F1_Module 3 Income Recognition - part 1 Flashcards
When does Revenue Recognition occur?
Revenue recognition occurs when an entity satisfies a performance obligation by transferring either a good or service to a customer. (I am a Star when I recognize REVENUE!!!)
What is the 5-step approach an entity should implement to properly apply the revenue recognition standard?
I-S-T-A-R
(I) Step 1: (I)dentify the contract with the customer.
(S) Step 2: Identify the (s)eparate performance obligations in the contract.
(T) Step 3: Determine the (t)ransaction price.
(A) Step 4: (A)llocate the transaction price to the separate performance obligations.
(R) Step 5: Recognize revenue when or as the entity satisfies each performance obligation.
What criteria must be met for the step 1 of 5 for revenue recognition (Identify)?
(I) S T A R
Step 1: (I)dentify: The following 5 criteria must be met:
a) All parties have approved the contract and have committed to perform their obligations.
b) The rights of each party regarding the contracted goods or services are identified.
c) Payment terms can be identified.
d) The contract has commercial substance, meaning future cashflows as expected to change as a result of tbe contract.
e) It is probable (based on the customers ability to pay when due) that the entity will collect substantially all of the consideration due under the contract.
What criteria must be met for the step 2 of 5 for revenue recognition (Separate)
I (S) T A R
Step 2: (S)eparate performance obligations.
a) The promise to transfer the good or service is separately identifiable from other goods and services in the contract; and
b) The customer can benefit either from the good or service independently or when combined with the customer’s available resources.
How do you determine the transaction price (T) as step 3 of 5 of revenue recognition?
I S (T) A R Step 2: (T)ransaction price determination. Consider the effects of
a) Variable consideration (WA or Most likely).
b) Significant Financing (<1 year do not discount).
c) Non-Cash Considerations (fair value at inception).
d) Any consideration payable to the customer (credits vouchers etc. should reduce the transaction price).
What are some variable consideration examples and how do you calculate it?
Bonus, penalty, discount, time value (paid over one year) are some examples.
Probability Weighted Average = Lots of options.
Most likely = When you have only 2-3 options (will you get it or not, rule of conservatism so you don’t have to reverser out revenue).
How should the transaction price be (A)llocated (step 4)?
Transaction price should be allocated to each separate performance obligation on a proportional basis (relative FMV Stand-alone-selling-price of each item).
When a performance obligation is satisfied and revenue recognized over-time, what are the two methods used to measure these?
Annual services, subscriptions, and similar services can be recognized over time. There are two methods of measuring over-time satisfaction. The (1) output method, i.e. number of goods delivered and the (2) input method, i.e. the cost incurred.
What is the criteria for recognizing revenue at a point in time?
This happens when the customer obtains control of the asset.
