CH6 Revenue and Inventories Flashcards
What is the five step model for revenue recognition?
- Identify the CONTRACT with the customer (written, verbal or implied; identifies each party’s rights and payment terms; has commercial substance; probable entity will collect consideration)
- Identify the PERFORMANCE OBLIGATIONS in the contract (distinct good or service; bundle of goods and services; series of distinct goods or services)
- Determine the TRANSACTION PRICE (total amount receivable; may include fixed and variable elements or expected value if most likely outcome unknown)
- ALLOCATE transaction price to performance obligations - unbundle (overall price is allocated to each distinct performance obligation based on their individual selling prices)
- RECOGNICE REVENUE when or as a performance obligation is satisfied (perf obligation satisfied when control of goods or services has transferred to customer. Can happen at a point in time OR over a period of time
Double entry for cash received before performance obligations met?
DR Cash
CR Deferred Income Liab (current or split with non current)
Double entry for recognising revenue when the customer paid us beforehand?
DR Deferred Income Liab (to clear)
CR Revenue
What happens when customers pay a long time after our performance obligations have been met? E.g. buy a sofa for £2000, pay two years later?
What is the initial double entry?
What do you have to do over the next two years?
What is the double entry?
What is the effective split?
DR Receivables (PV - 1653)
CR Revenue (PV - 1653)
Unwind the discount by the discount rate - 1653 x 10% = 165.30 (the receivable needs to grow from the PV of 1653 to £2000)
DR Receivables (PV x discount factor - 165.30)
CR FINANCE INCOME (same)
2000 split into:
1653 revenue
347 finance cost
A performance obligation satisfied over time will meet one of the following criteria. What are they?
- Customer receives and consumes benefits simultaneously (e.g. cleaning contract)
- Entity’s performance creates or enhances an asset that the customer controls as it is being created/enhanced (eg building a skyscraper)
- Entity’s performance does not create an asset with an alternative use to the entity and the entity has an enforceable right to payment for the performance completed to date (eg development of a website - bespoke; cannot sell it to another customer)
Stage of completion: the entity will recognise revenue by measuring progress towards completion. This can be done using he output or input method. What are they?
What is the caveat?
Output:
Total contract price/work completed so far (worth - need to have it valued) x 100 to give a percentage of revenue recognisable
Input:
total estimated costs of contract/costs incurred so far x 10 to give a percentage of revenue recognisable
Caveat:
If the outcome cannot be recognised reliably, eg in early stages of contract, you can only recognise revenue up to the amount of costs incurred so far (that you expect to be recoverable from the customer)
What are consignment sales?
A ‘sale or return’ arrangement where the original seller CAN ONLY recognise their sale when their buyer sells the goods on to a third party OR the right to return period has expired.
What might an exam question be on consignment sales?
What do you need to do (double entry)?
The original seller has recognised income too early and we need to unwind it.
Reduce Sales (DR)
Reduce Recs (CR)
Reduce COS (CR)
Increase inventory (DR)
What is a bill and hold arrangement?
When can the seller recognise revenue?
Where a customer pays for a large amount of stock but has no room for storing it. The goods are only delivered once the final instalment is paid.
Can recognise revenue upfront as control has passed to us.
What is a repurchase agreement?
What is it really?
Example: investment property sold to bank for 4 mil but worth 5 mil. Option to repurchase after 1 year for 4.32 mil.
What is the double entry?
Where would the investment property sit in acs?
An agreement where the seller agrees or has an option to REPURCHASE the goods at a later date.
The risks and rewards have been retained by the seller and therefore the arrangement is a financing agreement (a secured loan).
DR Cash 4 mil
CR Loan 4 mil
Don’t forget the interest:
DR Finance Costs 0.32mil
CR Loan 0.32 mil
On the SOFP
If you have inventory and purchases in the TB plus closing inventory is given/work outable in the notes, then you can work out COS and inventory in SOFP is the closing inventory figure.
However, if you are given inventory and COS in the TB, what figure goes into the SOFP?
The inventory figure in the TB IS the closing inventory figure that goes into the SOFP.
If valuing inventory at cost, what can you never include?
Abnormal costs
Costs of storing finished goods
Future administrative overheads
Future selling costs
Difference between IFRS and UK GAAP for inventory
UK GAAP requires inventories held for distribution at no/nominal consideration (eg promotional materials) to be measured at adjusted cost. Ie at cost to begin with (eg when the brochures are up to date, include the right prices, etc) but, once they go out of date, we have to write them down to nil.
Under IFRS, you would record them at the lower of cost or net realisable value straight away (ie, if promotional material, that would be nil straight away).
