Ch13: Revenue from Contracts with Customers Flashcards
Explain the 5 step revenue recognition process under IFRS.
Step 1 - Identify the contract.
Step 2 - Identify the performance obligations.
Step 3- Determine the transaction price.
Step 4 - Allocate the transaction price to each performance obligation.
Step 5- Recognize revenue when each obligation is satisfied.
Explain the 3 step revenue recognition process under ASPE.
S1: Performance is achieved.
S2: Revenue can be measured reliably.
S3: Collection is reasonably assured.
Define what a contract is.
A contract is an agreement between two or more parties that creates enforceable rights and obligations.
In order for an agreement to be considered a contract, 5 criteria must be met. What are they?
1- approved by all parties
2- rights and obligations by both parties can be identified.
3- payment terms can be identified.
4- the contract has commercial substance
5- it’s probable that the entity will collect the consideration, considering only the buyer’s ability and intention.
Briefly explain what commercial substance means0.
Commerical substance refers to when the risk, timing, or amount of future cashflows of an entity is expected to change as a result of a business transaction/contract.
Explain the difference between the contract price and the consideration paid.
The consideration collected can be different that the contract price due to reasons like volume discounts or rebates offered by the seller. In cases like these, when assessing the buyer’s ability and intention to pay, we would usually refer to the consideration owed and not the actual contract price.
Combination of contracts: it is stated that a vendor shall combine two or more contracts entered into at or near the same time with the same customer (or related parties with the customer and account for the contracts as a single contract if one or more of the following criteria are met..state those criteria.
1- contracts are negotiated as a package with a single commercial objective.
2 - The amount of consideration to be paid in one contract depends on the price/performance of the other contract.
3- Both contracts are considered one single performance obligation.
A contract modification shall be treated as a separate contract when both of the following criteria are met:
1- change in the scope of the contract in terms of goods and services.
2- an increase the contract price
A performance obligation is a promise to a customer to transfer one of the following:
a. a distinct single (or bundle) product or service.
b. a series of distinct goods/services that are substantially the same and have the same pattern of transfer to the customer.
A performance obligation can be externally stated in the contract and can arise inherently due to business practices. Explain.
Some goods/services are not explicitly stated but are implied based on customary business practices. In essence, if there is an expectation by the customer for additional goods or services, these would be considered performance obligations.
In determining the transaction price, what does an entity need to consider?
1- variable consideration.
2- constraining estimates of variable consideration
3- significant financing components
4- non-cash consideration
5- any consideration payable to the customer
Identify and explain the two methods for variable consideration.
a. expected value - the sum of probability-weighted outcomes. (i.e. takes the range of possible outcomes and considers the probability of each. This approach is appropriate when there are multiple outcomes.)
b. most likely value - takes the one outcome that is considered to be the most likely to be true and is usually appropriate when there are two possible outcomes.
