F2 - M1 - Revenue Recognition Introduction

Question 1

For revenue recognition, what is the “ISTAR” acronym?

Answer 1

This is the five step approach for when an entity should recognize revenue.

I - Identify the contract

S - Identify the separate performance obligations in the contract

T - Determine the transaction price

A - Allocate the transaction price to the separate performance obligations

R - Recognize revenue when or as the entity satisfies each performance obligation.

Question 2

Under “I” of “ISTAR” how is a contract enforceable?

Answer 2

The contract can be either verbal, written, or implied.

Question 3

For the combination of contracts, how should these be handled?

Answer 3

When two or more contracts are entered into with the same customer the contracts should be combined and accounted for as a single contract if:

The contracts are negotiated as a package with a single commercial objective.

Consideration for one contract is tied to the performance or price of another contract; or

the goods/services promised represent a single performance obligation.

Question 4

What is a contract modification? Does this create a new contract?

Answer 4

A contract modification is when the contract has a change to it.

New contract - only if the scope increased due to new goods or services. Like building a pool on top of the agreement of building a home. Or the price increases

A modification is if it is not a major change, and they will adjust revenue to reflect the change in the transaction price.

Question 5

In S of ISTAR what are the separate performance obligations?

Answer 5

This is a promise to transfer a good or service to a customer. The transfers can be either

Individual goods or services, or one bundle of goods or services that is distinct; or

a series of goods or services that are basically the same and are transferred in the same manner.

Remember, if one good or service is not distinct from other goods or services, they will be combined to one single performance obligation.

Question 6

What are the two criteria needed for an order to be distinct?

Answer 6

Promise to transfer the good or services is separately identifiable form other goods or services in the contract; and

Customer can benefit either from the good or service independently or when combined with the customer’s available resources.

Question 7

What are the two ways a good or service can be separately identifiable?

Answer 7

The entity does not integrate the good or service with other goods or services in the contract - You hire a firm to design the blueprint of your home and build the home. Those are so intertwined, that they are on obligation.

The good or service does not customize or modify another good or service in the contract

The good or service does not depend on or relate to other goods or services promised in the contract.

Question 8

In determining the transaction price, what are the four things we need to consider?

Answer 8

Variable consideration - This is more of an estimation of how much you will get. You want to be conservatives, because they might not pay you as much as you estimated.

Significant financing - Payment terms and loan amounts. If there is no loan, you have to use the discount rate and bring it back to the present value. Not needed, if you pay back in one year.

Noncash considerations - Pay you in something other than cash. Consideration is the fair value of the item. Now if you offer incentives to the customer for paying early, like knocking down a few bucks, then you just reduce the transaction price if they do it.

Any consideration payable to the customer -

Question 9

What’s allocating the transaction price to the performance obligations of a contract?

Answer 9

If there are separate performance obligations, then you need to allocate the transaction price, any discounts, variable considerations, change in transaction price

Question 10

For the R in ISTAR, what are the ways obligations may be satisfied?

Answer 10

They can either be satisifed over time or at a point in time.

Over time -

Point in time -

Question 11

What are some ways it is satisifed over time?

Answer 11

An entity enhances an asset that a customer controls. An example of this is installing the latest antivirus on your computer for a charge. This could be an annual service contract.

Customer receives the benefits of the entities performance as the entity performs it. This is like a subscription service.

Entity does not make an asset with an alternative use to the entity. Not basic inventory.

Entity must be able to measure progress toward it’s completion. Progress can be measured using the output or input method.

Question 12

What is the output method?

Answer 12

This is more like a subscription service, need to google.

Question 13

What is the input method?

Answer 13

This is where you cannot measure progress. Think of a CPA firm where the time you put in is billed to client. Or a gym.

Question 14

What is revenue that is satisfied point in time?

Answer 14

This is like when you go to a grocery store, buy some items, and the transfer happens in real time.

Customer accepted the asset, entity has right to payment, entity transferred possession of the asset, customer has legal title and risk of asset.

Question 15

When would you recognize revenue?

Answer 15

When the good has been delivered or completed, and when the service has been performed.

Question 16

What are areas that do not use the revenue recognition standards?

Answer 16

Leases

Insurance

Non-Warranty Guarantees

Financial instruments

Question 17

For construction contracts, what are some of the ways the revenue can be recognized?

Answer 17

One way is to divide the total costs incurred to the total project costs, and that is what you recognized as revenue. So, if you put 100,000 in costs but the project costs 1,000,000. That is 10% completion so you recognize 10% as revenue.

Question 18

What is the formula for computing construction revenue over time.

Answer 18

Step 1: Contract Price - Estimated total cost = Gross Profit

Step 2: Total cost to date/ total estimated cost of contract

Step 3: Step 1 * Step 2 = PTD

Step 4: PTD at current FYE (PTD at beginning of period)/ Current year to date GP

Question 19

For construction contracts, do you recognize losses right away?

Answer 19

Yes

Question 20

Can construction projects be point in time? What are some examples of this?

Answer 20

Yes, this would be when a customer does not have control of the asset, and pay the full price upon completion. You recognize no revenue until the project is completed, unlike the revenue over time method.

Question 21

What is the best way to help remember the input method?

Answer 21

They way I understand it that companies measure their revenue based on the input they used to perform that good or service. Examples include:

Labor hours

Resources consumed

Cost incurred to total expected costs.