7. Revenue Recognition Flashcards

1
Q

What are the 5 steps determining how revenue should be recongised?

A

COPAR

  1. Contract with customer in place
  2. Identify the performance obligations
  3. Determine the transaction price
  4. Allocate the transaction price to the obligations
  5. Recognise revenue as obligations are satisfied
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2
Q

What are the 4 contract requirements set out in IFRS 15?

A
  • Contracts approved
  • Rights and payment terms identifiable
  • Contract has commercial substance
  • It is probable that consideration will be transferred
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3
Q

What are performance obligations?

A

Promises in the contract to provide goods or services

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4
Q

When are obligations accounted for separately?

A

The good/service can be sold separately and the promise to supply is separately identifiable in the contract

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5
Q

What are the 3 major considerations in determining the transaction price?

A
  1. Discount future amounts to PV
  2. Estimate variable consideration using probabilities and weighted averages
  3. Measure non cash consideration at fair value
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6
Q

When we sell goods but anticipate a certain R% to be returned, what are the two additional double entries that are made?

A

Dr Rev, Cr Refund Liability (Sales value x R%)

Dr Right to Receive Asset, Cr COS (Goods cost x R%)

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7
Q

What is the performance obligation(s) when a car is sold on finance?

A

The sale of the car and the provision of finance, separately recognised

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8
Q

How is revenue recognised for goods sold on finance?

A

The PV of payments for the goods, and the interest payments under finance provided

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9
Q

When do we define a performance obligation as being satisfied?

A

When the customer obtains control over the promised good or service

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10
Q

What are the two methods for reconigising revenue when control passes over time?

A

Output method (% work completed to date) or input method (% cost incurred to date)

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11
Q

What are the 3 criteria of which a performance obligation satisfied over time must meet 1?

A
  1. Customer simultaneously receives and consumes the benefits (e.g. cleaning contract)
  2. Entity’s performance is enhanced as the asset is enhanced, and the entity has control (e.g. construction WIP)
  3. No alternative use to the asset (e.g. development of a website)
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12
Q

What are the 2 types of warranties?

A
  1. Warranty provides with assurance of compliance to specifications
  2. Warranty also provides additional service
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13
Q

What are the 2 ways a warranty might be recognised, and when?

A
  1. As a separate performance obligation (if can be sold separately)
  2. As a provision for a contingent asset based on estimated future repair costs (Dr Expense, Cr Prov)
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14
Q

What is the difference between a principle and an agent in terms of revenue recognition?

A
Principle = provides obligation = recognise gross amount expected to receive
Agent = arranges provision but doesn't control = recognise only fee or commission
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15
Q

What is a repurchase agreement?

A

A contract in which an entity sells an asset but retains the right to repurchase in the future

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16
Q

What is the substance of a repurchase agreement?

A

A secured loan - the customer does not obtain control of the asset

17
Q

How must the seller recognise a repurchase agreement transaction?

A

Continue to recognise the asset, recognise a financial liability for consideration from the customer, difference is interest

18
Q

What are consignment inventories?

A

When a seller delivers a product to another party for sale to end customers but control remains with the original seller (e.g. car dealership)

19
Q

When is revenue recognised for inventories held on consingment?

A

When the product is sold to the final customer