IFRS Flashcards
5 criteria to meet the definition of a contract
a. Contract is approved and parties committed to their obligations
b. Entity can identify each party’s rights
c. Entity can identify each party’s payment terms
d. Contract has commercial substance
e. Collection of consideration is probable
5 step process for revenue recognition?
- Identify the contract with customers
- Identify the separate PO in the contract
- Determine the transaction price
- Allocate the transaction price to the separate PO
- Recognize revenue when each PO is satisfied
If there is no contract, when are amounts still reocognizable?
amounts are refundable, and either:
- All obligations performed
- Contract terminated & non refundable
What are the 2 criteria to identify PO (determine separate PO)
- Goods/services capable of being distinct (customer can enjoy them separately)
- Distinct in context of the entire contract (no integration, one part does not significantly impact another)
What are the 2 methods to estimate variable consideration?
- Expected value (vast experience, weighted average, better with many comparable contracts)
- Most likely amount (no experience, pick most likely, better with limited outcomes)
How to consider contraint?
Only include amounts that are probable (+50%) to avoid having to reverse revenue in the future
What is the easiest way to determine the distinct criteria?
If a stand-alone selling price exists, if there is none you can look if the item could be used in combination with other items by the customer.
What cost are allowed to be capitalized with contracts?
- Incremental costs to obtain contract (sales commission or bonus)
_ cost incurred to fulfil contract if: (directly related, generate or enhance revenues, expected to be recovered)
What are the 2 criteria to recognize a new contract?
a. Scope increases (not just extension of services)
b. Contract price is stand-alone selling price
What is the definition of control?
an investor controls an investee when the investor is exposed, or has rights, to variable returns form its involvement with the investee and has the ability to effect those returns through its power over the investee.
What are the 3 required elements for control?
Power over the investee
Exposure or rights to variable returns
Ability to use its power over the investee to affect returns
What are the 4 steps in the acquisition method?
- Identify the acquirer
- Determining the acquisition date
- Recognize and measure the identifiable assets, liabilities and NCI
- Recognize and measure goodwill
Explain the key components of ‘core’ goodwill
Core goodwill has two main components: (i) Going concern goodwill: relates to the net assets of the acquiree, in that the acquiree’s net assets together are worth more than the net assets separately, caused by the synergy created by the acquiree’s net assets within the acquiree as a going concern. (ii) Combination goodwill: relates to the extra benefits accruing because of the synergy created by the acquirer and the acquiree combining together eg if the raw materials available to the acquiree are of particular use to the acquirer. These benefits could affect the recorded earnings of the acquirer or the acquiree [or both] depending on the nature of the benefits.
What are the indicators/guidelines to assist in the judgment of how acquires control?
- Form of consideration
- Subsequent management
- Large minority voting interests
- Predator or target
- Relative size of the businesses
How is consideration transferred calculated?
- Measured at FV, determined at acquisition date, and
- Calculated as the sum of the FV of the assets transferred by the acquirer, the liabilities incurred by the acquirer, and the equity interests issued by the acquirer.
What should be reassessed in the event of a gain on bargain purchase?
- Identification and measurement of the identifiable assets acquired and liabilities assumed
- Measurement of the consideration transferred.
This review is to ensure that the measurements are appropriate.
How should be accounted for a business combination where there acquirer already held part of the shares in the acquiree before?
Remeasure to FV at acquisition date, difference to P/L.
If it was measured at FV with increments in equity, transfer amounts to P/L.
What journal entry should be made to recognize a liability for contingent consideration?
Dr Goodwill
Cr Liability (provision) for contingent consideration
If the targets for the contingent consideration are not met, what journal entry should be made?
Dr Liability (provision) for contingent consideration
Cr Other income
What are the 2 parts of the substance over form test?
Part A: EI no obligation to: deliver FA or unfavorable exchange FA/FL
Part B: if settled in own EI:
- non derivative: no variable shares
- Derivative: only fixed FA for fixed EI
What is the fair value definition?
The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
How are transportation and transaction costs used in FV determination?
Only transportation used in FV measurement
But both used to determine most advantageous market
What are the 4 steps in FV measurement?
- Determine the asset or liability that is to be measured
- Determine the principal or most advantageous market
- Determine the market participants
- Determine the appropriate valuation technique
How does IFRS 15 require an entity to determine what goods and services should be treated as separate POs?
If they are distinct (either themselves or as part of a bundle) or they are part of a series of distinct goods and services that are substantially the same and have the same pattern of transfer to the customer.
What are the 2 conditions for when a good/service is dintinct?
A good/service is capable of being distinct (customer can benefit from it) and its distinct when considered in the context of the entire contract (the good/service is not integrated with, highly interdependent on, or significantly modified by other goods/services in the contract).
What are the 2 criteria that must be met for a modification to be treated as a separate contract?
- Scope of contract increases because additional goods/services are distinct from those in original contract.; AND
- The price increase reflects the standalone selling price of the added goods/services
When should revenue not be deferred if the old contract expired, goods continued to be delivered, but the new contract was still being negotiated?
Revenue recognition should not be deferred until the written contract is signed if there are enforceable rights and obligations established prior to the conclusion of the negotiations.
How is the transaction price determined under IFRS 15?
Variable consideration with ‘expected value’ or ‘most likely amount’ approach. And consider constraint:
- Choose method that better predicts
- Must be applied consistently over contract
- Update estimated transaction price each EOP
Why is it important to consider the order of importance of IAs?
There is a risk of duplication of CFs in the valuation of the IA. The same CF is considered in the valuation of multiple IAs. THerefore, the value of one IA should be deducted from the next. Normally value the most important asset first, and then use a contributory asset charge.
When can legal fees made for the defense of a patent be capitalized?
If the defense is successful, they can be capitalized.
What are the 6 criteria to capitalize R&D?
- Technical feasibility of completion
- Intention to complete the asset
- Ability to use or sell the asset (implies market)
- Probable future economic benefits (is there market, would customers buy it)
- Availability of adequate resources
- Ability to measure costs reliably
What are the 3 key characteristics of IA (decide if something is an IA)?
- Non-monetary
- Identifiable
- No physical substance
What are the 2 criteria for identifiability (and)
- Separability: it is separable from the entity and capable of being sold, transferred, rented or exchanged
- Contractual/legal right: it arises from a contractual or some other legal right (often government), regardless of whether these rights are transferable
What are the 3 generic criteria of IA (recognition criteria)
- Probable economic benefits
- Control
- Comes from past events
How is the consideration transferred calculated?
It is measured at FV, determined at acquisition date and:
calculated as the sum of the FV of the assets transferred, liabilities assumed and equity issued by the acquirer
Also describe cash, FI & non-monetary assets, deferred cash (discount), deferred shares (shares to be issued), contingent
What 2 elements does constraint consider?
The likelihood and magnitude of a potential revenue reversal
Where is an impairment loss reported in the income statement?
the loss is reported in income in the operating section as a separate line item labeled “Other income and expenses”
What are the 3 elements required in order for an investor to have control?
- Power over the investee
- Exposure or rights to variable returns
- Ability to use its power over the investee to affect the amount of the investor’s returns
