14. Revenue Recognition

Question 1

List the steps in the revenue recognition process.

Answer 1

• Identify the contract with a customer
• Identify performance obligations in the contract
• Determine the transaction price
• Allocate the transaction price to the performance obligations in the contract
• Recognize revenue as, or when, the performance obligations are satisfied

Question 2

Describe the three estimation methods available for estimating stand-alone selling price when individual selling prices are not observable.

Answer 2

• Adjusted market price: The price the market is willing to pay for the performance obligation.
• Expected cost plus margin: The estimated cost of fulfilling the performance obligation plus a reasonable markup
• Residual approach: The amount left over after subtracting all observable stand-alone selling prices for other performance obligations from the total transaction price

Question 3

Describe the differences between the input method and the output method of accounting for revenue recognized over time.

Answer 3

• When revenue is recognized over time, revenue to date is calculated by multiplying the total transaction price by a ratio determined under an input or output method.
• Under the input method, the organization recognizes revenue based upon the ratio of the amount of effort or cost expended to date divided by the total amount of effort or cost required to satisfy the performance obligation.
• Under the output method, the organization recognizes revenue based upon the ratio of the results achieved to date divided by the total output required to satisfy the performance obligation.

Question 4

Explain the three circumstances under which revenue is recognized over time.

Answer 4

• The customer simultaneously receives and consumes the benefit of the performance obligation.
• The satisfaction of the performance obligation creates or enhances an asset already controlled by the customer.
• The good or service has no alternative future use to the selling organization and the organization has a right to payment for work completed.

Question 5

If revenue does not meet the requirements to be recognized over time, what are some of the indicators that control has transferred at a point in time for purposes of revenue recognition at that time?

Answer 5

• The entity has an enforceable right to payment.
• Title to the asset has transferred to the customer.
• Physical possession of the asset has transferred to the customer.
• Risks and rewards of ownership have transferred to the customer.
• The customer has formally accepted the good or service.