15 Revenue Flashcards
if an item is made up of tree components e.g. product and service
and service is not sold separately- only comes as a pack
to which components is the discount applied?
to all components evenly
unless one component can be sold separately, the discount is applied evenly
As Creg does not sell the service and installation separately, the discount must be applied evenly to each of the three elements
give examples of non monetary items
Land and Intangible assets are non monetary items + inventory + machines held at cost
what is revenue and when is it recognised
revenue is income arising in the course of an entity’s ordinary activities
Revenue is recognised as control is passed, either over time or at a point in time.
what is the 5 step model framework for revenue
1) Identify the contract
2) Identify the separate performance obligations within the contracts
3) Determine the transaction price
4) Allocate the transaction price to the performance obligations from the contract
5) Recognise revenue when (or as) a performance obligation is satisfied
Contracts with customers will be presented in an entities statement of financial position as a
3 things
depending on the relationship between the entity’s performance and the customer’s payment
list them
Contracts with customers will be presented in an entities statement of financial position as a
- contract liability,
- a contract asset,
- or a receivable,
depending on the relationship between the entity’s performance and the customer’s payment
when is contract liability presented
A contract liability is presented in the statement of financial position where a customer has paid an amount of consideration prior to the entity performing by transferring the related good or service to the customer.
when is contract asset or receivable recognised
Where the entity has performed by transferring a good or service to the customer and the customer has not yet paid the related consideration, a contract asset or a receivable is presented in the statement of financial position, depending on the nature of the entity’s right to consideration.
A contract asset is recognised when the entity’s right to consideration is conditional on something other than the passage of time, for example future performance of the entity.
A receivable is recognised when the entity’s right to consideration is unconditional except for the passage of time.
contract assets and receivables are account in accordance with which standard?
Contract assets and receivables shall be accounted for in accordance with IFRS 9 Financial Instruments.
Any impairment relating to contracts with customers should be measured, presented and disclosed in accordance with IFRS 9
. Any difference between the initial recognition of a receivable and the corresponding amount of revenue recognised should also be presented as an expense, for example, an impairment loss.
In the 5 step model framework for revenue
1) Identify the contract
2) Identify the separate performance obligations within the contracts
3) Determine the transaction price
4) Allocate the transaction price to the performance obligations from the contract
5) Recognise revenue when (or as) a performance obligation is satisfied
Q- In number 2, what are the two types of ways the performance obligations are settled
In number 2, the obligation can be settle at a point in time where revenue is recognised at that point
OR the obligation can be settled over time where the revenue is recognised over time
what are three types of scenarious to look out for
1) Sale or return
2) Sale and repurchase agreements
3) Consignment inventory / Agency sales
what is sale or return
E.g. a car dealership
Under such an arrangement the dealer has the right to return the inventory to the manufacturer if it is not sold within a specified period of time.
The inventories are held by the dealer but legal title remains with the manufacturer until a certain event occurs or a point in time is reached. This could be sale to a third party or the specified period has ended.
how do you deal with sale or return
If control over goods does not pass to the buyer, do not record any revenue
In the car dealership,
- the manufacturer holds the risk and reqards of that sale
- has the legal title until the stock is sold
- therefore the dealer shouldn’t recognise this as inventory
what is sale and repurchase agreement
The legal form here is always a sale followed by a purchase at a later date.
The economic substance is more likely to be a loan secured against an asset that is never actually being sold.
how do you deal with sale and repurchase agreement
If control over goods does not pass to the buyer, do not record any revenue
Treat proceeds as loan and charge interest to date of repurchase
what is Consignment inventory
Inventory dispatched to a dealer by a manufacturer can be classified as consignment inventory. Here only one party can recognise the asset but the terms of the arrangement can vary significantly.
The arrangement can be similar to sale or return goods or there may NOT be a right of return. The simple way to assess the situation is to ask who bears the risks and rewards of ownership?
Key things to look for would be;
• Right of return – risks retained by manufacturer
• Price at which sale is set – is this price varies over time the risks has been retained by the manufacturer
• Demonstrator – if the dealer can use the asset as a demonstrator then transfer of risks and rewards normally takes place
how do you deal with agency sales
***Recognise commission element (%%) only in REVENUE
***remove the amount in CoS as well so it only includes the commission element
Creg is an agent and earns comission of 10%
creg’s Revenue includes 6m from clients
teh cost of sales from the smaller contracter is 5.4m
what adjustment needs to be made in revenue in respect of comission sales?
Reduce revenue by 5.4m
Revenue as an agent is made by earning commission. Therefore the revenue on these sales should only be $600,000(10%of$6million).
As Creg currently has $6million in revenue, $5.4million needs to be removed, with $5.4million also removed from cost of sales
.
.
Construction contracts are highly examinable in the exam
What are the 4 steps in calculating contract revenue/rpfot
.1. Forecast the outcome of the contract (Profit or loss making)
- Calculate the level of completion %
- Complete the Statement of profit or loss extracts using COS as a balancing figure (considering previous years recognition)
Cumulative - Previoys year = Current year
-Rev
-Cos
Profit - Complete statement of financial position balance
if the conntract is a loss making, how do you calculate the cost of sales to ensure that you will put the full loss to the SOPL
The COS will be the balancing figure
Rev total rev x % complete
Cos (balancing figure
= Full loss on the contract
Construction contracts are highly examinable in the exam
in step 4, how do you complete the SoFP balance
If revenue > amount received = Record receivable
If cash spent > cost of sales = Record work in progress
If cash received > revenue = Record liability
If contract is loss making = Record provision
you can calculate the gross amounts due to or from customer in a T formal or a table
what is the table format for calculating the gross amounts
Cost incurred x Dr Cntrct Asst (CA) Cr Bnk
Recognised profits x Dr Cntrct Asst (CA) Cr P/L
recognised losses (x ) Dr P/L (CA) Cr Cntrct Asst
Amounts billed ( x) Dr Bnk Cr Cntrct Asst
= Gross amount due from customer
