Chapter 4 Flashcards
Performance obligation
- Single performance obligation
- Bundle performance obligation
When the good / service distinct (separately/different) OR a series of distinct good / services that are substantially the same and have the same pattern of transfer to the customers
When can recognised revenue at a point in time?
Revenue can be recognised when performance obligation satisfied at a point in time (promised good / service transfer to the customer) and also 3 conditions of over a period time are not met
satisfied the P.O in one time
What other 3 rules for recognising revenue when P.O satisfied over a period of time?
- Customer receives and consumes the benefits simultaneously as the entity perform, i.e, service or teacher teach us (teacher provide knowledge and we receive it simultaneously)
- Entity performance create / enhance an asset that the customer controls, i.e, when the asset is still being constructed and customer can control the land
- Entity performance create an asset with no alternative use AND the entity has an enforceble right for payment on p.o completed to date, i.e, property developer develop a property and the property can only sell to you “no one other than you can use the asset” AND property developer has an enforceable right to collect money for the p.o that has satisfied to date, such as construct 30% property, then collect 30% money from customer)
Recognize revenue over time based on progress of satisfying performance obligation
Measurement of revenue
- measure the revenue based on transaction price
- significant financing component - if allow customer to pay the $$ exceed 12 months, need to discount to PV
- variable consideration - highly probable can get the revenue, then recognise it, if not, dun recognise
If the revenue is variable, should we recognize the revenue?
Exp: sales $100, fixed $95 can be received and $5 is variable
If highly probable (>50%) can earn that money, then recognize as revenue, If not sure, then do not recognize
What is consideration payable to customers?
p.s, look at the question (is it the entity got purchase distinct good or service from customer?) If got, then recognize as purchase, If no, then treat it as reduction in transaction price
Revenue will be recognised over 12 months (based on how much products are transferred) i.e total 20m product only transferred 4m of product at the end of reporting date, got 1m transaction price, then (4/20) x 1m = 0.2m, then deduct in revenue 4m-0.2m, just recognise 3.8m of revenue
If the progress cannot be reliably measured, recognise revenue up to recoverable costs incurred (how much get from customer to recover the costs)
Calculate input cost (transaction cost) using input method which is measure how much % of cost has incurred (on entity side) up to certain date to calculate how much revenue up to date will be recognised
*i.e, cost incurred up to date is 66.67% (Cost up to date $1m/Total cost would be incurred $1.5m); Then use total revenue $2m x 66.67% = $1.3m (then recognised $1.3m revenue). Gross profit $0.3m = use $1.3m minus $1m (Revenue received up to date minus cost incurred up to date)
Calculate input cost (transaction cost) using revenue up to date over total revenue - percentage-of-completion method to measure how much cost incurred up to date
i.e, total transaction cost $1m, $4m revenue up to date over total $20m revenue can be recognised: (4/20)*1m = $0.2m cost (then recognised $0.2m cost)
After that, those transaction cost need to be deducted from revenue to calculate gross profit
i.e, $4m revenue - $0.2m cost = $3.8m gross profit
input method = cost incurred todate / (cost incurred to date + future cost to complete product “total budgeted cost”)
What is principal
Principal enters into contract with customer
* He set price
* bear risks, i.e, inventory obsolete, risk of bad debt
* primarily responsible to fulfill performance obligation
SOPL: sales - cost of sales - commision (for agent)
What is agent
- Agent helps principal to arrange for provision of goods and services
- Agent earns commission
SOPL: commission income
How to record accounting treatment if customer directly pay the money to agent rather than principal?
In agent account (receive money from customer):
* Dr bank
* Cr sales
* Cr payable principal
In agent account (pay for principal)
* Dr payable
* Cr bank
Warranties
use probablity*expected amount of warranty cost
- Separately - If got add-on warranty, the customer has option to purchase the warranty separately, it needs to be treated as disctinct performance obligation (standalone selling price)
- Combined
Recognise revenue when each performance obligation is satisfied
Exp: Total revenue for 2 yesrs $21,000; Car standalone selling price $20,520; Servicing standalone selling price $540; Then use car $20,520/21600=95%x21,000 = $19,950; Servicing $540x2/21600=5%x21,000 = $1,050; So total $19,950 + $1,050 = $21,000
Consignments of inventory (寄放inventory）
Consignment inventory is where one party legally owns the inventory (Magazine entity) but another party keeps the inventory on iths premises (Supermarkets stores the magazine).
If the risk and reward does not pass to supermarket or 中间人, means the control has not been passed to supermarket, the entity cannot recognise revenue until he receive the revenue from supermarket.
If the risk and reward pass to supermarket, means the control pass to supermarket.
If enter into a contract with customer/xxx/xxx
Incur cost (before recognize revenue):
Dr Contract cost
Cr Bank
When recognizing revenue:
Dr Cost of sale
Cr Contract cost
sale with a right to return
Means u sell smt to customer, and customer has the right to return to u
* Is it highly probable that the customer will not return the goods?
* If yes, then recognise revenue;
* If no, dun recognise revenue, goes to deferred income (Dr trade receivable, Dr right to recover inventory “current asset”, Cr deferred income, Cr inventory)
Sales with a volume incentives
It means if the customer purchase more goods, entity will give discount to them,
* It is variable consideration, coz entity may earn revenue or may not earn revenue
* If give discount –> earn lesser
* If no give discount –> earn more
* If highly probable that the customers will not get the discount, entity can recognise more revenue; vice versa
