2 - Revenue Recognition

Question 1

ASC 606 (Revenues from contracts with customers) applies to all entities entering into _______ unless the contracts are accounted for under another standard

Answer 1

Contracts with customers

Question 2

What are the 2 core revenue recognition principles?

Answer 2

1. Revenue is recognized upon the TRANSFER of promised goods/services
2. Amount of revenue recognized represents the consideration the entity EXPECTS TO RECEIVE in exchange

Question 3

What are the 5 steps to revenue recognition?

Answer 3

1. 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
2. Identify all separate performance obligations within each contract
3. Determine the total consideration for the contract
4. Recognize revenue either when/satisfied or while/satisfying performance

Question 4

ASC 606 applies if:

1. Counterparty is a _____
2. Arrangement must be a ______

Answer 4

1. Customer

2. Legally binding contract

Question 5

“Customer” is ______

Answer 5

Party that has contracted with an entity to obtain goods or services that are an output of the entity’s ordinary activities

Question 6

If an arrangement does not meet all the criteria of a contract, then all amounts received will be recognized as _____

Answer 6

Liability (“deferred revenue”)

Question 7

If the criteria are never met, the liability is ______and treated as _____ when _____ received from the customer is _______ and one of the scenarios apply:

Answer 7

Derecognized; Revenue; Consideration; Non-refundable

Question 8

The 3 scenarios for derecognition as revenue are:

Answer 8

1. Entity has no remaining obligations and all consideration has been received
2. Arrangement has been terminated
3. Consideration relates to goods/services (control has been transferred), and entity no longer has obligation left

Question 9

Contracts should be “combined” if one or more criteria are met:

Answer 9

1. Contracts are negotiated as a single package within a single commercial objective
2. Price to be paid in one contract depends on other contracts
3. Goods/services promised in contracts are a single performance obligation

Question 10

In some cases, contracts having similar characteristics may be combined into a _____ and treated as a single contract

Answer 10

Portfolio

Question 11

Performance obligations are identified at the _____ of the contract

Answer 11

Inception

Question 12

An activity that does not result in the transfer of goods/services ____ a performance a obligation

Answer 12

Is NOT

Question 13

Performance obligations are either identified as _____ or are combined with other performance obligations

Answer 13

Distinct performance obligations

Question 14

Distinct obligations must meet 2 criteria:

Answer 14

1. Customers must be able to “benefit from good/service on its own”
2. Promise to transfer goods/services is “separately identified from other promises”

Question 15

Assurance type warranty represents a ______ that is _________ and should be accrued in the period incurred (period of sale)

Answer 15

Continent liability; Probable and estimable

Question 16

_________ generally provides customers with repairs in the form of parts and labor in addition to making certain that the product performs as promised.

Answer 16

Service-type warranty

Question 17

When a discount/option exceeds what is available to ______, then the gross sales price will be allocated between __________ and ________

Answer 17

Non-customers; Value of the merchandise; Value of the future discounts

Question 18

“Value of the merchandise” = ?

Answer 18

Selling price if there was no discount on future purchases

Question 19

“Value of the future discounts” = ?

Answer 19

Based on estimate of the discounts expected to be applied

Estimates adjusted to present value

Question 20

(Non-refundable prepayments) Payments are recognized as revenue in proportion if _________

Answer 20

Breakage is expected

Question 21

(Nonrefundable prepayments) Payments are recognized as revenue when the likelihood that the customer will exercise the rights become remote if _______

Answer 21

Breakage is not expected

Question 22

(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)

Answer 22

Liability

Question 23

Transaction price is the amount of consideration that the entity ____ to be entitled to in exchange for goods/services

Answer 23

Expects

Question 24

What are some factors that affect the amount of revenue? (PVTNP)

Answer 24

1. Whether reporting entity is a principal or agent
2. Variable considerations (e.g., discounts, rebates, etc.)
3. Time value of money
4. Non-monetary considerations requiring measurement
5. Seller may be providing consideration to the customer

Question 25

When the seller is a _____ in the transaction, the ______ amount of revenue will be recognized

Answer 25

Principal; Entire

Question 26

When the seller is an _____, only the ______ amount of revenue to be retained after paying the principal is recognized

Answer 26

Agent; Net

Question 27

To distinguish between principal and agent, a significant factor is ______ of the goods/services

Answer 27

Who has control

Question 28

Some indicators of who has control of goods/services prior to transfer are: (PRA)

Answer 28

1. Primary responsibility for providing goods/services 2. Risk of loss associated with inventory 3. Authority to set prices for goods/services

Question 29

"Variable consideration" is a factor when either:

Answer 29

1. Customer has a valid expectation that the seller will accept less than the contract amount 2. Facts indicate that the seller intended to make a price concession

Question 30

Variable consideration is estimated at the _____ of the contract and is included in the ________ to be earned.

Answer 30

Inception; Total consideration

Question 31

"Variable consideration" is estimated under 2 approaches:

Answer 31

1. Expected value approach - Different amounts obtained based on levels of performance are each assigned probabilities 2. Most likely amount approach - Each outcome is assigned a probability that total 100%

Question 32

In a period in which cash receipts exceed the expected amount, the excess is reported as a _________

Answer 32

Refund liability

Question 33

There may be a standard to establish ______ on the amount of variable consideration to be recognized. It should consider the likelihood of a ______

Answer 33

Constraint; Potential reversal

Question 34

Time value of money is considered when measuring consideration if buyer/seller obtains a ________

Answer 34

Significant financing benefit

Question 35

Financing is considered significant when there is a ______ between the _________ and the ______ for goods/services

Answer 35

Difference; Amount of consideration; Cash price

Question 36

There is no financing component included in measuring consideration if:

Answer 36

1. Customer paid in advance and the timing of performance is at buyer's discretion 2. Variable consideration is significant and is contingent on factors outside the entity's control 3. Difference is due to factors other than financing

Question 37

(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 _________

Answer 37

Interest income or expense; Recognized

Question 38

Non-cash considerations (e.g., stock shares) are measured at _______

Answer 38

Fair value