Ch. 13 Revenue from contracts with customers

Question 1

IFRS #

Answer 1

IFRS 15.9
9 An entity shall account for a contract with a customer that is within the scope of this Standard only when all of the following criteria are met:

(a) the parties to the contract have approved the contract (in writing, orally or in accordance with other customary business practices) and are committed to perform their respective obligations;
(b) the entity can identify each party’s rights regarding the goods or services to be transferred;
(c) the entity can identify the payment terms for the goods or services to be transferred;
(d) the contract has commercial substance (ie the risk, timing or amount of the entity’s future cash flows is expected to change as a result of the contract); and
(e) it is probable that the entity will collect the consideration to which it will be entitled in exchange for the goods or services that will be transferred to the customer. In evaluating whether collectability of an amount of consideration is probable, an entity shall consider only the customer’s ability and intention to pay that amount of consideration when it is due. The amount of consideration to which the entity will be entitled may be less than the price stated in the contract if the consideration is variable because the entity may offer the customer a price concession (see paragraph 52).

Question 2

ASPE #

Answer 2

ASPE 3400.05
in a transaction involving the sale of goods, performance shall be regarded as having been achieved when the following conditions have been fulfilled:
(a) the seller of the goods has transferred to the buyer the significant risks and rewards of ownership, in that all significant acts have been completed and the seller retains no continuing managerial involvement in, or effective control of, the goods transferred to a degree usually associated with ownership; and

(b) reasonable assurance exists regarding the measurement of the consideration that will be derived from the sale of goods, and the extent to which goods may be returned.

Question 3

Step 1

Answer 3

identify the contract
• The 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

Commercial substance

Answer 4

when the risk, timing or amount of the entity’s future cash flows is expected to change as a result of the contract
-> you get some money either now or in the futture= then the transaction has commercial substance

Question 5

Combination of contracts IFRS 15.17

Answer 5

vendor can combine contracts entered at the same time w same vendor if: one or more:
• 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 or services promised in the contracts (or some goods or services promised in each of the contracts) are a single performance obligation.

Question 6

Contract modification - replacement

Answer 6

change in the scope and/or price of a contract that is approved by the parties to that contract
treated as a separate contract if,both of the criteria:
• 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 (price they would sell to others for) of the additional promised goods or services and any appropriate adjustments to that price to reflect the circumstances of the particular contract.

Question 7

Contract modification - no replacement

Answer 7

a) remaining G&S is distinct -> replace old w new contract
b) some raiming G&S is distinct some no -> mixed, new contract for distinct and old for non distinct
c) no distinct G&S -> modification as old contract, adjust revenue

Question 8

Step 2

Answer 8

identify performance obligations
A performance obligation is a promise to a customer 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
Distinct ->
can a consumer benifit from the thing on its own?
no-not distinct
yes- can the thing be separated in the contract and be independent?

Question 9

Step 3

Answer 9

determine transaction price
amount vendor expects to get in exchange for G&S
you must consider the following:
• variable consideration
• constraining estimates of variable consideration
• significant financing components
• non-cash consideration
• consideration payable to a customer

Question 10

variable consideration

Answer 10

two methods
1. expected value = the probability of a range of outcomes. Sum of probability-weighted amounts is used as the measurement
2. most likely amount = takes the most likely outcome and uses it as a measurement: appropriate if there is only 2 outcomes
containing estimates of variable consideration

Question 11

constraining estimates of variable consideration

Answer 11

constraints being placed on variable considerations cuz;
Factors that could increase the likelihood or the magnitude of a revenue reversal include:
• highly susceptible to factors outside the entity’s influence. volatility in a market, the judgment 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 with similar types of contracts is limited, or that experience (or other evidence) has limited predictive value
• 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
• The contract has a large number and broad range of possible consideration amounts.

Question 12

Right of return

Answer 12

this is a variable consideration
two possible scenarios:
• A vendor cannot estimate the amount of revenue that is highly probable to be received - don’t recognize revenue, money received is deferred rev until time has passed for returns
• A vendor can estimate the amount of revenue this is highly probable to be received, based on a history of returns or other forms of reliable information
rev recognized up to amount which is expected to be gotten, anything else refunds liability.
COGS recognized aligned w rev.
inventory that is expected to be returned recognized as goods to be recovered = carrying costs - costs to recover
eg costs to recover = decrease in value of inventory

Question 13

right of return JE

Answer 13

if able to estimate: when sold:
dr cash
cr revenue
cr refund liability

Dr COGS (difference)
Dr asset -right to recover (inventory*return amount*amount still recoverable)
  cr inventory (full amount)

when returned: 
dr refund liab 
cr/dr rev
  cr cash
dr COGS
dr inventory 
  cr asset- right to recover (full amount)

Question 14

Significant financing components

Answer 14

difference in the timing of payments and the timing of the recognition of the related revenue - does this timing provide benefit to vendor or consumer
• the difference between the amount of promised consideration and the cash selling price of the promised goods or services
• the combined effect of:
o the expected length of time between when the entity transfers the promised goods or services to the customer and when the customer pays for those goods or services
o the prevailing interest rates is the relevant market

Question 15

Significant financing component not applicable

Answer 15

• consumer paid for goods in advance, and timing of the transfer of goods is at the discretion of the consumer: gift cards
• revenue is not guaranteed by consumer or vendor -> eg Spotify w artists
• difference between the promised consideration and the cash selling price of the goods or services arises for reasons other than the provision of finance

