Revenue

Question 1

5 steps in recognition process IFRS 15

Answer 1

1. Identify the contract
2. identify the separate performance obligations within a contract
3. Determine the transaction price
4. Allocate the transaction price to the performance obligations in the contract
5. Recognise revenue when (or as) a performance obligation is satisfied

Question 2

What is a contract?

Answer 2

• an agreement between tow or more parties that creates enforceable rights and obligations

Question 3

What are the criteria so entity can account for revenue?
AIPCS

Answer 3

– the parties to the contract have approved the contract and are committed to perform their respective obligations
- the entity can identify each party’s rights regarding the goods or services to be transferred
- the entity can identify the payment terms for the goods or services to be transferred
- the contract has commercial substance
- it is probable that entity will collect the consideration to which it will be entitled in exchange for the goods or services that will be transferred to the customer

Question 4

An entity must decide if the nature of a performance obligation is:

Answer 4

• to provide the specified goods or services itself ( i. e. the entity is the principal), or
• to arrange for another party to provide the goods or service ( i.e. the entity is an agent)

Question 5

What if the entity is an agent?

Answer 5

• revenue is recognised based on the fee or commission to which it is entitled

Question 6

What is the transaction cost?

Answer 6

• the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer

Question 7

When determining the transaction price, an entity shall consider the effects of all of the following:

Answer 7

• variable consideration
• the existence of a significant financing component in the contract
• non-cash consideration
• consideration payable to a customer

Question 8

What are the indications of a significant financing component?

Answer 8

• a difference between the amount of promised consideration and the cash selling price of the promised goods or services
• a significant length of time between the transfer of the promised goods or services to the customer and the payment date

Question 9

What is the best evidence of a stand-alone selling price?

Answer 9

• is the observable price of a good or service when the entity sells that good or service separately in similar circumstances and to similar customers

Question 10

When the revenue recognised?

Answer 10

• when (or as) the entity satisfies a performance obligation by transferring a promised good or service to a customer

Question 11

What is control of an asset?

Answer 11

• refers to the ability to direct the use of, and obtain substantially all of the remaining benefits (inflows or savings in outflows) from the asset
• includes the ability to prevent other entities form obtaining benefits from an asset

Question 12

Indicators of the transfer of the control

Answer 12

• the entity has a present right to payment for the asset
• the customer has legal title to the asset
• the entity has transferred physical possession of the asset
• the customer has the significant risks and rewards of ownership of the asset
• the customer has accepted the asset

Question 13

What is consignment inventory?

Answer 13

where one party legally owns the inventory but another party keeps the inventory on its premises

Question 14

What is a repurchase agreement?

Answer 14

• is where an entity sells an asset and promises (or has the right) to repurchase the asset

Question 15

What are the three forms of repurchase agreements?

Answer 15

• obligation to repurchase
• right to repurchase
• obligation to repurchase at customer’s request

Question 16

What is the result for repurchase contract?

Answer 16

• a lease, if the repurchase price is lee than the original selling price
• a financing arrangement, if the repurchase price is more than the original selling price

Question 17

What is a bill-and-hold arrangement?

Answer 17

• is a contract under which an entity bills a customer for a product but the entity retains physical possession of the product until it is transferred to the customer at a point of time in the future.

Question 18

For a bill-and-hold arrangement to exist:

Answer 18

• the customer must have requested the arrangement
• the product must be identified as belonging to the customer
• the product must be ready for physical transfer to the customer
• the entity cannot have the ability to use the product or sell it to someone else

Question 19

Which one of the criteria must be met to entity transfer control of a good or service overt time?

Answer 19

• the customer simultaneously receives and consumes the benefits provided by the entity’s performance as the entity performs
• the entity’s performance creates or enhances an asset ( for example, work in progress) that the customer controls as the asset is created or enhanced
• the entity’s performance does not create an asset with an alternative use to the entity and the entity has an enforceable right to payment for performance completed to date

Question 20

How to measure the recognise revenue over time?

Answer 20

by the progress towards complete satisfaction of that performance obligation

Question 21

What are the appropriate methods of measuring progress?

Answer 21

• output methods ( surveys of performance)
• input methods (proportion of total expected costs)

Question 22

Three rules of contract with a customer where revenue is recognised over time

Answer 22

1. If the expected outcome is a profit
2. If the expected outcome is a loss
3. If the expected outcome or progress is unknown

Question 23

What contract revenue compromises?

Answer 23

• the initial amount of revenue agreed in the contract
• variations in contract work and claims, to the extent that:
• it is probable that they will result in revenue
• they are capable of being reliably measured

Question 24

What contract costs comprise?

Answer 24

• costs that relate directly to the specific contract
• costs that are attributable to contract activity in general and can be allocated to the contract
  -such other costs as are specifically chargeable to the customer under the terms of the contract

Question 25

Costs that relate directly to a specific contract include:

Answer 25

• site labour costs, including site supervision
• costs of materials used in construction
• depreciation of plant and equipment used on the contract
• costs of moving plant, equipment and materials to and from the contract site
• costs of hiring plant and equipment
• costs of design and technical assistance that is directly related to the contract
• the estimated costs of rectification and guarantee work, including expected warranty costs
• claims from third parties

Question 26

Steps of Presentation in the statement of financial position

Answer 26

1. Calculate overall profit or loss ( to determine if loss-making)
   contract, less costs to date, less costs to complete = overall profit/loss
2. Determine the progress of a contract
3. Statement of profit or loss ( if profitable)
   revenue (total price x progress %) less revenue recognised in previous years, equals cost of sales(total costs to date) less cost of sales recognised in previous years
4. Statement or financial position
   Revenue recognised to date less amount invoiced to date equals to contract asset/liability