Revenue Flashcards
What standard is Revenue from Contracts with Customers?
IFRS 15
What is the pneumonic for Revenue?
CIDAR
What are the five steps for recognising revenue?
- Identify the contract with the customer
- Identify the separate performance obligations
- Determine the transaction price
- Allocate the transaction price to the performance obligations in proportion to the stand alone selling price of the goods or services
- Recognise revenue as each performance obligation is satisfied
Name and explain Step 1
- Identify the contract with the customer
- the parties have approved the contract and are committed to carrying it out
- the rights and payment terms regarding the goods and services to be transferred can be identified
- the contract has commercial substance
- it is probably that the entity will collect the consideration to which it will be entitled
Name and explain Step 2
- Identify the separate performance obligations
- The promised good or service needs to be distinct.
The customer can benefit on its own
The promise to transfer is separately identifiable
How would you recognise revenue at initial recognition and at the year end?
At initial recognition at discounted amount:
Dr Receivable
Cr Revenue
At year end - discount:
Dr Receivable
Cr Finance Income
Name and explain the two types of warranties
- Warranties that provided a customer with the assurance that the product will function as intended because it complies with agreed upon specifications
- Warranties that provide the customer with an additional service
How would you recognise a provision for a warranty (Assurance that the product will function)?
Dr Expense
Cr Provision
Revised at year end to best estimate
How would you recognise an additional service warranty?
Revenue under IFRS 15 as a separate performance obligation
What do you recognise if a principal?
ALL revenue and costs
What do you recognise if an agent?
Recognise a % of fees earned
What are the three determinants of a principal?
- The performance obligation is to provide the specified good and service itself
- The entity controls the goods or services before it is transferred to the customer
- Recongises revenue as the gross amount of consideration to which it expects to be entitled in exchange for those goods or services transferred
What are the four determinants of an agent?
- The performance obligation is to arrange for the provision of goods or services by another party
- The entity doesn’t control the good or service
- The entity can not determine the price to be charged for the other party’s goods or services
- Recognises revenue as the amount of any fee or commission to which it expects to be entitled
What are the risks/ determinants of control a principal has?
- Inventory Risk
- Holds Inventory
- Set price
- Deal with any issues
What are the two types of contract cost that can be capitalised?
- the costs of obtaining a contract
- the costs of fulfilling a contract if they do not fall within scope of another standard
Explain the criteria behind the capitalising the costs of fulfilling a contract
- the costs relate directly to the contract
- they generate or enhance resources of the entity
- The entity expects them to be recovered
What happens to the capitalised costs and how are the y accounted for?
They are amortised to the P/L as revenue is recognised
When should an upfront fee be recognised?
Deferred and spread over the period
Name and explain Step 3
Determine the transaction price
- the transaction price is the amount of consideration to which the entity expects it to be entitled
- entity should consider the effect of variable consideration
- time value of money should be taken into account
What is variable consideration?
Where there are discounts, incentives, penalties or where a product is sold with a right of return. Estimates should be based on probabilities and weighted averages, including estimates of contingent assets or on the single most likely amount.
Name and explain Step 4
Allocate the transaction price based on the stand alone selling price
- spread any discount across all elements
Name and explain Step 5
Recognise revenue as each performance obligation is satisfied
- When the customer obtains Control
- Identify when control passes
- Recognise over time or at a point in time
