F2 M1: Revenue Recognition Flashcards
GAAP cash basis of accounting
Recognize revenue when the cash is collected/received
GAAP accrual basis of accounting
Fees are paid in advance, recognize revenue over the contract years as services are performed
The Criteria of a Distinct service obligation (3)
- Buyer can benefit from each service when combined with other available resources
- Buyer is able to benefit from each service independently
- The promise to deliver each service is separately identifiable from the other services
Contract modification represents a…
change in the price or scope (or both) of a contract approved by both parties
Performance obligation
A promise to transfer a good or service to a customer
Collections received for service contracts should be recorded as
An increase (Cr.??) to Unearned Service Revenue
When service contracts are sold
Deferred Revenue (unearned liability) increases
Service Revenue (earned income) does not increase until service are performed
How should discounts that exist in a contract be allocated?
Any discount that exists in a contract should be allocated proportionately across all obligations within the contract
Deferred revenue is a liability until
The service has been performed
(Remember deferred revenue is an unearned liability)
Revenues have been received in cash but not yet earned
Deferred revenue
Deferred revenue represents
Billing for services that have not yet been performed
A deferred revenue of one company is a ________ on the books of another
Prepaid expense
?? What is the Revenue Recognition Rule??
Revenue cannot be recognized until the performance obligation is satisfied
Input and Output methods are used to measure what
Progress towards completion
In order to recognize revenue and entity must,
Must be able to measure progress towards completion
When using an Output Method to recognize revenue/measure completion, the revenue recognized is based on
The value of the goods/services transferred (to date) to the customer relative to the remaining goods/services promised
Examples of output method of revenue recognition
Units produced or delivered
Milestones achieved
Appraisals of results achieved
Surveys of performance toward complete satisfaction
What is revenue recognized based on when using the Input method
The entity’s efforts(inputs) to the satisfaction of the performance obligation relative to the total expected inputs
Examples of input methods
- Resource consumption
- Labor hours expended
- Time elapsed
- Costs incurred relative to total expected costs
Disadvantage of input methods
May not be a direct relationship between an entity’s inputs and the transfer of control of goods/services to a customer
If benefits are received by the buyer as the seller performs, revenue is recognized
Over time
If a buyer has legal title to an asset, the seller would recognize revenue
At a point in time, the buyer having legal title indicates control
If the buyer is benefiting as the seller performs the terms of the contract, revenue is recognized by the seller
Over time
If Physical possession transfers to the buyer, the seller will recognize revenue
At a point in time, transfer of possession indications control
Revenue is recognized over time when any of the 3 criteria is met. What are the 3 criteria
- Entity’s performance creates or enhances the asset (WIP) that the customer controls
- Customer simultaneously receives and consumes the benefits of the entity’s performs
- Entity’s performance does not create an asset with alternative use to the entity, and the entity has enforceable right to receive payment or performance completed to date
Revenue should be recognized at a point in time when the customer
Obtains control over the asset
Control over an asset would require:
- Entity has right to payment and customer has an obligation to pay for an asset
- Entity has transferred physical possession
- Customer has legal title to the asset
- Customer has significant reward and risks of ownership
- Customer has accepted the ownership
A contract asset/liability should be presented where and when?
Where: in the statement of financial position
When: when either party has performed in a contract
reflects an entity’s right to consideration in exchange for goods or services that the entity has transferred to the customer
Contract asset
(Entity has performed prior to customer paying or prior to payment due date)
Must be booked when an entity has an obligation to transfer goods or services to a customer
Contract liability
Customer pays or owes payment before the entity performs
(Entity has either already received consideration from the customer or customer owes consideration and it’s unconditional)
