FAR Recap

Question 1

Revenue definition

Answer 1

Income arising in the course of an entity’s ordinary activities

Results from

• Sale of goods
• Rendering of services
• Receipt of interest, royalties and dividends

Question 2

Step 1

Answer 2

Identify the contract

Question 3

Step 2

Answer 3

Identify the performance obligations, must be distinct

Common eg - sale of motor vehicle, and provision of servicing for 2 years

Question 4

Step 2 - Principal vs agent

Answer 4

Principal - provides goods or services itself, or controls goods or services before transfers to buyer

Agent - arranges goods or services to be provided by another party, only entitled to recognise commission as revenue

Question 5

Step 2 - Warranties

Answer 5

Providing extra service, or purchased separately - separate PO, IFRS 15

Assurance item will work - provision under IAS 37

Question 6

Step 3

Answer 6

Determine the transaction price

Question 7

Step 3 - Variable consideration

Answer 7

Eg bonus or penalty - entity must estimate amount expects to receive

Only include this in transaction price if highly probable that significant reversal in amount of revenue recognised will not occur when und=certainty is resolved.

Question 8

Step 3 - Financing

Answer 8

Adjust promised consideration for TVOM

Only if customer paying in >12m

Question 9

Step 3 - Non-cash consideration

Answer 9

Measure at FV

Question 10

Step 4

Answer 10

Allocate transaction price to each PO in proportion to standalone selling prices - these must be estimated if not directly observable

Question 11

Step 5

Answer 11

Recognise revenue

When or as PO satisfied by transferring good or service to customer

Must determine at contract inception if PO satisfied over time or at a point in time, recognise revenue in line

Question 12

Step 5 - PO satisfied over time criteria

Answer 12

• Customer simultaneously receives and consumes benefits from entity’s performance; OR
• Entity creating or enhancing asset owned by customer; OR
• Entity cannot use asset for alternative use, and entity can demand payment for its performance to date

If outcome of contract cannot be reliably determined, revenue recognised is restricted to costs incurred which are recoverable from the customer.

Question 13

Step 5 - PO satisfied at a point in time

Answer 13

If not satisfied over time

Normally when customer obtains control of promised asset

Question 14

Step 5 - Control of an asset

Answer 14

Entity controls an asset if it can direct its use and obtain its remaining benefits

Indicators of control passing to customer:

• Customer has physical possession
• Customer has accepted

Customer has significant risks and rewards of ownership

• Customer has legal title to the asset
• Seller has right to payment

Question 15

Step 5 - Sale and repurchase

Answer 15

Not exposed to risks and reward of ownership as repurchase is at a fixed price

Long term benefits remain with seller eg full access to property during arrangement, expected to exercise option to repurchase as repurchase price below MV

No sale, keep property in seller’s accounts, substance is a loan secured on property

Loan amount = proceeds, Dr Cash, Cr Loan

Interest to P/L= proceeds - repurchase amount (time apportion), Dr P/L, Cr Loan

Question 16

Step 5 - Consignment sales

Answer 16

Where buyer undertakes to sell on behalf of seller

Original seller only recognises sale when buyer sells on to third party

Question 17

Step 5 - Bill and hold arrangements

Answer 17

Entity bills customer but delivery delayed with agreement of customer

Entity must determine whether control has transferred to customer

Question 18

Step 5 - Sale with right of return (refunds)

Answer 18

Dr Revenue for goods transferred, Cr Liability for refunds (returned x selling price)

Dr Asset for right to recover products (returned x cost), Dr COS (total - returned) x cost, Cr Inventory (total x cost)

Question 19

Step 5 - Unbundling goods and services

Cash sale of 1m 1 July X1, computer + 2 yrs of support, support cost = £200k pa, 20% markup

Answer 19

Split 1m between good and service

Service rev: 200x x 120/100 x 2 = £480k over 2 yrs

Goods rev: £520k at point in time

Dr Cash 1m
Cr Rev for yr = 520k + 480x x 6/24 = £640k
Cr DI: 1m - (480k x 6/24) - 520k = £360k

Question 20

Disclosure

Answer 20

Revenue from contracts with customers disclosed separately from other sources

Question 21

Step 1 - Can only account for revenue from a contract if

Answer 21

• Parties have approved the contract and rights can be identified
• Payment terms can be identified
• Contract has commercial substance
• Probable that selling entity will receive consideration

Question 22

Step 1 - What is a contract?

Answer 22

A contract is an agreement between two parties that creates rights and obligations

Question 23

Step 2 - What is meant by a performance obligation?

Answer 23

POs = promises to transfer distinct goods or services to a customer. A good or service is distinct if it can be sold separately and has a distinct function.