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.