F2-M1-Revenue Recognition Introduction

Question 1

For long-term construction-type contracts, when are losses recognized?

Answer 1

Immediately when discovered, regardless of the method used for revenue recognition.

Question 2

State the formula for recognizing the gain/loss on long-term construction-type contracts over time.

Answer 2

Total cost to date
Total estimated cost of contract
*
Total estimated gross profit
-
Gross profit recognized to date

Question 3

List the steps associated with the five-step approach to revenue recognition.

Answer 3

1 . Identify the contract with the customer
2. Identify the separate performance obligations in the contract
3. Determine the transaction price
4. Allocate the transaction price to the separate performance obligations
5. Recognize revenue when or as the entity satisfies each performance obligation

Question 4

What criteria must be met in order to recognize revenue on a contract?

Answer 4

1. All the parties have approved the contract and are committed to performing their obligations
2. The rights of each party are identified
3. Payment terms can be identified
4. Future cash flows are expected to change as a result of the contract (Commercial substance)
5. It is probable that the entity will collect substantially all of the consideration

Question 5

What criteria must be met in order for a performance obligation to be considered distinct?

Answer 5

1. The promise to transfer the good/service is separately identifiable from other goods or services in the contract.
2. The customer can benefit from the good/service independently or when combined with the customer’s own available resources

Question 6

Describe how allocation works when a contract contains more than one performance obligation

Answer 6

For contracts with more than one performance obligation, the overall contract transaction price should be allocated among each obligation based on the stand-alone selling price expected for satisfying each unique obligation (along with applying any discounts and/or variable consideration).

Question 7

Describe how revenue recognition differs when performance is satisfied over time versus at a point in time.

Answer 7

Revenue is recognized based on measuring progress toward completion using either output or input methods when the performance obligation is satisfied over time. In order to recognize revenue when performance is satisfied at a point in time, the customer must obtain control of the asset.

Question 8

Distinguish between the treatment of costs incurred in obtaining a contract as assets or as expenses

Answer 8

If an entity expects to recover these costs through the performance of the contract, the entity will treat them as assets. If the costs are incurred regardless of whether the contract is obtained, they are treated as expenses.

Question 9

How do control and revenue recognition differ when an entity acts as a principal versus when it acts as an agent.

Answer 9

A principal has control over the good/service prior to transfer, and revenue equal to expected gross consideration will be recognized. An agent does not have control, and revenue equal to the agent’s fee/ commission will be recognized

Question 10

What criteria must be met in order for a customer to obtain control in a bill-and-hold arrangement?

Answer 10

1. There must be a substantive reason for the agreement.
2. The product is separately identified as belonging to the customer.
3. The product is ready (in its current condition) for transfer to the customer.
4. The entity (seller) cannot use the product or direct it to another customer.

Question 11

When is a warranty considered a separate performance obligation within a contract?

Answer 11

If a customer has the option to purchase a warranty separately or if the warranty provides a service that is beyond the assurance that the product will comply with agreed-upon specifications, the warranty will be treated as a separate performance obligation. A portion of the overall transaction price should then be allocated to the warranty obligation

Question 12

Describe refund liabilities and when it is appropriate to book them.

Answer 12

A refund liability represents the amount of money an entity does not expect to be entitled to receive. Refund liabilities should be recognized in situations in which customers have a right to return and the entity anticipates having to return a portion of the consideration already received from customers.

Question 13

Identify two methods of revenue recognition for long-term construction-type contracts under U.S. GAAP

Answer 13

Long term construction contracts may be recognized:
1. Overtime or
2. At a point in time

Question 14

Define the transaction price when recognizing revenue

Answer 14

The transaction price is the amount of consideration an entity expects to receive in exchange for transferring goods/services to a customer

Question 15

What factors should be accounted for when determining the transaction price:

Answer 15

The price should take into account (if applicable):
1. Variable consideration
2. Significant financing
3. Noncash considerations
4. Consideration payable to the customer

Question 16

Describe the accounting treatment for forwards and call options related to repurchase agreements

Answer 16

Forward or Call Option
1. Repurchase price<Original price (lease)
2. Repurchase price >= Original selling price (financing arrangement)

Question 17

Describe the accounting treatment for put options related to repurchase agreements

Answer 17

Put Option:
1. Repurchase price < Original selling price
a. Customer has a
significant economic
incentive to exercise the
right (lease)
b. Customer does not have
significant economic
incentive (sale with a right
of return)

2. Repurchase price >= Original selling price
   a. Repurchase price is greater
   than expected market value
   of the asset (financing
   arrangement)
   b. Repurchase price is less
   than or equal to the expected
   market value of the asset and
   customer does not have a
   significant economic
   incentive to exercise the right
   (sale with a right of return)

Question 18

Define a consignment arrangement

Answer 18

A consignment arrangement exists when a dealer/distributor is tasked by an entity with selling the entity’s products to customers

Question 19

Identify indicators of a consignment arrangement

Answer 19

Indicators of a consignment arrangement include:
1. The entity controls the product until a specified event occurs (such as a sale to a customer)
2. The dealer/distributor does not have a unconditional obligation to pay the entity for the product
3. The entity has the authorization to require the return of the product or transfer the product to another party.