Revenue

Question 1

A five step process

Answer 1

COPAR

Contract
Obligations
Price
Allocate
Recognise

Question 2

A repurchase agreement is where an

Answer 2

entity sells an asset and promises (or has the right) to repurchase the asset. This is not recognised as a sale, but either as a lease or secured loan against the assetThere are generally three forms of repurchase agreements:

Question 3

There are generally three forms of repurchase agreements:

Answer 3

 obligation to repurchase
 right to repurchase
 obligation to repurchase at customer’s request.

Question 4

If an entity has an obligation or a right to repurchase the asset, the customer does not obtain control of the asset. This is because the customer is not able to obtain substantially all of the remaining benefits from the asset, despite having physical possession. As a result the entity accounts for the repurchase contract as either:

Answer 4

 a lease, if the repurchase price is less than the original selling price.
 a financing arrangement, if the repurchase price is more than the original
selling price.

Question 5

If an entity has an obligation to repurchase the asset at the customer’s request at a price that is lower than the original selling price of the asset, and the customer is likely to exercise that right, the customer is effectively paying the entity to use a specified asset for a period of time, so the contract would be

Answer 5

a lease in accordance with IFRS 16.

Question 6

If the repurchase price of the asset is equal to or greater than the original selling price and is more than the expected market value of the asset, the contract is in effect a

Answer 6

financing arrangement.

Question 7

If the expected outcome is a profit:

Answer 7

– revenue should be recognised according to the progress of the
contract.

Question 8

If the expected outcome is a loss:

Answer 8

– revenue is recognised according to the progress of the contract
– the whole loss should be recognised immediately by recording a provision as an onerous contract and increasing cost of sales

Question 9

If the expected outcome or progress is unknown (often due to it being in the very early stages of the contract):

Answer 9

revenue should be recognised to the level of recoverable costs (usually costs spent to date).

contract costs should be recognised as an expense in the period in which they are incurred.

Question 10

There are two acceptable methods of measuring progress towards satisfying a performance obligation:

Answer 10

 Input methods – based on the inputs used. A commonly used measure looks at contract costs incurred to date as a percentage of total expected costs.
 Output methods – based on performance completed to date. This is commonly done based on the value of the work certified to date as a percentage of the total contract price.
If revenue is earned equally over time (e.g. providing a monthly payroll service), then revenue would be recognised on a straight line basis over that period.