Revenue

Question 1

What standard deals with Revenue?

Answer 1

IFRS 15

Question 2

What should be considered when discussing a Revenue Transaction?

Answer 2

~ recognition
* identifying the contract
* contract modifications
* identifying performance obligations
* satisfaction of performance obligations
~ measurement
* determining the transaction price
* allocating the transaction price to POs
* changes in Transaction Price
~ contract costs
* incremental costs of obtaining a contract
* costs to fulfill a contract
* amortization and impairment of contract costs
~ disclosure
* contract assets, accounts receivable and contract liabilties
~ Appendices B stuff

Question 3

How does one identify a contract?

Answer 3

LOOK IN THE STANDARD

Question 4

How does one account for contract modifications?

Answer 4

~ An entity shall account for a contract modification as a separate contract ONLY if BOTH of the followinf conditions are met
* The scope of the contract increases because of the ADDITION of goods and services that are distinct
* The price of the contract increases by the stand alone selling prices of the additional goods and services AND any appropriate adjustments to that price to reflectciecunatances within the contract (eg, the contract results in you not having to incur some selling costs and so you can decrease the price by that amount)

~ otherwise, If the remaining goods and services are distinct from the goods and services transferred on or before the modification date, treat it as a termination of the old contract and beginning of the new. The amount of consideration allocated to the remaining performance obligations is the sum of
* Any consideration originally promised that hasn’t been recognised as revenue
* Any consideration promised as part of the modification

~ otherwise, if the remaining goods and services are not distinct, they shall account for the motivation as part of the existing contract and form part of an existing performance obligation that is partially satisfied now. The revenue should be remeasured and recognised on a catch up basis

~ the modication could be a combination of distinct and not distinct goods

Question 5

How does one identify performance obligations?

Answer 5

/ Performance obilgations are what is required of us in the contract, in order to earn Revenue, as these get completed, we record revenue, but first to identify them we look for the following criteria
* a good or service that is distinct OR
* a series of goods or services that are distinct and substantially the same and have the same pattern of transfer to the customer
* a good or service is distinct when it meets the following criteria
~ the customer can benefit from the good or service either on its own or together with resources readily available to the customer
~ the entity’s promises to deliver the good to service is separately identifiable from the other goods and services within the contract

Question 6

How will you recognise revenue as you satisfy performance obligations? (step 5)

Answer 6

• first Decide if the revenue needs to be recognised overtime or at a point in time, if it meets any of the following requirements, then it’s recognised slowly overtime, otherwise at a point in time
• The customer simultaneously receives and consumes the benefits provided by the entities performance as the entity performs
• The entites performance creates or enhances an asset that the customer controls as the asset is created or enhanced
• The entities performance does not create an asset with an alternative use to the entity AND the entity has an enforceable right to payment for work completed to date
• then you need to realise that we only recognise revenue when an entity satisfies a performance obligation by transferring a promised good or service to the customer, IE something is transferred when the entity obtains control over it, they have control of the followinf criteria are met
• the direct the use of it
• And obtain the remaining economic benefits from the asset
• if it’s recognised overtime, you can use 2 methods to measure how much to recognise at a certain point in time but you will only measure it if you have reliable information
• Input method
  ~ this method involes seeing how much of the total cost of the contract, that you already incurred TO DATE
• Output method
  ~ this normally requires some external Chap to some and look at the work you have done and see how much is left and tell you how much to recognise

Question 7

How will you calculate the transaction price of an IFRS 15 transaction?

Answer 7

By adding all the payments you will be receiving, but these are affected by the following
- variable consideration
- signicant financing component
- non cash considerations
- consideration payable to customer

Question 8

How does significant financing affect your transaction price of a IFRS 15 transaction?

Answer 8

• You will need to present value/future value your stand alone selling price(s) to help when you allocate the transaction price
• you will need to present value/ future value your actual PAYMENT(s) which gets added to the total contract price
• it adds interest expense(debit) and sales (credit) when they pay early, this happens overtime
• if they pay early, on that day, you need to debit bank, credit contract liability
• contract liability goes into sales as you satisfy the performance obligations
• the reason that it’s debt interest expense and credit sales is because the value of the sale when you deliver it is more than what they paid you, which means the extra gets expenses and the met effect of the extra sales is then zero
• when you deliver POs early it adds accounts Receivable (debit) and interest income (credit)
• when a payment happens early, it is future valued
• when the payment happens later it is present valued
• the period of signifcant financing starts on either the payment date or start of satisfying the PO
• The significant financing component ends on the LAST payment date or the TOTAL satisfaction of the PO

Question 9

How do you identify a significant financing component?

Answer 9

When there is a difference between the payment and the Satisfaction of the performance obligation of 12 Months or more

Question 10

When determining how much of a variable component to add to your transaction price of IFRS 15, what should be considered?

Answer 10

• two methods are avaliable, the expected value method and the most likely amount
• however it needs to be limited to an amount that is HIGHLY PROBABLE to not result in a reversal

Question 11

How does non-cash consideration affect the transaction price?

Answer 11

The fair value of the non cash consideration must be included in the transaction price

Question 12

How does consideration payable to the customer affect the transaction price?

Answer 12

Look in the standard

but i think it results in a reduction of the total transaction price

Question 13

How do you allocate the transaction price in a IFRS 15 transaction?

