3.Revenue Flashcards
What are the five steps to recognise revenue
- Identify contract with customer
- Identify the performance obligations
- Determine Transaction price
- Allocation transaction price to perform obligation
- Recognise revenue when entity satisfies obligation
Define Revenue
- IFRS 15
- Income arising in the course of an entity’s ordinary activities
-Ordinary activities: transfer of goods and servcies to customers
What is the core principle of IFRS 15
Entity recognises revenue to depict the transfer of the promised goods or services to customers in an amount that rflects consideration to which the entity ecpects to be entitled
Define contract
An agreement between two or more parties that creates enforceable rights and obligations
Define customer
A party that has contracted with an entity to obtain goods or services that are an output of the entity’s ordinary activities in exchange for a consideration
What criteria must be met for a contract with a customer to be accoutned for IFRS 15
- Parties have aproved the contract
- Entity can identify party’s rights
The entity can identify the payment terms - Contract has commercial substance
- Probable that entity will collect the consideration
Define Performance obligation
A promise in a contract with a customer to transfer to the customer either:
- a good or service that is distinct or
- a series of distinct goods or services that are substantially the same and have the same pattern of transfer to the customer
What is meant by bundling of goods and services
- If items are not distinct, entity can combine goods and services to identify a bundle
Define transaction price
The amount of consideration to which an entity expects to be entitled in exchange for transferred promised goods or servcies, excluding amounts collected by third parties
What is meant by variable consideration
-Needs to be included If it is hihgly probable that a singifcant reversal of cumulative revenue will not occur
What are the two methods to estimate variable consideration
- If large number of contractds: Probability wieghted expected value
- If single contract: most likely amount
When is discounting not applicable in contract for revenue
When consideration is due less than on eyear
When is discounting applied
When financing componenet exists, discounting should be applied
Interest income must be presented separately as finance income
How do you allocation transaction price when there are multiple performance obligations
- Allocate price in proportion to the relative stand along selling prices
At what point can review be recognised
- When entity transfers goods or servces to customer and customer obtains control of asset
How can control of asset be defined
- Ability to direct the use of and obtain all of the remaining benefits from the asset
What indicators can entity consider satisfaction at point in time
- Entity has a present right to payment
- Customer has legal title
- Entity has transferred physical possession
- Customer has singifcant risks and reqards of ownership
- Customer has accepted asset
When can entity recognise revue over time
-When customer simultaenously recieves and consumes the benefits
- Entity’s performance creates or enhances the asset that the customer controls
- Entity’s performance does not create an asset with alternative use and entity has an enforcable right to payment to date
What are the two methods to measure rvenue over time
- Output: basis of direct measurements of the value to the customer
- Input: basis of entity’s efforts or input
What is the outcome when performance obligation cannot be measured
- If entity expects to recover costs, it should recognise revenue to the extent of costs incurred
How to Calculate revenue using inout
Cost incurred/total cost x contract price
How can revenue be presented in financial statements
- Recievables: right to consideration is unconditional
- Contract asset: entity transfers goods or services before customer ays as payment is conditional
- Contract liability: if customer pays consideration before transfer of goods
What is accoutning treatment for recievables
- Debit recievables
- Credit Revenue
What is accounting treatment - when right to consdieration is conditional
Debit Contract asset
Credit Revenue
What is accoutning treatment when customer pays before transfer of goods
Credit Contract Liability
Debit Cash
When entity transfers goods:
Debit Contract liability
Credit Revenue
What does IFRS guidance state for sale with a right of return
IFRS 15 requires entity to recognise
- Revenue for transferred products in amount of consideraiton to which entity expects to be entitled
- A refund liability
- A asset for rights to recover products
What is accounting treatment for asset for rights to recover products
Debit aset for right to recover products
Credit cost of sales
What are the types of warranties
- Standard warranty at no cost to customer
- Addtional warranty available at cost
- Additional warranty at no cost
How do you account for warranty when it is standard warranty at no cost
- In accordance with IAS37 provisions, contingent liabilities and contingent assets
How do you account for addtional warranty
- In accordance with IFRS 15
- As an additional performance obligation
- Debit recievable or cahs, credit revenue and credit contract liability
WHat is mean by principal vs agent
Principal controls the specified goods or services before transfer to customer - gross amount of consideration
Agent arranges for goods or services to be provided by other party - fee or commission revenue
