Revenue Flashcards
What does IFRS 15 relate to?
IFRS relates to revenue from contract with customers where revenue is identified using a 5 step process.
- Identify the contract
- Identify the performance obligations
- Determine the transaction price
- Allocate the transaction price
- Recognise revenue.
How is a contract identified?
A contract is an agreement between two parties that creates rights and obligations and must meet the following criteria;
- Parties have approved the contract & each parties rights can be identified.
- Payment terms can be identified
- The contract has commercial substance
- It is probable that the selling entity will receive consideration.
How are performance obligations recognised?
A performance obligation is a promise to transfer goods or services to a customer.
Contracts may contain more than performance obligation
How is the transaction price identified?
Transaction price is the consideration the selling entity will be entitled to once the performance obligations have been met.
Although consideration may be cash it may also be one of the following:
-
Variable - a bonus/penalty is included for early/late payment. In this case the entity must estimate the amount expected, but only include if payment is probable.
- Financing - Where there is a substantial delay between goods/services being provided and payment being made. Consideration being received needs to be discounted to net present value.
- Non cash consideration - Should be valued at fair value
-
Consideration payable to the customer - how this is accounted for depends if it is received for a distinct good or service.
- Yes - Account for as a separate purchase transaction
- No - Account for as a reduction in the transaction price.
How is the transaction price allocated?
The transaction price should be allocated in proportion to the total stand alone selling price.
This price may include several items where price may be identified in the following ways:
- Fair value - the item may have fair value or an identical item sold previously
- Mark Up/Gross margin - The selling price may be based on the cost to the business with margin or mark up added.
Take care some times element of the price relate to time periods and multiple time periods are covered in the contract.
When can revenue then be recognised?
Revenue can be recognised once an entity has satisfied a performance obligation by transferring a promised good or service to a customer.
At inception of the contract the entity must determine if the performance obligation will be met at a point in time or over time.
What is meant by an obligation being met at a point in time?
When an obligation is satisfied at a point in time when control passes to the customer. at which point:
- The entity has the right to payment
- legal title has passed to the customer
- Goods/services have been physically transferred
- risks and rewards have been transferred
- Asset has been accepted by the customer.
What is meant by an obligation being satisfied over time?
An obligation may be considered as satisfied over time when:
- The customer simultaneously has received and consumed the benefits from the entities performance.
- The entity is creating or enhancing an asset controlled by the customer.
- The entity cannot use the asset for alternative use
- the entity can demand payment for performance to date.
This would generally relate to construction contracts.
What other applications of revenue recognition are there?
- Consignment inventory - When revenue can be recognised will depend on who has control of the assets - consider risks, rewards and benefits.
- Sale and repurchase agreements - Where an entity sells an asset but retained a right to repurchase the asset. This would not be recognised as a sale but rather as a loan with interest being charged as an expense to the SPL.
- Bill and hold agreements - Entity bills for a product but physically retains it until transfer at a later date.
What about contract costs?
Under the accruals principle costs of obtaining a contract should be matched to the revenue received. In practice this means:
- The entity must capitalise and depreciate the following in relation to contract costs
- Costs of obtaining the contract
- Costs of fulfilling the contract that do not fall within the scope of other standards.
What happens when revenue from a contract is recognised before consideration is received?
The entity should recognise either:
- A receivable - if the right to consideration is unconditional.
- A contract asset - usually where chargeable consideration to date is less than charged. This would be recognised as a contract liability if consideration is received before recognition.
What are the Four stages for contract rules?
- Identify if the contract is profit making
- Determine the progress on the contract
- Calculate entries for the SPL
- Calculate entries for the SoFP.
How do we identify if a contract is profit making?
The perform for identifying if a contract is profit making is:
Contract Price x
Less:
Costs to date (x)
Costs to complete (x)
Profit/loss
Care must be taken with costs as these may include depreciation and a proportion of overheads.
What must be recorded in the accounts if a contract is profit/loss making or if it is unknown?
Profit making - Revenue and costs should be recognised according to contract progress.
Loss making - the whole loss should be recognised immediately as a provision. Revenue and cost are calculated as above the provision is the balancing figure posted to COS.
Unknown - revenue is based on recoverable costs, costs are recognised as they are incurred.
How is progress on a contract identified?
Contract progress will be identified using either the input or output method:
Input method - Costs incurred as a proportion of total costs.
Output method - Value of work completed as a proportion of the total contract price.
