Ch 17 - Revenue Recognition

Question 1

Revenue Recognition is easily accounted for in accounting practices (T/F)

Answer 1

False

It is a top fraud risk

Question 2

Who created the process to determine when revenue should be recognized?

And how many steps is it?

Answer 2

FASB 5-step process

Financial Accounting Standards Board

Question 3

Name the steps of Revenue Recognition Process

Answer 3

1. Identify the contract
2. Identify the performance obligations
3. Determe the transaction price
4. Allocate transaction price to each perforamance obligation
5. Recognize revenue when the performance obligation has been satisfied

Question 4

What information does revenue provide a company?

Answer 4

Insight into past and future performance

Question 5

What approach does the Revenue Standard use as a basis for revenue recognition?

Explain

Answer 5

asset-liabiity approach

Revenue is recognized and measured based on changes in liabilities and assets

Question 6

What are the conditions for the existence of a contract? (5)

Answer 6

• 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

Question 7

What the requirements for a good or service to be considered a separate performance obligation? (2)

Provide an example

Answer 7

• Capable of being distinct AND
• distinct within the contract

EX: the bagel shop providing coffee AND a bagel

Question 8

What the requirements for goods and services to be combined into one performance obligation?

Provide an example

Answer 8

They must be interdependent and interrelated

Ex: selling the software and software customization

Question 9

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?

Answer 9

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)

Question 10

What are the additional factors that must be considered when the customer isn’t paying a fixed amount?

Answer 10

1. Variable consideration
2. Time value of money
3. Noncash consideration
4. Consideration paid or payable to the customer

Question 11

What is variable consideration?

Answer 11

When customer isn’t paying a fixed amount, the price of the good or service may depend on future events

Question 12

When is the only time Variable Consideration should be used?

Answer 12

Only if it is reasonably assured that it will be entitled to that amount

Question 13

What are the possible future events that variable consideration may include?

Answer 13

• price increases
• volume discounts
• rebates
• credits
• performance bonuses
• royalties

Question 14

What are the 2 methods used to estimate the amount of revenue to recognize under Variable Consideration?

Answer 14

• expected-value
• most likely amount

Question 15

What is the Expected-Value Method?

Answer 15

When using Variable Consideration to determine how much revenue to recognize, company uses a probability-weighted average of possible consideration amounts

Question 16

When is Expected Value Method best used?

Answer 16

when company has a large number of contracts with similar characteristics

Question 17

What is the Most Likely Amount Method?

Answer 17

When using Variable Consideration to determine how much revenue to recognize, company picks the single most likely amount in a range of possible amounts

Question 18

When is Most Likely Amount Method best used?

Answer 18

when the contract has only 2 possible outcomes

Question 19

What is Time Value of Money method?

How should it be reported?

Answer 19

• 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

Question 20

What is Noncash Consideration?

Answer 20

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.)

Question 21

What is consideration paid or payable to the customer?

Answer 21

when the customer recevies a discount, rebate, coupon, or free services/products, the company should reduce the consideration received and revenue to be recognized

Question 22

What are the change of control indicators to confirm the performance obligation has been satisfied? (5)

Answer 22

• 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

Question 23

How should revenue be recognized from a performance obligation over long-term projects?

Answer 23

Measure progress towards completion, depicting a transfer of control from company to customer

Question 24

What are the 2 most common methods for measuring progress towards completion for long-term projects?

Provide examples/definitions

Answer 24

• 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 (%)

Question 25

What are the conditions and methods to recognize revenue for long-term contracts that haven’t been satisfied?

Provide definitions/examples

Answer 25

• Condition: the first 4 steps in revenue recognition should be satisfied
• Methods:
• Percentage-of-completion: rev/exp recognized in terms of progress made (costs, units, or value added)
• Completed contract: rev/exp recognized when project is complete

Question 26

Know how to calculate how much revenue to recognize in Percentage-of-Completion Method

Answer 26

SLIDE 20 & 21

Question 27

Know how to identify separate performance obligations and allocate the total contract price to separate obligations

Question 28

Know how to determine contract price when there is variable consideration

Question 29

Know the accounting for long-term contracts under the percentage-of-completion method (excluding overall loss situtation)

Question 30

Understand the principle-agent relationship

Provide Example

Answer 30

• Agent’s performance obligation is to arrange for principle to provide goods or services to customer
• Amounts collected on behalf of principal (gross amount) are not revenue of agent (net amount; commission)

Examples: Groupon; Travel agent, Priceline

Question 31

What must be done if the total estimated contract costs > contract price?

Answer 31

the entire expected loss must be recognized in the period in which the losses become known

Question 32

What type of account is Construction in Process (CIP) inventory?

Explain

Answer 32

asset account; costs of construction are held in inventory

Long-term

Question 33

What type of account is Billings on Contract?

Explain

Answer 33

contra-asset (contra to CIP inventory, to avoid overstating the contractor’s interest in the project)

also considered liability account

Question 34

What all must be disclosed under the New Standard? (8)

Answer 34

• Contracts with customers
• Disaggregation of revenue
• Reconciliation of contract balances
• Remaining performance obligations
• Cost to obtain or fulfill contracts
• Other qualitative disclosures, including:
• significant judgements and changes in them
• minimum revenue not subject to variable consideration constraint