Ch 3. Revenue Recognition

Question 1

Revenue From Contracts with Customers, what is it?

Answer 1

Newly adopted recognition standard: entity provides goods or services to customers; it should recognize revenue based on the value it expects to receive for those goods or services. This principle ensures a more consistent and transparent approach to revenue recognition across different contracts and industries.

Question 2

Why was the new standard of Revenue Recognition developed?

Answer 2

IASB & FASB decided to create a unifying framework determining when revenue should be recognized in order to have a framework that could be applied across any industry and provide similar results.

Question 3

ASC Topic 606 what does this relate to?

Answer 3

-Revenue from Contracts with Customers - a significant accounting standard by FASB to provide guidelines for recognized revenue from contracts.

-Entities should recognize revenue that depicts the transfer of promised good or services to customers and reflects the consideration (payment) expected in exchange for those goods/services.

• this applies to all contracts with customers.

Question 4

5 Step Revenue Recognition Model - Identify the 5 step model

Answer 4

1. Identify the contract(s) with a customer
2. Identify performance obligation in contract
3. Determine transaction price
4. Allocate the transaction price to the performance obligations in the contract
5. Recognize revenue when (or as) entity satisfies performance obligation

Question 5

Step 1 of the revenue recognitions model, what is a customer?

Answer 5

A party that has contracted with an entity to obtain goods/services in exchange for consideration(ie payment).

Question 6

What conditions must be met to account for a contract with a customer?

Answer 6

-All parties agree to contract; legally obligated to perform their obligations under contract

-each party’s rights regarding goods and services being exchanged can be identified.

-payment terms can be identified

-contract has commercial substance.

• collection is probable

Question 7

Combining Contracts - when would you combine contracts as a single contract?

Answer 7

2 or more contracts that are entered into around same time with same customer should be seen as a single contract if the contracts were negotiated together and have a single business purpose.

Question 8

Contract Modification, what is it, and what needs to be true for a contract to be considered as modified?

Answer 8

this is treated as a new contract or as part of an existing contract.

Modification is considered a new, sperate contract if both of the following are true:

Contract modification represents a new agreement for additional goods and service, possibly added to an existing contract for convenience.

Question 9

What two things must be true for a “Contract Modification” to be considered a new, separate contract?

Answer 9

• Modification adds distinct goods or services to agreement
• increase in contract price reflects the standalone selling price of additional services or goods

Question 10

Enforceability and Termination Rights (Contracts).

Answer 10

Contracts do not need to be written for it to be considered contracts under revenue recognitions standards, but they must be legally enforceable. Oral contracts if enforceable are considered contractions.

If neither party has yet performed under the contract both parties have a right to cancel without penalty. If canceled revenue recognition standard means no contract exists.

Question 11

Collectability vs Price Concessions (Contracts)

Answer 11

Both of these play into contracts with customers because the company needs to consider terms of agreement but also other scenarios like collectability issues and price concessions which can have an impact on how revenue is recognized and reported.

Question 12

Does this example show Collectability issue or Price Concessions issue? why?

Hospital treating uninsured patient in ER. Due to nature of emergency service is provided right away. As soon as the hospital determines patient is uninsured the hospital doesn’t expect to collect full amount of bill it will show for services rendered.

Answer 12

Collectability issue because hospital cannot determine the patient is committed to perform its obligation so no contract can be identified from 5 step revenue recognition model.

Question 13

Does this example show Collectability issue or Price Concessions issue? why?

Hospital treating uninsured patient in ER. Due to nature of emergency service is provided right away. As soon as the hospital determines patient is uninsured the hospital doesn’t expect to collect full amount of bill it will show for services rendered. But later Hospital expects patient to pay $1,000 out of $10,000.

Answer 13

Price concessions - Originally the hospital determined it was collectability issue but later realized they would be collecting a portion of the bill - there is a 9k discount (aka pricing concession). This is because patient never agreed to pay $10k.

Question 14

Step 2 : Identify the Performance Obligations in the Contract

Answer 14

At inception of contract, firm must determine its performance obligations.
Each obligation is a promise in providing goods or services.
Judgment may be required to determine if:
* The elements of a set of promised goods or services are different from one another, and therefor constitute sperate performance obligations or..
* They are not distinct

Question 16

Firm entered into a contract to construct a factory. Considering all the components of the factory (foundation, walls plumbing, etc) is this considered a single performance obligation?

Answer 16

Yes, because promised in contect of obligation there is a single identifiable obligation to transfer the factory and all its components.