2 - Revenue Recognition Flashcards
ASC 606 (Revenues from contracts with customers) applies to all entities entering into _______ unless the contracts are accounted for under another standard
Contracts with customers
What are the 2 core revenue recognition principles?
- Revenue is recognized upon the TRANSFER of promised goods/services
- Amount of revenue recognized represents the consideration the entity EXPECTS TO RECEIVE in exchange
What are the 5 steps to revenue recognition?
- Identify contracts with customers: Determine when -
a. Arrangement is considered a contract with customers
b. Multiple contracts with the same customer should be combined as a single contract - Identify all separate performance obligations within each contract
- Determine the total consideration for the contract
- Recognize revenue either when/satisfied or while/satisfying performance
ASC 606 applies if:
- Counterparty is a _____
- Arrangement must be a ______
- Customer
2. Legally binding contract
“Customer” is ______
Party that has contracted with an entity to obtain goods or services that are an output of the entity’s ordinary activities
If an arrangement does not meet all the criteria of a contract, then all amounts received will be recognized as _____
Liability (“deferred revenue”)
If the criteria are never met, the liability is ______and treated as _____ when _____ received from the customer is _______ and one of the scenarios apply:
Derecognized; Revenue; Consideration; Non-refundable
The 3 scenarios for derecognition as revenue are:
- Entity has no remaining obligations and all consideration has been received
- Arrangement has been terminated
- Consideration relates to goods/services (control has been transferred), and entity no longer has obligation left
Contracts should be “combined” if one or more criteria are met:
- Contracts are negotiated as a single package within a single commercial objective
- Price to be paid in one contract depends on other contracts
- Goods/services promised in contracts are a single performance obligation
In some cases, contracts having similar characteristics may be combined into a _____ and treated as a single contract
Portfolio
Performance obligations are identified at the _____ of the contract
Inception
An activity that does not result in the transfer of goods/services ____ a performance a obligation
Is NOT
Performance obligations are either identified as _____ or are combined with other performance obligations
Distinct performance obligations
Distinct obligations must meet 2 criteria:
- Customers must be able to “benefit from good/service on its own”
- Promise to transfer goods/services is “separately identified from other promises”
Assurance type warranty represents a ______ that is _________ and should be accrued in the period incurred (period of sale)
Continent liability; Probable and estimable
_________ generally provides customers with repairs in the form of parts and labor in addition to making certain that the product performs as promised.
Service-type warranty
When a discount/option exceeds what is available to ______, then the gross sales price will be allocated between __________ and ________
Non-customers; Value of the merchandise; Value of the future discounts
“Value of the merchandise” = ?
Selling price if there was no discount on future purchases
“Value of the future discounts” = ?
Based on estimate of the discounts expected to be applied
Estimates adjusted to present value
(Non-refundable prepayments) Payments are recognized as revenue in proportion if _________
Breakage is expected
(Nonrefundable prepayments) Payments are recognized as revenue when the likelihood that the customer will exercise the rights become remote if _______
Breakage is not expected
(Nonrefundable prepayments) Payments are recognized as _____ when the amounts are required to be remitted to a third party (e.g., government on unclaimed property laws)
Liability
Transaction price is the amount of consideration that the entity ____ to be entitled to in exchange for goods/services
Expects
What are some factors that affect the amount of revenue? (PVTNP)
- Whether reporting entity is a principal or agent
- Variable considerations (e.g., discounts, rebates, etc.)
- Time value of money
- Non-monetary considerations requiring measurement
- Seller may be providing consideration to the customer
When the seller is a _____ in the transaction, the ______ amount of revenue will be recognized
Principal; Entire
When the seller is an _____, only the ______ amount of revenue to be retained after paying the principal is recognized
Agent; Net
To distinguish between principal and agent, a significant factor is ______ of the goods/services
Who has control
Some indicators of who has control of goods/services prior to transfer are: (PRA)
- Primary responsibility for providing goods/services
- Risk of loss associated with inventory
- Authority to set prices for goods/services
“Variable consideration” is a factor when either:
- Customer has a valid expectation that the seller will accept less than the contract amount
- Facts indicate that the seller intended to make a price concession
Variable consideration is estimated at the _____ of the contract and is included in the ________ to be earned.
Inception; Total consideration
“Variable consideration” is estimated under 2 approaches:
- Expected value approach - Different amounts obtained based on levels of performance are each assigned probabilities
- Most likely amount approach - Each outcome is assigned a probability that total 100%
In a period in which cash receipts exceed the expected amount, the excess is reported as a _________
Refund liability
There may be a standard to establish ______ on the amount of variable consideration to be recognized. It should consider the likelihood of a ______
Constraint; Potential reversal
Time value of money is considered when measuring consideration if buyer/seller obtains a ________
Significant financing benefit
Financing is considered significant when there is a ______ between the _________ and the ______ for goods/services
Difference; Amount of consideration; Cash price
There is no financing component included in measuring consideration if:
- Customer paid in advance and the timing of performance is at buyer’s discretion
- Variable consideration is significant and is contingent on factors outside the entity’s control
- Difference is due to factors other than financing
(Time value of money) Financing component is recognized as _______, separate from revenues from customers. It is only recognized to the extent that a contract/liability has been _________
Interest income or expense; Recognized
Non-cash considerations (e.g., stock shares) are measured at _______
Fair value
