Chapter 18 Flashcards
What doe the income statement or profit or loss account report?
The income statement or profit or loss statement reports the profit of an entity by matching expenses to revenues.
What is the main difference between IAS 18 and IAS 15?
The main difference between IAS 18 and IFRS 15 is the basic concept of revenue recognition. In IAS 18, revenue was recognized when substantially all risks and rewards had been transferred to a third party, while IFRS 15 links revenue recognition to the transfer of control over the asset.
How does IFRS 15 define income?
IFRS 15 defines income as ‘increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants’.
How can we identify income?
We can identify two sorts of income: revenue and other income (or gains)
What are revenues?
Revenue arises during an entity’s ordinary activities. Revenue is the gross inflow.
What are other incomes and gains?
Other income and gains can arise as a result of recalculating an asset or selling fixed assets where the selling price is higher than the carrying amount. we have not regarded the item of inventory as revenue until it is sold or at least until we have exchanged it for another asset, perhaps a debtor.
What is the core principal of the proposals?
The ‘core principle’ of the proposals is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount which reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.
What 5 steps should an entity follow?
Step 1. Identify the contract(s) with a customer.
Step 2. Identify the performance obligations in the contract.
Step 3. Determine the transaction price.
Step 4. Allocate the transaction price to the performance obligations in the contract.
Step 5. Recognize revenue when (or as) the entity satisfies a performance obligation.
What is the scope of IFRS 15?
The scope of IFRS 15 is for all contracts with customers, except for lease contracts, insurance contracts and contracts that are financial instruments.
What exception does IFRS 15 have?
Besides IFRS 15 does not apply to non-monetary exchanges between entities in the same line of business to facilitate sales to customers or potential customers.
What is a contract?
A contract is an agreement between two or more parties that creates enforceable rights and obligations.
When does IFRS 15 require to combine a contract?
IFRS 15 requires an entity to combine contracts, entered into at or near the same time with the same customer, and account for them as one contract. A contract may be modified in a later period. A contract modification is a change in the scope price or both of a contract.
When does a contract modification be accounted for as a separate contract?
- (a) The scope of the contract increases because of the addition of promised goods or services that are distinct.
- (b) The price of the contract increases by an amount of consideration that reflects the entity’s stand-alone prices of the additional promised goods or services (which does not prevent a discount from being given if it is related to selling costs that would have been made for a new customer).
Which changes in a contract may not be accounted for as a separate contract?
- (a) The remaining goods and services are distinct from the goods and services transferred on or before the date of contract modification: account for the contract modification as if it were a termination of the existing contract and the creation of a new contract.
- (b) The remaining goods and services are not distinct and therefore form part of
a single performance obligation that is partially satisfied at the date of contract modification: account for the contract modification as an adjustment to revenue.
What is a performance obligation?
Is a promise in a contract with a customer to transfer a good or service to that customer. Distinct goods or services are accounted for separately as different performance obligations. A series of distinct goods or services that are substantially the same and have the same pattern of transfer to the customer are treated as one performance obligation.
What are differences of performance obligation in its nature?
To distinguish between a principal and an agent.
When is a performance obligation a principal?
If the nature of the promise is a performance obligation to provide the specified good or service itself, the entity is a principal
When is a performance obligation an agent?
If the nature of the promise is to arrange for those goods or services to be provided by the other party, the entity is an agent. An entity that is an agent does not control the specified goods or services provided by another party before that good or service is transferred to the customer. When the entity is an agent, the fee or commission is the revenue.
What indicators indicates that an entity is a principal?
- The entity is primarily responsible for fulfilling the promise to provide the specified good or service.
- The entity has inventory risk before the specified good or service has been transferred to a customer or after that transfer (for example, on return).
- The entity has discretion in establishing prices for the specified good or service.
- The entity is exposed to credit risk for the amount receivable from the customer.
What do warranties provide?
Warranties provided may or may not be a separate performance obligation. Assurance-type warranties provide a customer with assurance that the related product will function as the parties intended. Service-type warranties are separate performance obligations as these warranties can be purchased separately by the customer.
What does a discount mean?
Customers might be given options to buy additional goods or services for free or at a discount. If an entity grants such an option in the contract, there is a separate performance obligation only if the option provides a material right to the customer that it would not receive without entering into that contract.
What does a license provide?
A licence establishes a customer’s right to the intellectual property of an entity. If the promise to grant a licence is not distinct from other promised goods or services in the contract, the entity will identify all promises as a single performance obligation.
What is the transaction price?
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, excluding amounts collected on behalf of third parties.
What does the transaction price consist of?
The transaction price can be a fixed amount of customer consideration, but it may also include variable consideration or consideration in a form other than cash. Non-cash considerations are to be measured at fair value.
