FAR 2 Module 1

Question 1

How does an anticipated overall contract loss affect operating income under U.S. GAAP for revenue recognized over time or at a point in time?

Answer 1

1. Revenue Recognized Over Time:
   The entire anticipated loss must be recognized immediately, decreasing operating income.
2. Revenue Recognized at a Point in Time:
   The entire anticipated loss must still be recognized in the period identified, decreasing operating income.

Key Rule: Total anticipated contract losses are recognized immediately, regardless of the revenue recognition method.

Both are methods of revenue recognition for long-term construction-type contracts

Question 2

I am a STAR

Answer 2

Revenue recognition Five Step Approach

I STAR
Step 1: Identify the contract with the customer

Step 2: Separate performance obligations: identify the Separate performance obligations in the contract

Step 3: Transaction price: 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

Question 3

What is the criteria for treating multiple service-related performance obligations as distinct

Answer 3

1. The buyer is able to benefit from each service independently.
2. The promise to deliver each service is separately identifiable from the other services.
3. The buyer can benefit from each service when combined with her other available resources.

Question 4

What does contract modification represent? What is an example?

Answer 4

A contract modification represents a change in price or scope agreed upon parties

If the scope increases with goods or services and the price reflects their stand-alone value, its treated as a new contract.

Question 5

When can revenue be recognized in a bill-and-hold arrangement under US GAAP

Answer 5

1. The goods are complete and ready for delivery.
2. The customer has requested the goods to be held for a valid reason.
3. The goods are identified and set aside for the customer.

4.The seller cannot use or redirect the goods.

Question 6

What are the formulas used when calculating recognized revenue over time?

Answer 6

Estimate profit =
Contract price - (Total actual + estimate cost)

Percent complete =
Total actual cost
_____________________________
(Total actual + estimate cost)

Current profit =
Estimated profit X Percent complete

Gross profit = current profit - income recognized

Note: Estimated losses are recognized in full immediately (conservatism).

Question 7

What is the difference between revenue recognition over a point in time vs. over a period of time?

Answer 7

1. Point in Time: Revenue is recognized when the contract is complete, but expected losses are recognized immediately (Not multiplied by the progress complete ratio)
2. Period of Time: Revenue is recognized progressively as the performance obligation is fulfilled (e.g., long-term construction projects using the percentage of completion method).

combine:
Current profit with the Ratio
estimated losses without ratio

Question 8

When is a repurchase agreement treated as a financing arrangement instead of a sale?

Answer 8

It’s treated as a financing arrangement if:

The repurchase price is higher than the expected market value of the asset.

Why? The buyer is unlikely to keep the asset and is essentially giving the seller a loan with the asset as collateral.

Question 9

What is a financing arrangement?

Answer 9

an agreement where a transaction is treated as a loan or borrowing rather than a sale.

Question 10

What happens to revenue and inventory when goods are consigned?

Answer 10

The owner of the goods (Consignor) send them to another party to sell while retaining ownership until goods are sold

Inventory: Stays with the Consignor and is recorded on their books

Revenue: Belongs to the owner. The selling party (Consignee) reports the commission they earn on their side