FAR Recap Flashcards
Revenue definition
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
Step 1
Identify the contract
Step 2
Identify the performance obligations, must be distinct
Common eg - sale of motor vehicle, and provision of servicing for 2 years
Step 2 - Principal vs agent
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
Step 2 - Warranties
Providing extra service, or purchased separately - separate PO, IFRS 15
Assurance item will work - provision under IAS 37
Step 3
Determine the transaction price
Step 3 - Variable consideration
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.
Step 3 - Financing
Adjust promised consideration for TVOM
Only if customer paying in >12m
Step 3 - Non-cash consideration
Measure at FV
Step 4
Allocate transaction price to each PO in proportion to standalone selling prices - these must be estimated if not directly observable
Step 5
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
Step 5 - PO satisfied over time criteria
- 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.
Step 5 - PO satisfied at a point in time
If not satisfied over time
Normally when customer obtains control of promised asset
Step 5 - Control of an asset
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
Step 5 - Sale and repurchase
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
Step 5 - Consignment sales
Where buyer undertakes to sell on behalf of seller
Original seller only recognises sale when buyer sells on to third party
Step 5 - Bill and hold arrangements
Entity bills customer but delivery delayed with agreement of customer
Entity must determine whether control has transferred to customer
Step 5 - Sale with right of return (refunds)
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)
Step 5 - Unbundling goods and services
Cash sale of 1m 1 July X1, computer + 2 yrs of support, support cost = £200k pa, 20% markup
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
Disclosure
Revenue from contracts with customers disclosed separately from other sources
Step 1 - Can only account for revenue from a contract if
- 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
Step 1 - What is a contract?
A contract is an agreement between two parties that creates rights and obligations
Step 2 - What is meant by a performance obligation?
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.
