CHAPTER 3 - Revenue

Question 1

IFRS 15 - Revenue Recognition: A 5 Step Process

Answer 1

COPAR

1. identify the Contract
2. identify the separate performance Obligations
3. determine the transaction Price
4. Allocate the transaction price to the performance obligations
5. Recognise revenue when (or as) a performance obligation is satisfied.

Question 2

COPAR step 2. Performance Obligations

Answer 2

Performance Obligations are promises to transfer distinct goods or services to a customer.
Performance Obligations can be satisfied at a point in time or over a period of time.

Nature of performance obligations
- To provide the specified goods or services itself
or
- To arrange for another party to provide the goods or services. (i.e. Travel agent)
- Agents only recognise the % (commission) it is entitled to.

Journal entries for Agency Sales If commission is 20%
Revenue = $2m *20% = $400k
Cost of Sales = $2m - 400K = $1.6m

Dr Revenue $1.6m
Cr Cost of sales $1.6m

Question 3

COPAR step 3. Determine the transaction price

Answer 3

Variable consideration (payment is not guaranteed due to a clause of some kind e.g. returns/refund policy:

• e.g. a bonus based on delivery of the contract.
• This will be included within “the transaction price if it is highly probable that a significant reversal in the amount of cumulative revenue will not occur when the uncertainty is resolved” (IFRS 15 Para 56)
• If there is a financing component to the deal then the consideration receivable needs to be discounted to present value using the rate at which the customer would borrow.
• The PV is recognised in receivables
• The discount is unwound over the term of the contract.
• e.g. #### TO BE COMPLETED####
• non-cash consideration
• consideration payable to a customer.

Question 4

COPAR Step 1. Identify the contract

Answer 4

An entity can only account for revenue if the contract meets the following criteria:

• The parties to the contract have approved and are committed to fulfilling the contract.
• Each party’s rights can be identified
• The payment terms can be identified
• The contract has commercial substance, and
• It is probable that the entity will be paid.

Question 5

COPAR Step 5. Recognise revenue

Answer 5

Recognising revenue over time

Input method
Costs to date
divided by
(Costs to date + Estimate costs to complete)
= Completion %

Output method
Value of work done
Divided by
Contact price (amount customer pays)
= Completion %

Pro-forma to remember:

Recognition of a contract asset on the SOFP

Actual costs to date
Profit / (Loss) to date
Less amounts billed to date

Contract Asset or Liability. X

Question 6

Contract Rules

Answer 6

Profit Making:
Revenue and costs should be recognised according to the progress of the contract.

Loss Making:
The whole loss should be recognised immediately, recording a provision.

Unknown:
Revenue based on recoverable costs.
Costs recognised as they are incurred.

Question 7

Define Revenue

Answer 7

Income arising in the course of an entity’s ordinary activities

Question 8

Define Contract

Answer 8

An agreement between two or more parties that creates enforceable rights and obligations

Question 9

Define Customer

Answer 9

A party that has contracted with an entity to obtain goods or services that are an output of the entity’s ordinary activities in exchange for consideration