F2 - 7. Revenue Recognition

Question 1

What are the 5 steps in the revenue recognition model?

Answer 1

1. Identify the Contract
2. Identify the performance Obligations
3. Determine the transaction Price
4. Allocate the transaction price based on performance obligations
5. Recognise revenue as each obligation is satisfied

Question 2

What is a performance obligation?

Answer 2

A promise in the contract to provide a good or service

Question 3

What causes a performance obligation to be classified as distinct?

Answer 3

The customer could benefit from the good or service on its own, and the promise to deliver the good or service is separately identifiable in the contract

Question 4

What are the 3 main considerations influencing transaction price recognition?

Answer 4

1. If significant financing is involved, discount back to present value
2. Variable consideration
3. Non cash consideration - fair value

Question 5

How do you allocate transaction price to each performance obligation?

Answer 5

Based on stand alone selling price of each good or service

Question 6

What are the 3 possible criteria for a performance obligation being satisfied over time?

Answer 6

1. Simultaneous receipt and consumption of benefit (e.g. cleaning)
2. Entity controls asset as it is created (e.g. WIP in construction)
3. No alternative use to provider (e.g. website development)

Question 7

When is revenue recognised?

Answer 7

When control passes (either point in time or over time)

Question 8

What are the 2 methods for recognising revenue over time?

Answer 8

1. Output (% complete)

2. Input (costs)

Question 9

What are the 2 types of warranty?

Answer 9

1. Provide with assurance that the product complies with specifications
2. Provides the customer with a service in addition

Question 10

When is a warranty treated as a separate performance obligation?

Answer 10

If there is an option to purchase a warranty separately

Question 11

What is the substance of a repurchase agreement?

Answer 11

A secured loan - haven’t really sold the asset

Question 12

How do we recognise repurchase agreements?

Answer 12

Continue to recognise the asset on the SoFP, recognise a financial liability for any consideration received from the customer

Question 13

What are consignment inventories?

Answer 13

A seller delivers a product to another party for sale to end customers, but retains control of the product

Question 14

When should an organisation recognise revenue for consignment inventories?

Answer 14

Upon delivery to the final customer