F1 - M4 - Revenue Recognition Part 2

Question 1

“Incremental Costs” of “Obtaining a Contract”

Answer 1

• Would NOT have incurred if contract not obtained
• Recognized as an ASSET, capitalized and amortized
• Example: Travel costs are NOT incremental so expensed.

Question 2

Costs to Fulfill Contract

Answer 2

Raw Materials, Direct Labor and FOH, CAPITALIZED

• Direct labor, materials, allocated costs – explicitly chargeable to customer
• Expected to be recovered
• EXPENSED = Selling, G&A, wasted labor / materials, costs tied to performance obligations

Question 3

Principal (gross) vs Agent (net) – Determine what the party is (Think websites)

Answer 3

Principal
o Controls good / service, Revenue = Gross
Agent
o “Arranges” for other party to provide good / service, Revenue = Net
o Another party is responsible to fulfil contract
o No inventory risk
o Can’t set prices
o Credit – Due to Other Companies, Credit – Revenue at percentage of fee, Debit – Cash

Question 4

Repurchase Agreements

Answer 4

Sale with RIGHT OF RETUEN / Financing Arrangement
- Entity sells an asset, PROMISES / OPTION, to repurchase asset. 3 forms:
A Forward = Obligation to Repurchase Asset
A Call Option = “Right” to repurchase asset
- Repurchase price greater than selling price = Financing Arrangement
A Put Option = “Customer’s Request” for entity to purchase asset
- Request LESS than selling price = Lease or Sale with Right of Return
- Request GREATER than selling price = financing arrangement,

Question 5

Bill and Hold Arrangements

Answer 5

Bills customer for a product and HAS NOT DELIVERED. Revenue recognized when CUSTOMER OBTAINS CONTROL OF THE PRODUCT.

Revenue if ALL met if not delivered

• “Substantive Reason” – customers request for it to be held
• “Separately” identified as belonging to the customer
• “Ready for transfer”
• Entity cannot use product

Question 6

Consignment

Answer 6

Dealer / distributor does NOT have control of product, Revenue recognized when product is SOLD

Consignment, NOT Revenue
o Entity controls product until something occurs (sale or time expires)
o Dealer does not have “unconditional obligation” to pay entity
o Entity can require a return of the product / transfer

Question 7

Warranties

Answer 7

Depends on “option” to purchase separately, Separately = “Distinct Service” / Separate Performance Obligation. If law requires, it’s not separate.

Question 8

Refund Liabilities and Right of Return

Answer 8

“Anticipates” having a refund portion, amount expected not to receive

• Revenue = Keep; transferred products
• Refund liability = Give back
• Asset related to the subsequent “recovery of products” when refund liability is settled

Question 9

Long-term Contracts: Construction, engineering, real estate and defense

Answer 9

ISTAR!
Identify
o Modifications, combined contracts, change orders
 Add on?, Clarifies? Document all changes
 Costs to obtain = capitalized and amortized
 Acquisition and fulfillment costs = capitalized and amortized
 Long term maintenance contracts vs warranties
• LTM = single performance obligation
• Warranties are not separate performance obligation

Separate Performance Obligations
o Sellers use “professional judgement”

Determine transaction price
o Amount expected to be entitled to, more than one year = PV
o Noncash = fair value
o Losses recognized immediately
o Onerous contract = cost to fulfill is greater than economic benefit, EG: no charge contracts, customer compliant, if whole contract will produce profit, do not need to recognize loss

Allocate the Transaction Price 
o	Stand alone selling price
o	Market observable prices 
-	Recognize revenue 
o	Over time or a point in time

Recognize revenue
o Over time or a point in time