Ch7 - Revenue Recognition Flashcards
– Which statement about IFRS 15 is correct?
A: Revenue is generally recognized when cash is received. Receiving
cash from customers is a necessary and sufficient condition for
revenue recognition.
B: In determining the transaction price, only fixed price elements may be
taken into account. Variable amounts can only be recognized after
the relevant payments have been made.
C: A performance obligation includes a promise in a contract with a
customer to transfer a good or service that is distinct.
D: The transaction price should be allocated to each performance
obligation on a relative cost basis.
E: When recognising revenue over time, the entity needs to measure the
progress towards complete satisfaction of the respective performance
obligation. This requires an output-oriented measure, because input-
(cost-) oriented measures are not closely linked to the transfer of
control of goods or services to a customer.
C: IFRS 15 establishes principles for reporting useful information to users of financial statements about the nature, amount, timing, and uncertainty of revenue and cash flows arising from a contract with a customer.
A performance obligation is a promise in a contract to transfer a good or service that is distinct, which means that it can be separately identified in the contract and is separately deliverable to the customer.
1.2 - Which is the main consideration to determine whether a
sale has occurred?
A: The economic substance of the transaction
B: Whether title to the goods has passed
C: The provisions of the legal contract
D: Whether the sale is for goods or services
A: The main consideration for determining whether a sale has occurred is the economic substance of the transaction, rather than just its legal form. According to IFRS 15, revenue is recognized when control of a good or service is transferred to the customer, reflecting the substance of the transaction.
Multiple Choice (1of 4)
Jedi Inc. enters into an outsourcing contract with new customer, a largemultinational pharmaceutical company. The contract stipulates that Jedi will
process the travel expense claims for all of the company’s sales agents for
the next three years, using a cloud-based system. The customer will not have
any access to the software. Jedi will charge an upfront fee of € 100,000, and
a € 12 fee for each expense claim, payable on a monthly basis. If the
customer renews the contract, it will again have to pay an upfront fee.
A: Each expense claim is a separate performance obligation. Thus, revenue can
be recognized by Jedi on a continuous basis, as it performs the processing of
the travel claim expenses.
B: Jedi provides distinct services which however represent a single performance
obligation satisfied over time. Therefore, it needs to distribute the upfront
payment of € 100,000 over the contract time, most likely on a pro rata basis,
and recognize the variable payments on a monthly basis.
C: The contract consists of a single performance obligation. Thus, Jedi
recognizes all of the revenue when it has completed its obligations under the
contract, that is, after three years.
D: Jedi can recognize the upfront payment immediately; the variable payments
are recognized on a monthly basis.
B: In this scenario, the € 100,000 upfront fee is related to the services that Jedi will provide over the three years. According to IFRS 15, if the upfront fee relates to services to be delivered over time, it should be spread over the duration of the contract.
The ongoing processing of expense claims represents a single performance obligation because it is a continuous service over time, and the service is not delivered as individual, distinct goods or services.
The € 12 fee per claim is a variable consideration that is recognized monthly as the claims are processed, which aligns with the satisfaction of the performance obligation over time.
Multiple Choice (1of 4)
Standard mobile contracts commonly include goods and services that
may be used together: Which of the following statements is correct?
A: As the handset is given for free, it is not a performance obligation.
B: The whole contract consists of one performance obligation.
C: The contract comprises two separate performance obligations, the
transfer of the handset and the provision of the network connection
services.
D: As the variable cost for the network service is almost zero, the
handset is the main performance obligation.
C: Under IFRS 15, a contract may consist of multiple performance obligations if the goods or services are distinct from one another. In this case, the handset and the network services are distinct because they can be identified separately and provide separate benefits to the customer.
Even if the handset is provided for free or at a significant discount, it is still considered a separate performance obligation because it has standalone value to the customer.
The network services are provided over time, making them another distinct performance obligation. Thus, the contract should be accounted for as containing two separate performance obligations: one for the delivery of the handset and one for the ongoing network service.
Multiple Choice (1 of 4)
If revenue for 20X1 is understated then …
A: … there are hidden reserves - profit for 20X1 is understated and net
assets are overstated.
B: … there are hidden reserves - profit for 20X1 is overstated and net
assets are overstated.
C: … there are hidden reserves - profit for 20X1 is understated and net
assets are understated.
D: None of the above.
C: If revenue for 20X1 is understated, this means that the revenue and profit reported for that period are lower than they should be. Understatement of revenue can create a situation where a company has hidden reserves, as it has not yet recognized all of the revenue it could have.
This understatement would result in profit being understated for the period because revenue directly contributes to profit.
Additionally, if revenue is understated, net assets (such as accounts receivable or cash) may also be understated, as the unrecognized revenue means that the corresponding asset (e.g., receivables) is not recorded correctly.
