Revenue

Question 1

Two main criteria for Revenue recognition

Answer 1

The revenue is earned, meaning the goods or services have been provided to the customer

Reasonable assurance that the receivables will be collected

Question 2

ASC 606 “5 steps”

Answer 2

1. Identify the contract with the customer.
2. Identify the performance obligations in the contract. If there are different performance obligations (products) in the contract, these are accounted for separately
3. Determine the transaction price. This is the amount that the providing entity expects to be entitled to in exchange for providing the goods or services to the customer.
4. Allocate the transaction price to the performance obligations in the contract. The price is allocated on the basis of standalone prices of goods or services promised in the contract. If standalone prices are not observable, the entity estimates them.
5. Recognize revenue when (or as) the entity satisfies the performance obligation.

Question 3

Transaction price

Answer 3

Final amount expected to be exchanged for providing goods or services to a customer, and excludes amounts collected for third parties such as taxes. Also sales discounts or volume discounts - if they are expected to be hit, are subtracted from the transaction price

Question 4

Input method (revenue recognition)

Answer 4

Most common and is very similar to the percentage of completion approach. Recognizes revenue based on satisfying the performance obligation relative to the total performance obligation to be performed, such as recognizing revenue on construction project as costs are incurred relative to the total estimated cost to finish the project. Used when the costs being tracked are things like costs incurred, labor hours, machine hours, etc.

Question 5

Output method

Answer 5

Recognizes based on the value transferred to the customer relative to the total value to be transferred. These are things such as units produced or delivered, milestones reached, etc

Question 6

Not for Profit Revenue from Contributed Services

A NFP can recognize revenue from donated services if:

Answer 6

1. The services provided require special skills
2. The services are provided by someone who has the skills
3. Such skills would be paid for if they hadn’t been donated