Ch. 13 Revenue from Contracts with Customers

Question 1

Technical Competencies: 1.2.2 Evaluate treatment for routine transactions

Answer 1

Technical Competencies: 1.2.2 Evaluate treatment for routine transactions

Question 2

What are the steps in recognizing revenue from contracts under IFRS 15

Answer 2

1. Identify the contract
2. Identify the performance obligation
3. Determine the transaction price
4. Allocate the transaction price to each performance obligation
5. Recognize revenue when each obligation is satisfied

Question 3

What are the attributes required to be considered a contract?

Answer 3

• contract has been approved by all parties
• the rights regarding goods and services to be transferred can be identified
• the payment terms can be identified
• the contract has commercial substance
• it is probable that the entity will collect the consideration to which it is entitled, considering only the customer’s ability and intention to pay

Question 4

What forms of approval of contracts are accepted?

Answer 4

written, oral, or implied by an entity’s customary business practice.

Question 5

What is commercial substance?

Answer 5

Refers to the risk, timing, or amount of the entity’s future cash flows is expected to change as a result of the contract

Question 6

Why is the customers ability and intention to pay important?

Answer 6

A key understanding is that the consdieration received may be different from the contract price, as the vendor may be offering a discount or some form of variable consideration.

Question 7

When are you able to combine two or more contracts into at or near the same time with the same customer?

Answer 7

Only if the following are set:

• the contracts are negotiated as a package with a single commercial objective
• the amount of consideration to be paid in one contract depends on the price or performance of the other contract
• the goods for services promised in the contracts (or some goods or services promised in each of the contracts) are a single performance obligation.

Question 8

When will a contract modification be treated as a separate contract?

Answer 8

• the change in the scope of the contract is due to the addition of distinct goods or services
• the price of the contract is increased by the amount of the vendor’s stand-alone selling price of the additional promised goods or services and any adjustments to that price to reflect the circumstances of the particular contract.

Question 9

If the adjustments of the contract are not treated as a separate contract, then what scenarios are applicable?

Answer 9

1) Remaining goods and services are distinct = Termination: Replace the original contract with a new contract
2) Some of the remaining goods and services can be separated as distinct: Mixed approach - Terminaiton for distinct services and continuation for the remainder
3) Remaining goods and services are not distinct: Continuation - Treat the modification as part of the original contract and adjust revenue as needed

Question 10

How are performance obligations identified

Answer 10

If a promise to a consumer is to transfer one of the following:

• a good or service (or a bundle of goods or services) that is distinct
• a series of distinct goods or services that are substantially the same and that have the same pattern of transfer to the customer.

Question 11

How are distinct goods or services determined?

Answer 11

Can the customer benefit from the good or service on its own?

Is the promise to transfer the good or service separately identifiable from other promises in the contract?

Question 12

How are the transaction prices determined?

Answer 12

It is the amount of consideration that a vendor expects to be entitled to in exchange for the promised goods or services to a customer, excluding amounts collected on behalf of third parties (sales tax for example), these include:

• variable consideration
• constraining estimates of variable consideration
• significant financing components
• non-cash components
• consideration payable to a customer

Question 13

What are two methods that a vendor can account for variable considerations?

Answer 13

Considerations can be variable due to factors including: volume discounts, rebates, performance bonuses and returns.

They must use:

• expected value or
• most likely amount

Question 14

What is the expected value method

Answer 14

takes the range of possible outcomes and considers the probability of each. The sum of probability-weighted amounts is used as the measurement.

Question 15

What is the most likely amount?

Answer 15

It takes the one outcome that is considered to be the most likely and uses this as the measurement.

Question 16

What issues may arise with variable consideration?

Answer 16

There is always a risk that amounts that are being included are not what is really received. IFRS 15 places constraints on the estimates to minimize the risk.

• That is a significant reversal is unlikely to occur.

Question 17

What are some factors that could increase the likelihood or the magnitude of a revenue reversal include?

