ACCY231 WK7 L14 Revenue Recognition

Question 1

What accounting standard deals with revenue from contracts with customers?

Answer 1

NZ IFRS 15 Revenue from Contracts with Customers.

Question 2

What is the definition of income?

Answer 2

An increase in economic benefits in the form of inflows or enhancements of assets or decreases in liabilities that result in an increase in equity, other than those relating to contributions from equity participants.

Question 3

What is the definition of revenue?

Answer 3

Income arising in the course of an entity carrying out its normal activities.

Question 4

What is the difference bewteen income and revenue?

Answer 4

All revenue is income. However, not all revenue is income. Income is an increase in assets or a decrease in liabilities that results in an increase in equity, other than those relating to contributions from equity participants. Revenue is income that arises in the course of an entity carrying out is normal activities.

Question 5

What are the five steps to recognising and measuring revenue?

Answer 5

1. Identify the contract with the customer;
2. Identify the performance obligation(s) in the contract;
3. Determine the transaction price for the contract;
4. Allocate the transaction price to the performance obligation(s); and
5. Recognise revenue when or as the performance obligations are satisfied.

Question 6

What are the requirements for being able to recognise a contract?

Answer 6

1. Contract approval by the parties made in writting, through oral communication, or in accordance with customary business practices, and commitment to perform their respective obligations;
2. The entity can identify the party’s rights regarding the goods or services to be transferred;
3. The entity can identify the payment terms for the goods or services to be transferred;
4. The contract has commercial substance, meaning that the risk, timing, or amount of the entity’s future cash flows is expected to change as a result of the contract; and
5. It is probable that the entity will receive the consideration to which it will be entitled to in exchange for the goods and services that will be transferred to the customer.

Question 7

What is identified as a performance obligation?

Answer 7

Each promise to transfer either a good or a service or a bundle of goods or services that is distinct, or a series of distinct goods or services that are substantially the same and that have the same pattern of transfer to the customer shall be identified as a performance obligation.

Question 8

What is the transaction price?

Answer 8

The transaction price is the total amount of consideration to which the entity expects to be entitled to in exchange for transferring the promised goods or services to the customer, excluding any amounts collected on behalf of third parties.
When determining the transaction price, variable consideration, deferred consideration, and exchanges or swaps must be considered.

Question 9

How is the transaction price allocated to the performance obligation(s)?

Answer 9

When multiple performances are identified in a contact with a customer, the entity must allocate the transaction price to each performance obligation because revenue may be recognised at different times based on the timing of the performance obligations.
The transaction price must be allocated to the performance obligations in the contract by reference of their relative stand-alone selling prices.
Methods for estimating relative stand-alone prices include adjusted market assessment approach as expected cost plus margin approach.`

Question 10

When is a performance obligation satisfied?

Answer 10

Revenue is recognised when a performance obligation is satisfied. A performance obligation is satisifed when control of the good or services is transferred to the customer.
Control is defined as the ability to to direct the use of and obtain substantially all of the remaining benefits from the asset.

Question 11

Illustrative Example 1

Answer 11

a