Chapter 6 Revenue

Question 1

Revenue recognition

Answer 1

The Conceptual Framework 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.

Question 2

Revenue from contracts with customers (IFRS 15)

Answer 2

Revenue is recognised when there is transfer of control to the customer from the entity supplying the goods or services.

IFRS 15 sets out a five step model:

1. Identify contract
2. Identify performance obligations
3. Determine transaction price
4. Allocate transaction price to performance obligations
5. Recognise revenue when (or as) performance obligation satisfied.

Question 3

Common types of transactions

Answer 3

1. Principal vs Agent
   An entity is a principal if it controls the promised goods or services before they are transferred to the customer.

An entity is an agent if it’s performance obligation is to arrange the provision of goods or services by another party. Revenue will be the amount of any fee or commission.

2. Repurchase arrangements
   An entity sells an item to a customer with a right or option to repurchase.
   - entity has an obligation to repurchase the asset (forward contract)
   - entity has the right to repurchase the asset (call option)
   - entity must repurchase the asset if requested to do so by the customer (put option)
3. Consignment arrangements
   The customer does not obtain control of the product at the delivery date. Inventory remains in the books of the entity and revenue is not recognised until control passes.
4. Bill and hold arrangements
   Goods sold and remain in possession of the seller for a specified period of time.

For a customer to obtain control of a product the following criteria must be met:-

1. The reason for the bill and hold must be substantive.
2. The product must be separately identified as belonging to the customer.
3. The product must be ready for physical transfer to the customer.
4. The entity cannot have the ability to use the product or transfer it to another customer.

Question 4

Performance obligations satisfied over time

Answer 4

An entity may transfer a good or service over time and therefore recognise revenue over time.

An entity must determine the amounts to include as revenue and costs in each accounting period where obligations are satisfied over time.

Output methods:-

1. Surveys of performance completed to date
2. Appraisals of results achieved
3. Time elapsed
4. Units produced or delivered

Input methods:-

1. Resources consumed
2. Labour hours explained
3. Costs incurred
4. Time elapsed
5. Machine hours used

If the entity undertakes a contract satisfied over time, they must determine what to include as revenue.

The amount of payment corresponds to the performance complete to date which approximates to the costs incurred in satisfying the performance obligations plus a reasonable profit margin.

The revenue and costs are recognised based on the proportion of work complete.

If the contract is expected to make a loss, it is recognised immediately.

Question 5

Government grants (IAS 20)

Answer 5

Grants are not recognised until there is reasonable assurance that the conditions will be complied with and the grants received.

Grants are shown in profit or loss either separately or part of other income or deducted from the related expense.

Government grants relating to assets are presented in the statement of financial position either as deferred income or by deducting the grant in the carrying amount of the asset.

Repayment of grants relating to income are applied first against any unamortised deferred credit and then in profit or loss.
Repayment of grants relating to assets are recorded by increasing the carrying amount of the asset or reducing the deferred income balance. Any cumulative extra depreciation is recognised in profit or loss immediately.