FAR F2 Flashcards
List the steps associated with the 5 step approach to revenue recognition
ISTAR
#1 I- Identify the contract with the customer
#2S- Identify the separate performance obligations in the contract
#3T- Determine the transaction price
#4A- Allocate the transaction price to the separate performance obligations
#5R- Recognize revenue when or as the entity satisfies each performance obligation
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 (commercial substance)
It is probable that the entity will collect substantially all of the consideration.
What criteria must be met 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 customers own available resources.
Define the transaction price when recognizing revenue
The transaction price is the amount of consideration an 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:
- Variable consideration
-Significant financing
- Noncash considerations
Describe how allocation works when a contract contains more than one performance obligation
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/pr variable consideration).
Describe how revenue recognition differs when performance is satisfied over time vs. at a point in time
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 mist obtain control of the asset.
Identify 2 methods of revenue recognition for long-term construction type contracts under GAAP
Long term construction contracts may be recognized:
Over time
at a point in time
For long-term construction type contracts. when are losses recognized?
immediately when discovered, regardless of the method used for revenue recognition
state the formula for recognizing the gain/loss on long-term construction-type contracts over time
Total cost to date & Total estimated cost of contract * Total estimated gross profit- gross profit recognized to date
Distinguish between the treatment of costs incurred in obtaining a contract as assets or as expenses
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.
How do control and revenue recognition differ when an entity acts as a principal vs. when it acts as an agent
A principle 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 tot he agents fee/commission will be recognized.
Describe the accounting treatment for forwards and call options related to repurchase agreements
Forward or call option
- Repurchase price < original price (lease)
- Repurchase price >_ original selling price (financing arrangement)
Describe the accounting treatment for put options related to repurchase agreements
Put option
- Repurchase price < original price
- customer has a significant economic incentive to exercise the right (lease)
- Customer does not have significant economic incentive (Sale with a right of return)
What criteria must be met in order for a customer to obtain control in a bill-and-hold arrangement
- There must be a substantive reason for the arrangement
- The product is separately identified as belonging to the customer
- The product is ready (in its current condition) for transfer to the customer
- The entity (seller) cannot use the product or direct it to another customer.
Define a consignment arrangement
A consignment arrangement exists when a dealer/distributor is tasked by an entity with selling the entity’s products to customers.
Identify indicators of a consignment arrangement
indicators of a consignment arrangement include:
- The entity controls the product until a specified event occurs (such as a sale to a customer)
- The dealer/distributor does not have an unconditional obligation to pay the entity for the product.
- The entity has the authorization to require the return of the product or transfer the product to another party.
When is a warranty considered a separate performance obligation within a contract?
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 separately performance obligation,
A portion of the overall transaction price should then be allocated to the warranty obligation.
Describe refund liabilities and when it it appropriate to book them
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.
How is a change in an accounting estimate reported?
Prospectively
How is in accounting principle reported?
- Cumulative effect of change is included in the retained earnings statement as an adjustment of the beginning retained earnings balance of the earliest year presented.
- Prior period financial statements are restated, if presented
- RETROSPECTIVELY
What are the special exceptions to the general rule for the reporting of changes in an accounting principle?
How are these exceptions reported?
-Changes where it is impracticable to estimate the cumulative effect adjustment, E.G.- a change to LIFO from another method of inventory pricing under GAAP or a change in depreciation methods.
Such exceptions are accounted for prospectively, like a change in accounting estimate.
Name 3 types of accounting changes
-Change in accounting principle
-Change in accounting estimate
-Change in accounting entity
Under GAAP how is a change in the accounting entity reported?
All current and prior period Financial statements presented are restated.
