Financial accounting: revenue Flashcards
Significance of revenue:
Headline figure
Impacts profit
Impacts many key ratios
Revenue & Fraud
Revenue recognition is a common area of manipulation.
The incentive is high as loads of people are looking at it
Directors may have bonuses linked to revenues.
Revenue definition (Conceptual framework)
Increase in assets or decreases in liabilities that result in increases in equity other than those relating to contributions from holders of equity claims.
Revenues (income from ordinary activities)
Sales, fees, royalties, rent, interest, dividends.
Disposals and capital contributions are not revenue.
When to recognise revenue
When goods or services are transferred to the customer.
How to measure revenue
To reflect the amount of consideration the company expects to receive from the customer.
Identify the 5-step approach to revenue recognition
- Identify revenue contract.
- Identify the separate performance obligations.
- Determine transaction price.
- Allocate the transaction price to the performance obligations.
- Recognise revenue when a performance obligation is satisfied.
Step 1 of 5 step approach.
Identify the contract
- Doesn’t have to be written down
Could be straight forward
Complication: when there is more than one company involved.
Step 2 of 5 step approach
Identification of the separate performance obligations in the contract.
PO = a promise to transfer goods or services to customer.
- If distinct, you must recognise separate revenue. E.g. if the asset cant be used without completion.
Step 3 of 5 step approach:
Determine the transaction price:
- How much is the customer expected to pay?
Complications:
- Financing
- Discounts, rebates, bonuses.
Step 4 of 5 step approach:
Allocate the transaction price between the POs
Handset and services can be split into categories of PO’s.
Step 5 of 5 step approach
When should a PO be recognised?
- When a customer obtains control of the goods or services.
Construction contracts
Construction contracts have their own accounting standards because it is not clear when to recognise certain aspects of the job.
How do we deal with construction contracts?
Revenue likely to be recognised over time -
Look at % of contract complete and apply this to total revenue and costs to obtain IS figure
% of costs incurred?
% of physical progress?
Take all losses immediately to maintain prudence.
How does the customer pay construction contracts.
Will often pay in instalments.
Any amount not yet received will exist in receivables.