Answer 13

You must allocate it in proportion to the stand alone selling prices while considering the following
- stand alone selling prices
- discounts
- variable consideration

Question 14

How would you identify a discount in a IFRS 15 transaction?

Answer 14

When the sum of the stand alone selling prices exceed the total contract price

Question 15

How does a discount affect your your IFRS 15 transaction?

Answer 15

• That depends on whether the discount needs to be allocated to the all the performance obligations or just one or some
• it needs to be allocated to one or some when all the following criteria are met
• look at the standard

Question 16

How does variable consideration affect the allocation of the transaction price in IFRS 15 transactions?

Answer 16

It could need to be allocated to one or some of the specific POs, if specific criteria in the standard are met

Question 17

How does one account for changes in the transaction price?

Answer 17

~ change in transaction price can arise for multiple reasons:
* the happening of uncertain future events
* a contract modification
* other

~ The way to account for a transaction price change from uncertain events OR other, is as follows
* allocate the change in price to the performance obligations in the same way that it was done at inception of the contract. (this could mean that satisfied obligations receive a deduction in revenue)

~ the way to account for a transaction price change that arises from a contract modification is just as a contract modification

~ but if the transaction price change arises AFTER a modification, then you must do the following
* If the modification resulted in a separate contract and the change is attributable to an amount of variable consideration promised before the modification, the new consideration and remaining consideration to be earned, must be allocated to the performance obligations that existed before the modifications
* In all other cases, the change in transaction price will be accounted for by allocating the new change to all the Performance obligations unsatisfied after the modification

Question 18

How does one account for Contract costs?

Answer 18

~ firstly what needs to be noted is that these are different from the contract assets that we recognise, those relate to revenue, these relate to assets helping us get that revenue, but are not the actual revenue, which is what those are

~ incremental costs of obtaining a contract
* these costs should be recognized as an asset if the entity expects to recover those costs (eg sales commission)
* costs to obtain a contract that would be incurred regardless of whether the contract shall be obtained is expensed unless they are explicitly chargeable to the customer
* also if the amortization period is 1 year or less, you can just expense the costs anyways

~ costs to fulfill a contract.
* the entity can recognize these costs as an asset if the following criteria is met.
> costs relate directly to a contract that the entity can specifically identify
> costs generate or enhance the resources of an entity that will be used in satisfying performance obligations
> costs are expected to be recovered

~ Amortization and Impairment
* shall be amortized in a way that is consistent with the method of transfer of goods and services to the customer
* changes in the impairment per year will be accounted for as a change in estimate
* impairment for these contract costs shall be recognized for goods where the following is true: The carrying amount of the asset is more than the consideration still going to be received less the costs that still need to be incurred in order to do that

~ costs that are always expensed
* General and administrative costs unless explicitly chargeable to the customers
* costs of wasted materials, labor and other resources that were not reflected in the price of the contract
* costs that relate to satisfied performance obligations
* any costs that you cant distinguish from satisfied and unsatisfied performance obligations

Question 19

What disclosure is required for IFRS 15?

Answer 19

• contract assets, accounts receivable and contract liabilties
• Look it up Karen

Question 20

How do contract assets, accounts receivable and contract liabilities work?

Answer 20

• contract asset - One must recognise a contract asset when you have performed work for a contract but do not have a any right to payment as of yet (DR contract asset, CR Revenue)
• contract liability - one must recognise this instead of revenue when you receive money before you satisfy your performance obligations (DR Bank; CR contract liability)
• once the money is due to you but you haven’t received it yet, you can transfer the value from the contract asset into accounts receivable (Dr accounts receivable; CR contract asset)

Question 21

What Appendices B stuff is at the back of the IFRS 15 standard?

Answer 21

• additional customer options for additional goods and services
• repurchase agreements
• consignment arrangements
• bill and hold arrangements
• non-refundable upfront fees
• principle vs agent sales

Question 22

What is the principal verses agent sale what should be taken into consideration when dealing with with this concept?

Answer 22

IFRS 15
- an entity can either account for the goods as principle or as an agent

• the requirements to account for it as a principle is as follows
• it must control the good or service being transferred to the customer before it is transferred to the customer, the following are indicators
  ~ Primary responsibility - are they the ones providing the service or good or relying on someone else to provide it?
  ~ inventory risk - do you carry the risk of the inventory getting damaged, lost or stolen
  ~ Pricing Risk - do you have discretion in determining the price at which you can sell the good or service
• an entity is classified as an agent if the entity’s performance obligation is to arrange for provision of the specified goods or services by another party and they do not have control of the goods or services
• a principal entity will account for the revenue contract as follows
• idk, look it up and write it here brother
• an agent will account for the revenue contract as follows
• the amount of consideration which the entity
  to be entitled to, being their share of the transit fares/ net amount (commission). OR It
  is inappropriate to reflect revenue and cost of sales separately and as an agent, the
  net amount (being the fee or commission)
  should be recognized and presented as revenue

Question 23

What happens when you offer additional goods and services (at a discount) because they entered into a contract with you?

Answer 23

• you need to check if the additional goods and services are charged at a price below the stand alone selling prices, if not, then nothing happens
• if it is, then the material right to those dicounted goods and services is considered as a separate performance obligation as treated as one when allocating the transaction price
• however when estimating it’s stand alone selling price, one must consider the following factors
• Something else
• The likehood of the customer exerising this right
• the revenue for this material right should only be recongised when the performanfe obligation is satisfied