Question 16

Non-cash considerations

Answer 16

when a transaction occurs when a consumer promises something other than cash, the vendor must measure transaction at fair-value of asset received
if fair value is not available, measure at a stand-alone selling price

Question 17

The consideration payable to the consumer

Answer 17

includes cash amounts that a vendor pays to the customer.
also includes credit or other items (like coupons) that can applied against amounts owing to vendor = reduction of transaction price = reduction in rev

Question 18

Step 4

Answer 18

Allocate the transaction price to each performance obligation
reflect on the value of each performance -> use stand-alone selling price for each obligation and:
a) allocation based on stand-alone prices

Question 19

Allocation based on stand-alone prices

Answer 19

1) determine stand-alone price at inception
stand-alone price = price vendor would sell for if sold alone to a consumer, if unavailable then estimate an appropriate allocation: combo can be used
i: Adjusted market assessment approach: evaluate the market, see what consumers would be willing to pay for in that market eg. compare w competitor prices
ii: Expected cost plus a margin approach: vendor forecasts its expected costs of satisfying a performance obligation and then adds a margin
iii. residual approach: stand-alone selling price by reference to the total transaction price- sum of the known stand-alone selling prices of other G&S promised in the contract.
iii-> use only if one criteria:
o The G&S being priced has been sold for a broad range of amounts in recent transactions, and therefore the stand-alone selling price is not discernible.
o The vendor has not yet established a price for that good or service and the good or service has not previously been sold on a stand-alone basis (that is, the selling price is uncertain).

Question 20

Allocation of a discount

Answer 20

if contract has multiple G&S and each stand-alone price exceeds total contract price= apply disocunt proportionally to all performance obligations
this is true except if vendor thinks discount is applicable to only one performance obligation. all criteria must be met
• The vendor regularly sells the distinct G&S in the contract on a stand-alone basis.
• The vendor also regularly sells some of those distinct G&S in the contract at a discount.
• The discount in the contract being attributed to the G&S is substantially the same as what the vendor regularly offers on the specific G&S; therefore, there is observable evidence of the performance obligation to which the entire discount in the contract belongs

Question 21

Allocation of variable consideration

Answer 21

If a variable consideration in a contract then it should be allocated to the performance obligation(s) to which it is attributable.

Question 22

Change in the transaction price

Answer 22

Changes in the transaction price should be adjusted to the performance obligations on the same basis as at contract inception= do not update stand-alone prices. any changes in price is just recognized as rev gain/loss

Question 23

Step 5

Answer 23

recognize revenue when vendor satisfied its performance obligation to the customer. This may occur over time or at a single point in time
Over time, if one of these criteria is met:
• The customer simultaneously receives and consumes the benefits provided by the vendor’s performance (for example, rental of an office space)
• The vendor’s performance creates or enhances an asset (for example, work in progress on a construction contract on land owned by the customer) that the customer controls as the asset is created or enhanced.
• The vendor’s performance does not create an asset with an alternative use to the vendor, and the vendor has an enforceable right to payment for performance completed to date (for example, work in progress on custom equipment that the vendor cannot sell to another party due to the customization).

Question 24

Progress in completion

Answer 24

when rev is recognized over time, the amount of rev recognized in the period is determined by comparing how much work is done
IFRS 15 allows both output and input methods
governing standards:
- consider nature of G&S eg. for desks consider output, how many is delivered
- when output is used, rev recognized is based directly on the output eg 50% of goods is delivered, 50% rev recognized
- when contract allows for vendor to invoice the client for completed performance, u can recognize the rev that u invoiced
-when inputs r used, rev is based on % of completion of a project eg 50% of estimated costs r used up, u can recognize 50% of rev

Question 25

Performance obligation satisfied at a point in time

Answer 25

consumer gets control of asset and vendor satisfies performance. indicators are:
• There is a present right to payment for the asset.
• Legal title to the asset has transferred to the customer.
• Physical possession of the asset has transferred to the customer.
• The customer has the significant risks and rewards of ownership of the asset.
• The customer has accepted the asset.

Question 26

ASPE differences

Answer 26

5 step model is not used. instead when following is met:
• Performance is achieved. Under ASPE, how performance is achieved depends on whether goods or services are sold (see Section 6.1 and Section 6.2)
• Revenue can be reliably measured when there is reasonable assurance about the amount of consideration that the entity will receive in exchange for the goods or services being provided.
• Collection is reasonably assured. In other words, there is little risk that the customer will not remit the agreed-upon consideration in exchange for the goods or services purchased.
sale of goods-> performance is achieved when transferred the significant risks and rewards of ownership to the buyer eg when delivered

Question 27

Rendering of services

Answer 27

rev is recognized when the service or contract has been performed
point at which risks and rewards are transferred is determined using either of the following:
• the percentage of completion method-> used when performance relates to more than one act. rational and consistent basis should be used to determine revenue to recognize
• the completed contract method ->performance of a service consists of a single act or when the extent of progress toward completion cannot be measured

Question 28

Effect of uncertainties

Answer 28

Uncertainty related to revenue recognition can result from one or both of the following issues:
• Consideration is not determinable
This may occur when the payment to be received is dependent on the resale of goods by the buyer, for example. dont recognize
• Uncertainty regarding a right of return
This would occur in a situation where an entity is subject to significant and unpredictable amounts of goods being returned. no historical data on returns. In this scenario, revenue should not be recognized. but if entity is subject to high returns, make provisions for expected amount of returns.