F2 - Financial Reporting & Disclosures Flashcards
What is the five-step revenue recognition process?
In order to properly apply the revenue recognition standard, an entity should implement the five-step approach described below:
- Step 1: Identify the contract with the customer
- Step 2: Identify the separate performance obligations in the contract
- Step 3: Determine the transaction price
- Step 4: Allocate the transaction price to the separate performance obligations
- Step 5: Recognize revenue when or as the entity satisfies each performance obligation.
How do you assess a multiple service-related performance obligations?
When the services are all very similar in nature and can be provided to the buyer in a similar manner, this would indicate that the services can be combined into a single performance obligation. When the buyer can benefit from each service independently or in conjunction with her own available resources and when the promise to deliver each service is separately identifiable from the other services, then the performance obligation overall can be split apart into distinct components.
What is a contract modification and how is this treated?
A contract modification represents a change in the price or scope (or both) of a contract approved by both parties. The modification is treated as a new contract if the scope increases because of the addition of distinct goods or services and the change in contract price represents stand-alone prices
How do you identify a separate performance obligations?
A performance obligation is a promise to transfer a good or service to a customer. Identifying the performance obligation is step two of the five-step revenue recognition process. The transfer of the good/service can be a contractual agreement by the company to provide an individual good/service (or bundle) that is distinct for the customer, or a series of goods/services that are substantially the same and transferred in the same manner.
What are some examples of output methods and input methods to recognize revenue?
Milestones achieved (whether production or distribution related) are an example of an output method used to recognize revenue. Resource consumption, labor hours expended, and costs incurred relative to total expected costs are all examples of input methods.
How do you determine if the recognition of revenue should be over time instead of point in time?
If the buyer is benefitting as the seller performs per the terms of the contract, this is an indication that revenue should be recognized over time as opposed to at a point in time. The buyer having legal title to an asset indicates control, which is in line with recognizing revenue at a point in time. When rewards and risks of ownership remain with the seller, revenue would not be recognized. When physical possession transfers to the buyer, this is indicative of control, which implies revenue recognition at a point in time.
How do you calculate the amount that should be reflected as deferred revenue (or liability) ?
- Calculate total estimated profit
- Calculate the Percent completed
- Calculate gross profit earned to date
- Calculate the Actual costs incurred plus Gross Profit earned to date
- Compare #4 to Progress Billings to determine if there is a liability
How is estimated losses recognized in point in time and percentage of completion methods?
Estimated losses are recognized in full immediately (conservatism).
When revenue is recognized at a point in time, revenue is recognized when the contract is complete; however, expected losses are recognized immediately in their entirety
When do you book a transaction as a financing arrangement in terms of repurchase price?
The seller will book the transaction as a financing arrangement when the repurchase price is equal to or greater than the original sale price and the expected market value. In this case, the repurchase price of $60,000 is greater than both the original sale price of $55,000 and the expected market value of $58,000.
What amount should you record as revenue if there is a refund liability?
An entity should recognize a refund liability if it receives or expects to receive consideration from a customer and anticipates having to refund a portion or all of that consideration. The refund liability represents the amount an entity does not expect to be entitled to receive. In this case, Clothes Co. cannot book revenue at the time of sale because it cannot reasonably estimate returns. Because Link is given 12 months to return any clothing for a refund, once the 12-month period has passed, Clothes can then recognize revenue because any future returns will result in exchanges rather than refunds.
What is the result of the accounting changes that result in financial statements that are, in effect, the statements of a different reporting entity?
Financial statements of all prior periods presented should be restated when there is a “change in entity” such as result from:
1. Changing companies in consolidated financial statements.
2. Consolidated financial statements versus previous individual financial statements
What is the effect of a change in accounting principle if it is inseparable from the effect of a change in accounting estimate?
When the effect of a change in accounting principle is inseparable from the effect of a change in accounting estimate, the reporting treatment for the overall effect is as a change in estimate. Thus, the effect is reported PROSPECTIVELY as a component of income from continuing operations.
When there is a change in the reporting entity, how should the change be reported in the financial statements?
Retrospectively, including note disclosures, and application to all prior period financial statements presented.
If comparative financial statements are presented and a change of reporting entity has occurred, all previous financial statements that are presented in the comparative financial statements should be restated.
What is the effect of the change from cash basis of accounting to the accrual basis of accounting?
Effect of the change from cash basis of accounting to the accrual basis of accounting
- Prior period adjustment resulting from the change in accounting principle
- the cash basis for financial reporting is not a generally accepted accounting basis of accounting (GAA); therefore, it is an error. Correction of an error from a prior period is a reported as prior period adjustment to retained earnings.
What is the effect of the correction of error in the financial statements if the company is NOT presenting comparative financial statements?
If a company is NOT presenting comparative financial statements, The correction of an error in the financial statements of a prior period should be reported, net of tax, in the current statement of retained earnings as an adjustment of the opening balance.
What is the effect of the correction of error in the financial statements if the company is presenting comparative financial statements?
If a company is presenting comparative financial statements , the correction of an error in the financial statements of a prior period (Year 1 and 2) should be:
- restatement of prior year’s financial statements (Year 1 and 2). The carrying amounts of the assets and liabilities for these years will be corrected in each year’s financial statements and shown as restated in the comparative financial statements. As of the beginning of Year 3, the cumulative effect of the error will have been corrected and reflected in the carrying amounts of the affected assets and liabilities.