Answer 17

• The amount of consideration is highly susceptible to factors outside the entity’s influence. This includes: volatility in a market, judgement or actions of third parties, weather conditions, and a high risk of obsolescence of the promised good or service.
• The uncertainty about the amount of consideration is not expected to be resolved for a long period of time
• the entity’s experience (or other evidence) with similar types of contracts is limited, or that experience has limited predictive value
• the contract has a large number and broad range of possible consideration amounts.
• the entity has a practice of either offering a broad range of price concessions or changing the payment terms and conditions of similar contracts in similar circumstances.

Question 18

How should vendors account for returns?

Answer 18

IFRS 15 considers to be a form of variable consideration, and limits the amount of revenue that can be recognized. Revenue to be recognized is limited to an amount that is highly probable to be received.

if a vendor cannot estimate the amount of revenue that is highly probable to be received – revenue is simply not recognized and sets up the revenue as deferred revenue until the right has passed.

If a vendor can estimate the amount of revenue based on the history of returns, or other forms of reliable information - revenue is recognized up to the amount that the vendor expects to receive, a refund liability is recognized for any consideration received of which the vendor is not certain and expects to have to refund to the customer. Similar with COGS, only amounts that are expected to be sold are recognized, amounts that are expected to be returned, an asset is recorded for goods to be recovered.

Question 19

How should a vendor account for non-cash considerations?

Answer 19

A vendor shall measure the transaction at the FV of the non-cash consideration received. If the FV is not available, the entity shall measure the consideration indirectly by reference to the stand-alone selling price of the goods or services promised to the customer.

Question 20

What is there are consideration payables to the customers? I.e. coupons or vouchers?

Answer 20

A vendor shall account for consideration payable to a customer as a reduction of the transaction price, and therefore, of revenue unless the payment to eh customer is in exchange for a distinct good or service that the customer transferred to the entity.

Question 21

What is the next step after the vendor has correctly identified the performance obligation and the amount of consideration that is to be received.

Answer 21

They must allocate the consideration to each performance obligation - using stand-alone prices

Question 22

What can vendors to if they cannot observe a stand-alone selling price

Answer 22

• adjusted marketing assessment approach - vendor valuates the market in which the good or service is sold, and estimates the price that a customer in that market would be willing to pay for that good or service
• expected cost plus a margin approach - vendor forecasts its expected costs of satisfying a performance obligation and then adds an appropriate margin or that good or service
• residual approach - vendor estimates the stand-alone selling price by reference to the total transaction price less the sum of the known stand-alone selling prices of other goods or services promised in the contract. This may only be used if:
  - the good or service being priced has been sold for a broad range of amounts in recent transactions, therefore selling price is not discernible
  
  • vendor has not yet established prices for that good or service

Question 23

How are allocations of discounts made?

Answer 23

The vendor should allocate the discount proportionately to all performance obligations in the contract.

Exceptions - if a vendor has evidence that the entire discount relates to only one or more performance obligations.

• the vendor regularly sells the distinct goods or service in the contract on a stand-alone basis
• the vendor regularly sells some of the those distinct goods or services in the contract at a discount
• the discount in the contract being attributed to the goods or services is substantially the some as what the vendor regularly offers on the specific good or service

Question 24

How do you recognize revenue under ASPE 3400

Answer 24

1. Risks and rewards of ownership have transferred - goods: the seller has no continuing involvement of control. Services - use percentage of completion method
2. Revenue can be measured reliably - completed contract method is used when there are limitations on the ability to reliably estimate stage of completion.
3. Collection is reasonably assured

Question 25

What are the criterias required to combine contracts?

Answer 25

• contracts are negotiated as a package with a simple commercial objective
• the amount of consideration to be paid in one contract depends on the price or performance of the other contract.
• the goods or services promised in the contracts (or some goods or services promised in each of the contracts) are a single performance obligation.
  (not a criteria, but also if they’re entered into at the same time or with the same customer)

Question 26

When is a contract allowed to be modified?

Answer 26

If there are changes to the scope of the price of a contract that is approved by the parties in the contract