7. Revenue Recognition Flashcards
What are the 5 steps determining how revenue should be recongised?
COPAR
- Contract with customer in place
- Identify the performance obligations
- Determine the transaction price
- Allocate the transaction price to the obligations
- Recognise revenue as obligations are satisfied
What are the 4 contract requirements set out in IFRS 15?
- Contracts approved
- Rights and payment terms identifiable
- Contract has commercial substance
- It is probable that consideration will be transferred
What are performance obligations?
Promises in the contract to provide goods or services
When are obligations accounted for separately?
The good/service can be sold separately and the promise to supply is separately identifiable in the contract
What are the 3 major considerations in determining the transaction price?
- Discount future amounts to PV
- Estimate variable consideration using probabilities and weighted averages
- Measure non cash consideration at fair value
When we sell goods but anticipate a certain R% to be returned, what are the two additional double entries that are made?
Dr Rev, Cr Refund Liability (Sales value x R%)
Dr Right to Receive Asset, Cr COS (Goods cost x R%)
What is the performance obligation(s) when a car is sold on finance?
The sale of the car and the provision of finance, separately recognised
How is revenue recognised for goods sold on finance?
The PV of payments for the goods, and the interest payments under finance provided
When do we define a performance obligation as being satisfied?
When the customer obtains control over the promised good or service
What are the two methods for reconigising revenue when control passes over time?
Output method (% work completed to date) or input method (% cost incurred to date)
What are the 3 criteria of which a performance obligation satisfied over time must meet 1?
- Customer simultaneously receives and consumes the benefits (e.g. cleaning contract)
- Entity’s performance is enhanced as the asset is enhanced, and the entity has control (e.g. construction WIP)
- No alternative use to the asset (e.g. development of a website)
What are the 2 types of warranties?
- Warranty provides with assurance of compliance to specifications
- Warranty also provides additional service
What are the 2 ways a warranty might be recognised, and when?
- As a separate performance obligation (if can be sold separately)
- As a provision for a contingent asset based on estimated future repair costs (Dr Expense, Cr Prov)
What is the difference between a principle and an agent in terms of revenue recognition?
Principle = provides obligation = recognise gross amount expected to receive Agent = arranges provision but doesn't control = recognise only fee or commission
What is a repurchase agreement?
A contract in which an entity sells an asset but retains the right to repurchase in the future