FAR Revenue recognition

Question 1

What are the steps in revenue recognition?

Answer 1

I am a S T A R
1. I - Identity the contract with the customer
2. S - Separate performance obligations are identified
3. T - Transaction price is determined
4. A - Allocate the transaction price to the separate
performance obligation
5. R - Recognize revenue when or as the entity satisfy each performance obligation

Question 2

What are the 2 methods used to recognize revenue over time?

Answer 2

1. Output Method

2. Input method

Question 3

What is an incremental cost of obtaining a contract

Answer 3

these are costs incurred in obtaining a contract that would not have been incurred if the contract would not have been obtained.

Question 4

What is the treatment of incremental cost of obtaining a contract

Answer 4

They are recognized as assets (capitalized and amortized) if the entity expects it will recover the costs.

Question 5

What are the indicators that an entity is working as an agent

Answer 5

1. Another party (the principal) is primarily responsible for fulfilling the contract
2. The entity does not have inventory risk
3. The entity does not have discretion in establishing prices for the other party’s goods or services

Question 6

What is a repurchase agreement

Answer 6

It is a contract that an entity sells an asset and also either promises to or has the option to repurchase the asset.

Question 7

What are the 03 types of repurchase agreement

Answer 7

1. Foward: ie the entity has the OBLIGATION to repurchase the asset
2. Call Option: RIGHT to repurchase the asset
3. Put Option: Obligation to repurchase the asset AT THE CUSTOMER’S REQUEST

Question 8

How to recognise a PUT OPTION

Answer 8

1. LEASE: If obligation to repurchase an asset at customer’s request is LESS than the original selling price (SP) and customer has significant incentive to exercise right
2. FINANCING AGREEMENT: If obligation to repurchase an asset at customer’s request is GREATER than the original selling
3. SALE WITH RIGHT OF RETURN: If repurchase price is <= expected mkt value and the customer does not have a significant economic incentive to exercise the right.

Question 9

What are the conditions for a BILL-and-HOLD arrangelent

Answer 9

1. There must be a SUBSTANTIVE REASON for the arrangement (e.g customer has requested the arrangement b/c it does not have space for the product.
2. The pdt has been separately identified as belonging to the customer
3. The pdt is currently ready for transfer to the customer
4. The entity cannot use the product or direct it to another customer