Recognition of New Orders and Order Backlog Flashcards
Reconition of new Orders - 3 criteria
1) Enforceable rights and obligations (2+5)
2) additional factors to be considered
3) simplification rule
Order Intake - Existing of accounting contract, Criteria 2+5
1) Approval
2) Legal effectiveness
3) Commitment to the contract by the parties (binding contract)
4) Identification of the rights regarding the goods or services
5) Identification of payment terms
6) Commercial substance
7) Collectibility of consideration (below 50% default probability)
Orders - additional factors to be considered (2)
1) Assessment of contract term
2) Related measurement of transaction price
Orders - Simplification Rule, Definition
If the simplification rule is applied, new orders do not need to be recognized until revenue is recognized.
Orders - Simplification Rule, Criteria
1) Performance Obligations with an avg of up to 30 days
2) All contracts for SRE and SFS
3) Time and material contracts / pay as you go. All contracts where price and/or qty is not defined
Orders - Letter of intent
No OI, as LOI is not enforceable
Order recognition - Rating 8+ or worse
Limited to max 10 years
Order recognition - termination right & payment
Order recognition until termination date with payment obligation
Order Value Adjustments - triggering events (4)
1) Adjustments of transaction price
2) Contract Modifications
3) FX rate changes
4) Hyperinflation accounting
Order Value Adjustments - Cancellation of Orders or Changes of the Customer Credit Rating
1) Cancellations
2) Changes of Credit rating to 8+ or worse
3) Changes of the default probability of more than 50% -> Either deduction of open obligation or reduction of new orders/backlog by the amount that concedes 10 years
Order Value adjustments - cancellation of a contract directly linked to a new contract
Economic link between cancellation/new order. Same scope of activity, parties are the same.
-> Order value adjustment if the triggering events all come togehter
-> Cancellation of orders if one triggering event or more is not fulfilled
Order Value adjustment - Inventory taking of Order backlog
Triggering event: If inventory of the order backlog highlights discrepancies between the actual and posted order backlog
-> Differences are corrected against new orders if they are not attributable to changes of the customer rating or cancellation
New Orders or Backlog
1) Differences arising from order value adjustments
2) Cancellation of orders or changes of the customer rating
3) Cancellation of a contract directly linked to a new contract
4) Differences arising from inventory taking of order backlog
1) New Orders
2) New Orders / Backlog
3) New Orders / Backlog
4) New Orders
When deciding whether to make an order value adjustment or carry out a cancelation and recognize the subsequent new contract as a new order, economic criteria according to a certain basic principle must be applied.
Substance over form. Means that the economic substance of the transaction must be recorded in the financial statements rather than just their legal form
