Rev Rec & PPE Flashcards
"yaaaay"
Revenue Recognition (IFRS 15)
- Identify contract
- Find the performance obligation
- Find the transaction price
- Allocate the transaction price to performance obligation
- Recognize Revenue
Revenue Recognition (ASPE 3400)
- Transfer of Risk and Rewards = performance is complete
- Collection is reasonably assured
- Measurable consideration
long term = completed contract method
- Identify contract (5)
- all approve
- each party’s rights identifiable
- identify payment terms
- change in CFs
- collection is probable
should combine 2+? or any modifications
- Find the performance obligation
if met = distinct
- can custo benefit from good or service
- promise to transfer good is separate from other promises
- Find the transaction price
Variable consideration
- only if a subsequent change cannot result in reversal of revenue and theres many options for revenue
- Right of Return
- Allocate the transaction price to performance obligation
literally what it says lol
- Recognize Revenue
Satisfied at a point in time when customer obtains control. Consider: a present right to payment legal title has transferred physical possession has transferred the customer has the significant risks and rewards of ownership customer’s acceptance
Kingsmere Properties (Kingsmere) has just commenced construction on a multi-unit townhome development. Although construction will not be completed for another 12 months, some units have been pre-sold, and the future homeowners have made a down payment for homes in this popular new development. Payments are refundable if the development is not completed. The homes are a standard construction, and the future homeowners are not involved in the decision-making. Kingsmere is anxious to record this revenue as soon as possible in order to secure the necessary financing.
What would be the most appropriate accounting policy recommendation?
Correct Answer
a)
Recognize revenue when the home is completed and legal title transfers, because the performance obligation will not be satisfied until this time.
b)
Recognize revenue when payments are received, because the amount to be recognized is measurable and collectable, and the performance obligation has been satisfied.
Incorrect Response
c)
Recognize payments into revenue when the related operating expenses are recorded, because this will ensure that revenues match their related expenses.
d)
Recognize revenue for the payments in accordance with the owners’ wishes, because there appears to be uncertainty and, as such, the policy can match user objectives.
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Answer c) is incorrect. The revenue recognition criteria must be met, irrespective of when the related operating expenses are recorded. Answer a) is correct. The performance obligation is satisfied at a point in time when the unit is transferred to the purchaser. The purchaser is purchasing the asset of the house, not the service of construction, which is evident by the purchasers’ lack of involvement in the process and the ability of the down payment to be refunded. Therefore, no revenue should be recognized until title transfers.
A company sells clothes wholesale from its factories overseas to department stores in Canada. The shipping terms are FOB Shipping. Under ASPE, at what point are revenues generally recognized in the financial statements?
Incorrect Response
a)
When the return period has expired
Correct Answer
b)
When the clothes are shipped to the customer
c)
When future benefits of an asset expire
d)
When contracts/invoices are prepared
Answer a) is incorrect. The right of return is usually an insignificant risk that should not delay revenue recognition, provided the seller can reliably estimate future returns and recognizes a liability for returns. Answer b) is correct. Performance is achieved when control has transferred to the buyer, and when reasonable assurance exists regarding the measurement of the consideration that will be derived from the sale of goods and the extent to which goods may be returned. Per ASPE, revenue is recognized when performance is complete, consideration is measurable, and collection is reasonably assured.
Percentage of completion
Total contract fee*(%complete @y/e = cost to date/est.total cost)
Reed Construction Ltd. (RCL) uses the percentage of completion method under ASPE on its long-term construction contracts. In 20X4, RCL agreed to build an apartment building for a total contract price of $250 million. The percentage of completion is most reliably measured through costs. The job was completed with the following information:
(in millions) 20X4 20X5 20X6 Costs incurred to date $ 80 $165 $240 Estimated costs to complete 150 70 — Billings to date 90 180 250 Collections during the year 80 95 75 What amount should be recognized as revenue in 20X5?
Correct Answer
a)
$88.5 million
b)
$90 million
Incorrect Response
c)
$95 million
d)
$175.5 million
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Answer c) is incorrect. This calculation uses collections for 20X5. Using the cash basis of accounting is not an acceptable approach under ASPE. Answer a) is correct. In 20X4, the contract is $80 / ($80 + $150) = 34.8% complete. In 20X5, the contract is $165 / ($165 + $70) = 70.2% complete. The additional 35.4% (70.2% – 34.8%) completed in 20X5 × the total contract price of $250 million = $88.5 million of revenue to recognize in 20X5.
On April 15, 20X6, SFC Inc. consigned 80 units of Product A to HGL Inc. Each unit cost SFC $450 to produce, and it cost $1,000 to ship all the consigned units to HGL. On December 31, 20X6, HGL reported that it had sold 40 units for $800 each, and remitted to SFC the proceeds of sales, less a 15% commission and $850 in delivery costs to customers.
What profit on the consigned sales will SFC report for 20X6?
a)
$7,350
b)
$7,850
c)
$13,500
d)
$26,350
Answer b) is correct. The profit on SFC’s consigned sales of $7,850 is calculated as proceeds from the sale of 40 units = $26,350 {[($800 selling price – $120 commission) × 40 units sold] – $850 delivery costs} less the cost of sales = $18,500 {($450 cost per unit × 40 units sold) + [$1,000 total shipping cost × (40 units sold / 80 units total)]}.
On April 15, 20X6, SFC Inc. consigned 80 units of Product A to HGL Inc. Each unit cost SFC $450 to produce, and it cost $1,000 to ship all the consigned units to HGL. On December 31, 20X6, HGL reported that it had sold 40 units for $800 each, and remitted to SFC the proceeds of sales, less a 15% commission and $850 in delivery costs to customers.
What profit on the consigned sales will SFC report for 20X6?
a)
$7,350
b)
$7,850
c)
$13,500
d)
$26,350
Answer b) is correct. The profit on SFC’s consigned sales of $7,850 is calculated as proceeds from the sale of 40 units = $26,350 {[($800 selling price – $120 commission) × 40 units sold] – $850 delivery costs} less the cost of sales = $18,500 {($450 cost per unit × 40 units sold) + [$1,000 total shipping cost × (40 units sold / 80 units total)]}.
PPE - Recognition
- future economic benefits flow to entity
- reliably measurable
PPE - Subsequent measurement
repairs n maintenance = expensed
capitalize = LASTING BENEFIT OR IMPROVES ASSET (inc. output, inc. useful life or op. costs lower)
capitalize costs = directly spent to bring asset to necessary location or condition
ASPE
