Lecture 9 - Revenue Recognition And Recievables

Question 1

What does IFRS 15 define revenue as?

Answer 1

Income arising from the sale of goods or services to customers in the course of the businesses ordinary activities.

Question 2

What does IFRS 15 exclude from revenue?

Answer 2

Revenue excludes:

• Gains (e.g. revaluation gains or gains from the disposal of non-current assets)
• Rental income (IFRS 16)
• Interest and dividends (IFRS 9)

Question 3

What are the five stages of the revenue recognition model?

Answer 3

1. Identify the contract (contract between two parties)
2. Identify performance obligations (a promise within a contract)
3. Determine the transaction price (the monetary value of the contract)
4. Allocate the transaction price (the proportion of cost allocated to each portion of the performance obligations)
5. Recognise revenue

Question 4

What is the definition of a ‘performance obligation’?

Answer 4

A performance obligation is a promise in a contract with a customer to transfer to the customer either:

1. A single good or service that is distinct.
2. A series of distinct goods or services that are substantially the same and have the same pattern of transfer to the customer.

Question 5

What two things mean that a good is ‘distinct’?

Answer 5

1. The customer could benefit from the good or service on its own.
2. The promise to transfer the good or service is separately identifiable within the contract (e.g. airbus sell an aircraft with 20 years of technical support)

Question 6

A good or service is transferred when the customer…

Answer 6

Obtain control over the promised good or service

Question 7

The point at which revenue is recognised depends on whether the performance obligation is…

Answer 7

1. Satisfied over time

2. At a point in time

Question 8

If revenue is satisfied over time, it is…

Answer 8

Measured as progress is made towards the satisfaction of the obligation.

This can be based on :
Proportions of output (units delivered)
Proportion of inputs (work performed, costs incurred, hours expended)

Question 9

If a performance obligation is satisfied at a point in time, this means that revenue is recognised…

Answer 9

When the customer obtain control over the promised asset

Question 10

What is the process for calculating how much revenue and costs should be recognised at a given date?

Answer 10

1. Calculate the costs to date.
2. Calculate how much the costs to date account for the total costs.
3. Calculate the percentage of costs to date and the calculate the percentage of revenue to date that is owed.

Question 11

What is meant by the term ‘contract costs’? And what sort of costs are included in it?

Answer 11

Contract costs are the costs necessary to fulfil a contract. They can include things such as:

• inventory
• PPE
• intangible assets

Question 12

Contract costs are initially recognised as…

Answer 12

Assets

Question 13

Under what circumstances are contract costs recognised as assets?

Answer 13

1. The costs relate directly to a specific contract with a customer.
2. The costs generate resources that will be used in satisfying performance obligations.
3. The costs are expected to be recovered.

Question 14

When the asset has been transferred to the customer (and revenue has been recognised) contract costs are reclassified as…

Answer 14

Expenses (cost of sales)

Question 15

An impairment loss on contract costs should be recognised if the carrying amount of the asset exceeds:

Answer 15

• The remaining amount of consideration (selling price) that the entity expected to receive in exchange for the goods or services less
• The remaining costs that will be incurred in providing those goods or services

Question 16

What is meant by the term ‘contract asset’?

Answer 16

A contract asset arises if an entity has performed by transferring a good or service to a customer but hasn’t received payment yet.

Question 17

A contract asset should be included in which financial statement and should exclude…

Answer 17

A contract asset should be included on the balance sheet and should exclude any amounts recognised as receivables.

Question 18

In relation to contract assets, amounts are recognised as ‘receivables’ only when…

Answer 18

The customer has been invoiced (the entity’s right to collect the consideration becomes unconditional and there is nothing but the passage of time before the customer pays)

Question 19

Contract assets could also be referred to as…

Answer 19

Unbilled revenue

Question 20

A contract liability occurs where…

Answer 20

The customer has made prepayments before the entity transfers the good or service

Question 21

In relation to the revenue recognition for entities and contracts, IFRS 15 required the entity to disclose:

Answer 21

1. The amount of revenue for the period, divided into appropriate categories.
2. The opening and closing balances of receivables, contract assets and contract liabilities, together with an explanation of significant changes during the period.
3. Descriptive information about the entity’s performance obligations within contracts.