F1 - M3 - Revenue Recognition Part 1

Question 1

Revenue recognition

Answer 1

entity satisfies a performance obligation, transfer good / service, amount / expected consideration, “enter into contracts” – subject to revenue recognition standard

Question 2

The FIVE STEP APPROACH - ISTAR

Answer 2

• “Identify” contract w/ customer
• “Separate” performance obligations
• “Transaction” Price
• “Allocate” price to each performance obligation
• “Recognize” revenue – satisfies each performance obligation

Question 3

ISTAR - “Identify” contract w/ customer

Answer 3

o Agreement two or more parties, enforceable rights, verbal, written or implied
o Criteria to recognize – contract meets ALL criteria, assessment = contract inception
 All parties have approved
 Rights are identified
 Payment terms identified
o Contract has “commercial substance” and “future cash flows”
o Probable entity will collect consideration
 *If collected and not all met AND nonrefundable, its revenue
o Rule of Conservatism = Revenue when job is DONE / EARNED

Question 4

ISTAR - “Separate” performance obligations

Answer 4

o Break the “stuff” into pieces, recognize revenue by separate performance obligation
o “Distinct” good or service, separately identifiable, customer benefit “independently”
 Example of NOT separately identifiable
• Highly interrelated / interdependent
• Integrating good / service with others
o EG – Hardware and software, Design and Build

Question 5

ISTAR - “Transaction” Price

Answer 5

o Consideration “expect” to be entitled to
o “Variable” Consideration
 Bonus, Penalty, Discount, Time Value
 Estimated using expected value
 Two types – “Conservatism”
• Probability Weighted Average = Lots of options
• Most Likely = Few options
o Significant Financing
 Time value of money = adjustment to transaction price, if significant benefit
 Revenue recognized = Price would have been paid in cash at the TIME OF TRANSFER
 Greater than one year
o Noncash Consideration = Fair Value at contract inception
 FV at inception date
o Consideration Payable to a Customer
 Reduction in the transaction price

Question 6

ISTAR - “Allocate” price to each performance obligation

Answer 6

o If more than one performance obligation, allocated to each separate performance obligation
o Proportional basis – FMV
o Stand-alone selling price = price allocated in proportion
o Discounts = proportion

Question 7

ISTAR - “Recognize” revenue – satisfies each performance obligation

Answer 7

o Transfer of Control – obtain “benefits”