What are the 5 criteria for an entity to recognise revenue?

Answer 3

• The parties have approved the contract and are committed to perform obligations
• Can identify each party’s rights and obligations regarding goods or services
• Can identify payment terms
• Contract has commercial substance
• It is probable that the entity will collect the consideration

Question 4

If an entity is an agent then what is revenue recognised based on?

Answer 4

The fee or commission to which it is entitled

Question 5

What is described below?

The amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer

Answer 5

The transaction price

Question 6

How should discounts be allocated in a transaction?

Answer 6

Allocated across each component of a transaction

Only apply discount to a single component if that component is regularly sold separately at a discount

Question 7

According to IFRS 15, when is revenue recognised?

Answer 7

When (or as) the entity satisfies a performance obligation by transferring a promised good or service to a customer

Question 8

Give 5 indicators of transferring control to an entity

Answer 8

• Customer has a present right to payment for the asset
• Customer has legal title to the asset
• The entity has transferred physical possession of the asset
• The customer has the significant risks and rewards of ownership of the asset
• The customer has accepted the asset

Question 9

What are performance obligations?

Answer 9

Promises to transfer distinct goods or services to a customer.

Question 10

Give an example of a contract that has more than one performance obligation.

Answer 10

Agreement to sell a car, that also includes a year of servicing.

Question 11

Are amounts collected on behalf of third parties such as sales tax included in revenue?

Answer 11

Nope

Question 12

What are the four things that effect the transaction price in revenue?

Answer 12

• Variable consideration
• Significant financing component
• Non-cash consideration
• Consideration payable to customers

Question 13

How do we account for revenue when we pay discunted consideration in two years?

Answer 13

Recognise discounted revenue now (Cr Revenue Dr receivable)

Each year unwind the difference in finance income (Dr Receivable Cr finance income)

Question 14

If consideration is paid to a customer e.g

You pay a customer 1m and they promise to purchase 20m of products

At year end 4m of products have been sold to the customer

How much revenue is recognised from the 4m?

Answer 14

Recognise the percentage of transaction that is revenue e.g 19/20*20=3.8m

Question 15

What is consignment inventory?

Answer 15

When one party legally owns the inventory but the other keeps it on their premises

Question 16

What is a repurchase agreement?

Answer 16

Where an entity sells an asset but retains a right to repurchase the asset.

Question 17

How do we often recognise a Repurchase agreement?

Answer 17

As a sale, but as a secured loan against the asset.

Question 18

What are 5 indications that a repurchase agreement should not be recognised as a sale?

Answer 18

• Sale is below fair value
• Option to repurchase is below the expected fair value
• Entity continues to use the asset
• Entity continues to hold the majority of risks and rewards associated with ownership of the asset
• Sale is to a bank or financing company

Question 19

What is a bill and hold arrangement?

Answer 19

An entity bills a customer for a product but the entity holds onto the product

Question 20

How is revenue recognised with a bill and hold arrangement?

Answer 20

Over time

Question 21

What are the four criteria for a bill and hold arrangement to exist?

Answer 21

• The customer must have requested the arrangement
• The product must be identified as belonging to the customer
• The product must be ready for physical transfer to the customer
• The entity cannot have the ability to use the product or sell it to someone else.

Question 22

An entity transfers control of a good or service over time and, therefore, satisfies a performance obligation and recognises revenue over time, if one of the following criteria is met:

Number 1

Answer 22

The customer receives and consumes the benefits provided by the entity performance as they perform

Question 23

An entity transfers control of a good or service over time and, therefore, satisfies a performance obligation and recognises revenue over time, if one of the following criteria is met:

Number 2

Answer 23

The entity’s performance creates or enhances an asset

Question 24

An entity transfers control of a good or service over time and, therefore, satisfies a performance obligation and recognises revenue over time, if one of the following criteria is met:

Number 3

Answer 24

The entity’s performance does not create an asset with an alternative use to the entity and the entity has an enforceable right to payment for performance completed to date

Question 25

What are the two appropriate methods of measuring progress?

Answer 25

Input methods

Output methods

Question 26

What is the input method?

Answer 26

Recognise revenue based on proportion of total costs incurred

Question 27

What is the output method?

Answer 27

Recognise revenue based on proportion of work completed so far or time elapsed

Question 28

What Is IFRS 15?

Answer 28

Revenue from contracts with customers

Question 29

What two costs are capitalised under IFRS 15?

Answer 29

• The incremental costs of obtaining a contract
• The costs of fulfilling a contract if they do not fall under another standard and the entity expects them to be recovered

Question 30

How do we treat capitalised costs as a project progresses?

Answer 30

The capitalised costs will be amortised as revenue is recognised. This means that they will be expensed to cost of sales as the contract progresses.

Question 31

What do we do if the expected outcome is a profit?

Answer 31

Revenue and costs should be recognised according to the progress of the contract.

Question 32

What do we do if the expected outcome is a loss?

Answer 32

The whole loss should be recognised immediately, recording a provision as an onerous contract.

Question 33

What do we do if the expected outcome or progress is unknown?

Answer 33

– Revenue should be recognised to the level of recoverable costs (usually costs spent to date).

– Contract costs should be recognised as an expense in the period in which they are incurred.

Question 34

What are the four steps in calculating the entries to be made for a contract where the performance obligation is satisfied over time?

Answer 34

Step 1 – Calculate overall profit or loss of the contract
Step 2 – Determining the progress of a contract
Step 3 - Statement of profit or loss if profitable
Step 4 - Statement of financial position

Question 35

What is the first step in calculating the entries to be made for a contract where the performance obligation is satisfied over time?

Answer 35

Step 1 – Calculate overall profit or loss

Contract price X
Less: Costs to date (X)
Less: Costs to complete (X)

Overall profit/Loss X/(X)

Question 36

What is the second step in calculating the entries to be made for a contract where the performance obligation is satisfied over time?

Answer 36

Step 2 – Determining the progress of a contract

• Input or output costs
• If earned equally over time then recognise as such

Where progress cannot be measured
- Revenue recognised as the extent of recoverable costs incurred

Question 37

What is the third step in calculating the entries to be made for a contract where the performance obligation is satisfied over time?

Answer 37

Step 3 – Statement of profit or loss (if profitable)

Revenue (Total price X Progress %)
Less: Revenue recognised in previous years
Cost of sales recognised (Total cost X progress %)
Less: Cost of sales recognised in previous years

Profit

Question 38

What is the fourth step in calculating the entries to be made for a contract where the performance obligation is satisfied over time?

Answer 38

Step 4 – Statement or financial position

Costs to date (actual costs not costs of sales)
Profit/Loss to date
Less: Amount billed to date

Contract asset/liability