Chapter 11 - Revenue

Question 1

What is the five-step process for recognising revenue (COPAR)?

Answer 1

1. Identify the contract
2. identify the seperate performance obligations
3. Determine the transaction price
4. Allocate the transaction price to the performance obligations
5. Recognise revenue as or when a performance obligation is satisfied

Question 2

What is a contract?

Answer 2

an agreement between 2 or more parties that creates enforceable rights and obligations.

Question 3

What are performance obligations?

Answer 3

promises to transfer distinct goods or services to a customer. Some contracts contain more than one performance obligation

Question 4

An entity can only account for revenue from a contract if it meets what criteria?

Answer 4

• the parties have approved the contract and each party’s rights can be identified
• payment terms can be identified
• the contract has commercial substance
• it is probable that the selling entity will receive consideration

Question 5

An entity must decide if the nature of a performance obligation is what?

Answer 5

• to provide the specified goods or services itself (i.e. it is the principal)
• to arrange for another party to provide the goods or service (it is an agent)
• if an entity is an agent, then revenue is recognised based only on the fee or commission to which it is entitled rather than the full value of the sale.

Question 6

What should be considered when determining the transaction price?

Answer 6

• variable consideration
• the existence of a significant financing component in the contract
• non-cash consideration
• consideration payable to a customer

Question 7

What are some examples of variable elements?

Answer 7

discounts, incentives, rebates, credits, refunds, price concessions, performance bonuses and penalties

Question 8

The total transaction price should be allocated where?

Answer 8

To each performance obligation in proportion to stand-alone selling prices

Question 9

If a stand-alone selling price is not directly observable what must happen?

Answer 9

it must be estimated

Question 10

How is revenue recognised if satisfied over time?

Answer 10

Measure progress
Dr Cash
Cr Deferred income

Dr Deferred income
Cr Revenue

Question 11

how is revenue recognised if not satisfied over time?

Answer 11

Satisfied at a point in time

Question 12

IFRS 15 states that an entity only satisfies a performance obligation over time if one of which criteria is met?

Answer 12

• the customer simultaneously receives and consumes the benefits from the entity’s performance
• the entity is creating or enhancing an asset controlled by the customer
• the entity cannot use the asset ‘for an alternative use’ and the entity can demand payment for its performance to-date

Question 13

Progress towards completion may be measured by using what?

Answer 13

Input method
Output method

Question 14

What is the input method?

Answer 14

based on costs incurred as a proportion of total expected cost

Question 15

What is the output method?

Answer 15

based on value of work completed as a proportion of total contract price

Question 16

if a entity receives more revenue for a contract than payments (cash) what would it recognise?

Answer 16

an asset

Question 17

if a entity receives less revenue for a contract than payments (cash) what would it recognise?

Answer 17

Liability

Question 18

How is the contract asset/liability calculated?

Answer 18

Revenue recognised to date X
Less: invoices to customer (X)
Contract asset/(liability) X/(X)

Question 19

where it is estimated that a contract will produce a loss rather than a profit, how is the loss recognised

Answer 19

in full immediately by increasing cost of sales.

Question 20

What is the calculation to find COS when contract makes a loss?

Answer 20

COS = Calculated revenue + Estimated loss

Question 21

Where costs are incurred to rectify errors, and these costs are not recoverable from the customer, how should they be recognised?

Answer 21

should not be included in the profit calculation, but should instead be recognised in full as period costs as they are incurred

Question 22

Where it is not possible to calculate costs necessary to complete the contract, how is revenue recognised?

Answer 22

revenue only recognised up to the value of recoverable costs incurred to date, leaving nil profit

Question 23

What are indicators that control has passed to the customer?

Answer 23

• customer has physical possession of the asset
• customer has the significant risks and rewards of ownership
• customer has legal title
• seller has a right to payment

Question 24

In relation to a bundled sale, any discount should usually be allocated where?

Answer 24

across each component in the transaction based on the selling price of each component

Question 25

What is the calculation if customer not paying for item for few years?

Answer 25

amount paid + Present value of amount still due (amount x ((1/(1+0.1) 2))

Question 26

What is consignment inventory?

Answer 26

where goods are provided to a customer on consignment, it is important to identify whether the seller or the buyer has control.

Question 27

What is a repurchase agreement?

Answer 27

where an entity sells an asset and promises (or has the right) to repurchase the asset

Question 28

How are repurchase agreements recognised?

Answer 28

not recognised as a sale and there are generally 3 forms of repurchase agreements

Question 29

What are the 3 forms of repurchase agreement?

Answer 29

• obligation to repurchase
• right to repurchase
• obligation to repurchase at customer’s request

Question 30

How should we account for a repurchase?

Answer 30

• a lease if the repurchase price is less than the original selling price
• a financing agreement, if the repurchase price is more than the original selling price

Question 31

What is a bill and hold agreement?

Answer 31

a contract under which an entity invoices a customer for a product but the product is physically retained by an entity until it is transferred to the customer at some point

Question 32

what must occur for bill and hold to be recognised?

Answer 32

• the customer must have requested the arrangement
• the product must be identified as belonging to the customer
• the product must be ready for physical transfer to the customer
• the entity cannot have the ability to use the product or sell it to someone else

Question 33

How is revenue recognised if an entity is an agent?

Answer 33

based on the fee or commission to which it is entitled