F1M4 Specific Application of Revenue Recognition Flashcards
Incremental Costs
Incremental Costs are costs incurred only if a contract was successfully obtained. They are capitalized if recovery is expected. (Legal and Commissions)
Costs incurred regardless of success are expensed. (Travel and Meals)
Cost to Fulfill a Contract
Costs that enhance an entity’s resources and directly relate to fulfilling a contract are capitalized if recovery is expected. (Adding a new workstation specifically for a contract)
Costs from reassigning or modifying resources already tied to a performance obligation/contract are expensed. (Reassigning an existing employee or modifying an existing system)
General Rule for Capitalizing Costs
At a minimum, recovery of the cost is expected to capitalize costs. There are also other rules like Incremental Cost and Cost to Fulfil a Contract.
Principal and Agent Arrangement
The Principal has everything: Inventory Control, Risk, and Pricing power. Therefore, they record all proceeds from the agent as Gross Revenues.
The Agent only arranges the sale. It has no Inventory Control, Risk, or Pricing power. Their revenue is only the agent fee or sales commission.
Repurchase Agreements
Contract to sell an asset back. There are three types: must forward, can call, and customer put.
Forward and Call options just depend on price differences. Put options also look at incentives first and then price differences.
Put Options
The customer can put it back into the seller’s hands.
Recording it depends on incentives and price differences.
There is an incentive if the repurchase price is more than the market value since it is more worth to sell it back than to sell to the market.
If there is the incentive, we look at the price difference.
If there is no incentive, it is a regular sale with a right return regardless of price difference.
Price difference for presenting Repurchase Agreements
We look at the repurchase price relative to the orignial price.
It is a Lease if the original price is less.
It is a Financing arrangement if the original price is equal or more.
Financial Arrangement presentation
For Financial arrangements, “Financial Liability” is used as the suspense account until cash and interest expense becomes revenue.
Bill and Hold Arrangements
Revenue before delivery is only allowed if all criteria are met.
There is a good reason, it is separated, ready for transfer, and the entity can’t use or transfer to another customer.
(Note that the arrangement itself can be considered a custodial service that will be recognized over time.)
Consignment
Consignment is only revenue once it reaches end customer. Revenue to Consignor is netted for the sales commission.
Consignors have control and require the dealer to return or transfer the products.
The Consignee or Dealer is not obligated to pay back until a product is sold to the customer.
Warranties
Warrenties depend on if it optional or required.
Optional warrenties are distinct services and is another performance obligation to allocate transaction price.
Require warrenties are not distinct services and can be required by law or contracts.
Refund Liabilities
Refund Liabilities are amounts received by expected to be refunded.
If can’t estimate the return, it will wait until the return period is over to record Revenue and Refund Liabilities.
Accounting for products with a right of return have three parts.
Revenue, Refund Liability, and Asset.
Amounts you keep are Revenue.
Amount you plan to give back are Refund Liabilities.
Amounts you get back for once Refund Liabiliites settle are assets.
