Chapter 6 Flashcards
What is the core principle of revenue recognition under the revenue recognition standard?
Revenue should be recognized when CONTROL of a good or service is transferred to a customer in an amount that reflects the consideration to which the company expects to be entitled in exchange
ASPE 5 steps to revenue recignition
- Identify the contract
- Identify the performance obligation in the contract
- Determine the transaction price
- Allocate the transaction price to the p.o
- Revenue recognition when (or as) he entity satisfies a po
How does the concept of control play a role in determining when revenue is recognize?
Revenue recognized when customer gains control of the good or service, which may occur at any time
What is the difference between recognizing revenue at a point in time versus over time?
Point in time: Revenue is recognized when control of the good or service is transferred to the customer (e.g., delivery of goods).
Over time: Revenue is recognized as the company performs its obligations (e.g., construction contracts, long-term services).
What is the role of performance obligations in revenue recognition?
A performance obligation is a promise in a contract to transfer a good or service to a customer. It is recognized as revenue when the company satisfies the obligation (i.e., when control is transferred).
How do you determine the transaction price in a contract?
The transaction price is the amount of consideration expected to be received in exchange for transferring goods or services, including adjustments for variable consideration (e.g., discounts, incentives), financing components, non-cash consideration, and any consideration payable to the customer.
What factors should be considered when estimating variable consideration?
Nature of variability:
Volume discounts
Rebates, bonusses
future events
historical data
Experience with similar contracts
What are some examples of variable consideration in a contract (e.g., discounts, rebates, performance bonuses)?
Examples include performance bonuses (e.g., a percentage of sales), rebates or discounts based on future volume, penalties for non-performance, and incentives based on meeting targets.
What is a contract modification, and how does it affect revenue recognition?
A contract modification is a change to the scope or price of a contract. It can either be treated as a separate contract if the modification adds distinct goods or services at a price that reflects their standalone selling price, or part of the original contract if it doesn’t meet the criteria for a separate contract.
Company A sells a piece of machinery to Company B. The agreement includes free installation services that will be provided over the next 30 days. How should Company A recognize revenue?
Company A should allocate the transaction price between the machinery and installation services based on their relative standalone selling prices. Revenue for the machinery would be recognized at the point of sale (when control passes), while revenue for the installation services would be recognized over time as the services are provided.
A company enters into a long-term construction contract. How should revenue be recognized for this contract if the company is expected to complete the project in multiple phases over several months?
Revenue should be recognized over time based on the progress of the construction. Typically, the input method (e.g., costs incurred or labor hours expended) or output method (e.g., milestones achieved or units delivered) is used to measure the extent of performance.
Company X sells software licenses with a 12-month subscription. The customer also receives an update to the software that will be delivered within the next 6 months. How should Company X recognize revenue for the software license and the updates?
Revenue for the software license should be recognized over time (typically ratably) over the 12-month period. Revenue for the software updates should be recognized when they are provided to the customer as the updates are a distinct service.
If a company receives payment upfront for services that will be provided over a period of time, how should it recognize revenue over the service period?
The company should recognize the revenue over time as the service is provided. The payment is initially recorded as unearned revenue (liability), and revenue is recognized periodically as the service is performed.
A company sells a product to a customer but provides a 90-day right of return. How should the company recognize revenue, and how does the right of return affect the transaction price?
The company should estimate the expected returns and recognize revenue for the portion of the transaction price that is expected to be non-refundable. The estimated liability for returns should be recognized as a refund liability.
Company A offers a 1-year warranty on its products, and historically, 5% of products sold are returned. How should the company recognize revenue and account for the warranty?
The company should recognize the full revenue upon sale of the product and estimate the warranty costs based on historical return rates. The estimated warranty liability should be recognized as an expense and a provision at the time of sale.
How are costs of obtaining and fulfilling a contract treated under ASC 606?
Costs of obtaining a contract (e.g., sales commissions) should be capitalized if they are expected to be recovered and amortized over the period of the contract.
Costs of fulfilling a contract (e.g., setup costs, contract labor) should be capitalized if they are directly related to the contract and expected to be recovered.
What is the concept of a “contract liability” in revenue recognition, and how does it differ from a “contract asset”?
A contract liability is the obligation to transfer goods or services for which the company has received consideration (e.g., advance payments). A contract asset arises when a company has transferred goods or services but has not yet received the consideration (e.g., unbilled receivables).
In a multi-element arrangement, how should a company allocate the transaction price across different performance obligations?
The transaction price should be allocated based on the relative standalone selling prices of the performance obligations. If standalone selling prices are not directly observable, they may need to be estimated.
What is the difference between principal and agent relationships in revenue recognition?
n a principal relationship, the company controls the goods or services before transferring them to the customer and recognizes revenue based on the gross amount billed to the customer.
In an agent relationship, the company acts as an intermediary and recognizes revenue based on the net amount (the commission or fee) it earns.
How should revenue be recognized for a consignment arrangement where the consignee does not take ownership of the goods until sold?
Revenue should be recognized by the consignor when the goods are sold by the consignee to the customer, as that is when control passes to the custome
How are “gift cards” or “store credits” accounted for under revenue recognition rules?
Revenue for gift cards or store credits should be recognized when the card is redeemed, or when it is expected that the likelihood of redemption is remote. Until redemption, the company recognizes a liability for the unredeemed cards.
What are the revenue recognition implications for a company providing a “right to use” intangible asset (e.g., intellectual property or software)?
Revenue from a right to use intangible asset is recognized either at a point in time (if control is transferred) or over time (if the customer receives access to the asset throughout the contract term). If the asset is distinct, it may be treated as a separate performance obligation.
How should a company recognize revenue when it sells goods to a retailer but has to take the goods back if they are unsold after 90 days?
The company should recognize revenue only to the extent that it expects the goods to be sold. It should estimate returns and recognize a refund liability and an asset for the goods expected to be returned.