When should revenue be recognised for the following businesses?
a soft-drink manufacturer
When the soft drinks are delivered to the customers
When should revenue be recognised for the following businesses?
a legal firm
When services are rendered
When should revenue be recognised for the following businesses?
a theatre that sells tickets to a musical production
After the musical production is performed. In most cases, refunds are not given to
those who do not show up (no-shows)
When should revenue be recognised for the following businesses?
a magazine publisher producing monthly titles
Revenue is recognized each time an issue is delivered to the subscriber.
If a subscription is paid upfront for a year, the revenue is deferred and recognized monthly as each magazine is delivered to the customer. This aligns with the transfer of control of each magazine issue.
When should revenue be recognised for the following businesses?
a gold-mining company
Revenue is recognized when the gold is delivered to the buyer, and control has passed to the customer, typically at the point of shipment or delivery. This is when the gold-mining company has fulfilled its obligations and the customer has taken ownership of the product.
Explain the measurement of revenue and the corresponding journal entries for the
variant!
Car dealer Fast offers several sports cars at bargain conditions. All of the cars are the same model and have the same equipment. Fast offers clients two payment modes with different prices; if clients pay in cash immediately, the price of the cars is € 40,000.
The transaction price is the amount of consideration to which an entity expects to be
entitled in exchange for transferring promised goods or services to a customer,(IFRS
15.47). € 40,000
| Dr. Bank € 40,000 | Cr. Revenues € 40,000
Explain the measurement of revenue and the corresponding journal entries for the
variant!
clients can pay in one year; in that case, the price is € 45,000 (directly it is 40,000). In either way, clients can take possession of the cars immediately; they agree, however, that they are
liable for all risks associated with the cars.
Variant 2 – Deferred payment
Effectively the agreement represents a financing transaction. Because the payment is
deferred, the fair value of the consideration is less than the nominal value. The fair
value of the consideration is determined by the discounting of the future receipts with
the imputed rate of interest. (IFRS 15.64)
Interest rate = (€ 45,000 / € 40,000) – 1 = 12,5 %
The difference between the fair value and the nominal value of the reward is
determined as interest revenue. (IFRS 15. 65).
Journal Entry today:
Dr. Loan to client (Receivables) € 40,000
Cr. Revenues € 40,000
Journal Entries in one year:
Dr. Loan to client (Receivables) € 5,000
Cr. Interest Revenues € 5,000
Dr. Bank € 45,000
Cr. Loan to client € 45,000
!!!Only Answer for 2014!!!
Building AG signs a contract to build a villa and expects a construction period of 3 years
with the following contract cost structure:
2014: 150,000
2015: 400,000
2016: 450,000
The customer of Building AG will pay the fixed amount of € 1,500,000 at the end of 2016. Building AG determines the stage of completion of the project according to the cost-tocost method. Please give the journal entries of Building AG for the years 2014, 2015 and 2016.
Total expected contracts costs = 150,000+400,000+450,000 = 1,000,000
Total expected revenue = 1,500,000
Expected profit for the project = 1,500,000 - 1,000,000 = 500,000
2014:
Stage of completion: 150,000 / 1,000,000 = 15 %
Dr. Contract cost Cr. Miscellaneous Assets 150,000
Dr. Gross amount due from customers Cr. Revenue 225,000
(0,15*1,500,000)
!!!Only answer for 2015!!!
Building AG signs a contract to build a villa and expects a construction period of 3 years
with the following contract cost structure:
2014: 150,000
2015: 400,000
2016: 450,000
The customer of Building AG will pay the fixed amount of € 1,500,000 at the end of 2016. Building AG determines the stage of completion of the project according to the cost-tocost method. Please give the journal entries of Building AG for the years 2014, 2015 and 2016.
Total expected contracts costs = 150,000+400,000+450,000 = 1,000,000
Total expected revenue = 1,500,000
Expected profit for the project = 1,500,000 - 1,000,000 = 500,000
2015:
Stage of completion: (150,000+400,000) / 1,000,000 = 55 %
Dr. Contract cost Cr. Miscellaneous Assets 400,000
Dr. Gross amount due from customers Cr. Revenue 600,000
(0,55*1,500,000-225,000)
!!!Only answer for 2016!!!
Building AG signs a contract to build a villa and expects a construction period of 3 years
with the following contract cost structure:
2014: 150,000
2015: 400,000
2016: 450,000
The customer of Building AG will pay the fixed amount of € 1,500,000 at the end of 2016. Building AG determines the stage of completion of the project according to the cost-tocost method. Please give the journal entries of Building AG for the years 2014, 2015 and 2016.
Total expected contracts costs = 150,000+400,000+450,000 = 1,000,000
Total expected revenue = 1,500,000
Expected profit for the project = 1,500,000 - 1,000,000 = 500,000
2016:
Stage of completion: (150,000+400,000 +450,000) / 1,000,000 = 100 %
Dr. Contract cost Cr. Miscellaneous Assets 450,000
Dr. Gross amount due from customers Cr. Revenue 675,000
(1,0*1,500,000-225,000-600,000)
Dr. Cash Cr. Gross amount 1,500,000
due from customers