What does it mean when the consideration is a variable?
If the consideration is variable, an entity estimates the amount of consideration to which it will be entitled in exchange for the promised goods or services. The amount of variable consideration may be estimated by determining either the expected value or the most likely amount.
What does a refund mean?
A customer may be entitled to a refund in the case of a sale with a right of return. Revenue may not be recognized for the products expected to be returned. Furthermore, the entity shall recognize a refund liability for the amount of consideration received for which the entity does not expect to be entitled as well as an asset for its right to recover products from customers on settling the refund liability.
What is the procedure when there are more performance obligations at the same time?
If there is more than one performance obligation, the allocation should be done based on the relative stand-alone selling prices of each distinct good or service promised in the contract. If a stand-alone price is not observable, estimations should be made.
What happens when there is a change in the transaction price?
Changes in the transaction price shall be allocated on the same basis as at contract inception. An entity shall not reallocate the transaction price to reflect changes in stand-alone prices after contract inception. Amounts allocated to a satisfied performance obligation shall be recognized as revenue.
When does an entity recognise a revenue?
An entity recognizes revenue when (or as) it satisfies a performance obligation by transferring a promised good or service to a customer. This transfer happens when the customer obtains control of that good or service.
What are indicators of a transfer of control?
- (a) The entity has a present right to payment for the asset.
- (b) The customer has legal title to the asset.
- (c) The entity has transferred physical possession of the asset.
- (d) The customer has the significant risks and rewards of ownership of the asset.
- (e) The customer has accepted the asset.
What are performance obligations that are satisfied at the point in time?
- (a) Performance obligations that are satisfied at a point in time: typically for promises to transfer goods to a customer. Revenue is recognized at the point in time.
What are performance obligations that are satisfied over time?
- (b) Performance obligations that are satisfied over time: typically for promises to transfer services to a customer. Revenue is recognized over time by selecting an appropriate method for measuring an entity’s progress towards complete satisfaction of that performance obligation.
When is a performance obligation satisfied over time?
- (a) The customer simultaneously receives and consumes the benefits provided by the entity’s performance as the entity performs.
- (b) The entity’s performance creates or enhances an asset that the customer controls as the asset is created or enhanced.
- (c) The 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 performance completed to date.
What is a repurchase agreement?
A repurchase agreement is a contract in which an entity sells an asset and also promises or has the option to repurchase the asset.
What forms can a repurchase agreement have?
1 A forward: the entity must repurchase.
2 A call option: the entity has a right to repurchase.
3 Aputoption: the entity must repurchase at the customer’srequest.
What happens when an entity delivers a product to another entity?
When an entity delivers a product to another entity, such as a dealer or distributor, for sale to end customers, it might be a consignment arrangement. When the delivered product is held on consignment, no revenue is recognized.
What does a forward or call option imply?
A forward or call option implies that a customer has not obtained control of the asset. the entity shall consider at contract inception whether the customer has a significant economic incentive to exercise its option right.
What is a bill-and-hold arrangement?
A bill-and-hold arrangement is a contract under which an entity bills a customer for a product, but the entity retains physical possession of the product until it is transferred to the customer at a point in time in the future.
When does an entity only recognise revenue?
- 1 The reason for the bill-and-hold arrangement must be substantive (for example, the customer has requested the arrangement).
- 2 The product must be identified separately as belonging to the customer.
- 3 The product currently must be ready for physical transfer to the customer.
- 4 The entity cannot have the ability to use the product or to direct it to another customer.
What are construction contracts?
Construction contracts are contracts specifically negotiated for the construction of an asset or a combination of assets that are closely interrelated or interdependent in terms of their design, technology and function of their ultimate purpose or use. The essential difference between the two types of contracts is the way in which the revenue of the transaction is determined.
What is a fixed-price contract?
Is a construction contract in which the contractor agrees to a fixed contract price or a fixed rate per unit of output, which in some cases is subject to cost escalation clauses.
What is a cost-plus contract?
Is a construction contract in which the contractor is reimbursed for allowable or otherwise defined costs, plus a percentage of these costs or a fixed fee.
When is an entity not permitted to recognise a revenue based on IFRS standards?
It is not permitted to recognize revenue for a performance obligation over time if an entity is not able to reasonably measure its progress towards complete satisfaction, as it lacks reliable information.
Where does contract costs consist of?
Contract costs are not only costs to fulfil a contract but also costs to obtain a contract. The incremental costs are those costs that an entity would not have incurred if the contract had not been obtained.
When is are different kinds of revenue recognised?
Revenues for a sales-based or usage-based royalty promised in exchange for a licence shall be recognized at the later of (a) when the subsequent sale or usage occurs, and (b) the performance obligation concerned has been satisfied.
