F2:M1-Revenue Recognition Intro Flashcards
What is the Five-Step Approach to recognize revenue?
ISTAR
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 satisfied a performance obligation.
When is revenue recognized at a point in time?
Revenue is recognized the moment control is transferred to the customer. This usually happens at delivery, installation or handover.
Typical Indicators:
- Transfer of physical possession
- Legal title passes
- Customer accepts the asset
- Payment become due
When is revenue recognized over time?
1) Customer receives and consumes the benefit as the entity performs (Ex. subscriptions, ongoing maintenance).
2) Customer controls the asset as it is created or enhanced (Ex. construction, customer manufacturing or long-term projects).
3) The asset being created has no alternative use and entity has enforceable right to payment (Ex. custom build for client, built for unique needs, can’t be sold to other clients).
What is Variable Consideration?
When the amount of consideration (revenue) you expect to receive is not fixed at the time of the contract and could change based on future events.
Part (or all) of transaction price depend on things like: performance bonuses, penalties, discounts, rebates, refunds, price concessions, sales incentives, etc.
What is a Contract Liability?
A contract liability arises when the seller has received consideration (cash or billing) but has not yet performed the service or delivered the good.
It represents an obligation to transfer goods or services in the future.
THINK: “I got paid (or billed), but I still owe the customer something.”
What is a Contract Asset?
A contract asset arises when the seller has performed (earned revenue) but has not yet billed the customer.
It represents a right to consideration in exchange for goods/services that have already been transferred, but where **payment is conditional **on something other than just the passage of time (e.g., performance milestones).
THINK: “I’ve done the work, but I haven’t billed yet.”
What criteria must be met in order to recognize revenue on a contract?
All the parties have approved the contract and are committed to performing their obligations.
The rights of each party are identified.
Payment terms can be identified.
Future cash flows are expected to change as a result of the contract (oommercial substance).
tis probable that the entity will collect substantially all of
the consideration.
What criteria must be in order for a performance obligation to be considered distinct?
• The promise to transfer the good/service is separately
identifiable from other goods or services in the contract.
• The customer can benefit from the good/service
independently or when combined with the customer’s own available resources.
Define the transaction price when recognizing revenue.
The transaction price is the amount of consideration (revenue) and entity expects to receive in exchange for transferring goods/services to a customer.
What factors should be accounted for when determining the transaction price?
The price should take into account (if applicable):
Variable consideration
Significant financing
Noncash considerations
Consideration payable to the customer
What is consideration?
Consideration is something of value exchanged between parties in a contract.
- Can be money, goods, services, or a promise
- Each party must give and receive something
- It forms the bargained-for exchange
- Required for a contract to be legally enforceable
Describe how allocation works when a contract contains more than one performance obligation
