Revenue Recognition is easily accounted for in accounting practices (T/F)
False
It is a top fraud risk
Who created the process to determine when revenue should be recognized?
And how many steps is it?
FASB 5-step process
Financial Accounting Standards Board
Name the steps of Revenue Recognition Process
- Identify the contract
- Identify the performance obligations
- Determe the transaction price
- Allocate transaction price to each perforamance obligation
- Recognize revenue when the performance obligation has been satisfied
What information does revenue provide a company?
Insight into past and future performance
What approach does the Revenue Standard use as a basis for revenue recognition?
Explain
asset-liabiity approach
Revenue is recognized and measured based on changes in liabilities and assets
What are the conditions for the existence of a contract? (5)
- it has commercial substance
- the parties have approved the contract
- each party’s rights are identifiable
- payment terms are identified
- it is probable that the consideration will be collected
What the requirements for a good or service to be considered a separate performance obligation? (2)
Provide an example
- Capable of being distinct AND
- distinct within the contract
EX: the bagel shop providing coffee AND a bagel
What the requirements for goods and services to be combined into one performance obligation?
Provide an example
They must be interdependent and interrelated
Ex: selling the software and software customization
Given the following example:
Company sells a computer that comes with a service warranty. They also provide an extended warranty for the computer for an additonal 3 years.
How should the perforamnce obligation be reported?
Why?
1st obligation: computer and service warranty
2nd obligation: extended warranty
The service warranty is dependent on the computer BUT the extended warranty is independent from it (the computer doesn’t HAVE to come with the extended warranty)
What are the additional factors that must be considered when the customer isn’t paying a fixed amount?
- Variable consideration
- Time value of money
- Noncash consideration
- Consideration paid or payable to the customer
What is variable consideration?
When customer isn’t paying a fixed amount, the price of the good or service may depend on future events
When is the only time Variable Consideration should be used?
Only if it is reasonably assured that it will be entitled to that amount
What are the possible future events that variable consideration may include?
- price increases
- volume discounts
- rebates
- credits
- performance bonuses
- royalties
What are the 2 methods used to estimate the amount of revenue to recognize under Variable Consideration?
- expected-value
- most likely amount
What is the Expected-Value Method?
When using Variable Consideration to determine how much revenue to recognize, company uses a probability-weighted average of possible consideration amounts
When is Expected Value Method best used?
when company has a large number of contracts with similar characteristics
What is the Most Likely Amount Method?
When using Variable Consideration to determine how much revenue to recognize, company picks the single most likely amount in a range of possible amounts
When is Most Likely Amount Method best used?
when the contract has only 2 possible outcomes
What is Time Value of Money method?
How should it be reported?
- When company provides financing to customer to pay for service or goods over time
- The interest accrued should be determined by using an imputed interest rate
The effects of the financing should be reported as interest revenue
What is Noncash Consideration?
revenue is recognized on the basis of the fair market value of what is received in exchange for the goods or service (stock, land, building, use of facilities, etc.)
What is consideration paid or payable to the customer?
when the customer recevies a discount, rebate, coupon, or free services/products, the company should reduce the consideration received and revenue to be recognized
What are the change of control indicators to confirm the performance obligation has been satisfied? (5)
- company has right to payment for asset
- company has transferred legal title to asset
- company has transferred physical possession of asset
- customer has significant risk and rewards of ownership
- customer has accepted the asset
How should revenue be recognized from a performance obligation over long-term projects?
Measure progress towards completion, depicting a transfer of control from company to customer
What are the 2 most common methods for measuring progress towards completion for long-term projects?
Provide examples/definitions
- Units-of-delivery: ex: # of miles completed on railway btwn Houston and Dallas
- Cost-to-cost: how much has been paid to complete project
- ex: how much money that’s been spent and how much total money that’s expected to spend (%)
