Revenue and inventories Flashcards
What are the steps in the 5 step model?
Identify contract with customer - has commercial substance and probable to be completed
Identify performance obligations in the contract
Determine the transaction price
Allocate the transaction price to the performance obligation
Recognise revenue when performance obligation is satisfied
What amount is recognised as revenue for deposits and advanced sales?
No revenue is recognised - creates a deferred income liability
What is deferred consideration?
When an entity offers a period of interest-free credit, fair value of the goods on the date of sale must be recognised on delivery of goods (reversing discounting), and financing income must be recognised separately
How is a bundle of goods/services treated?
Total transaction price is unbundled and allocated separately.
If fair value of individual exceeds total because of discount, discount split in proportion of fair values
What is the fair value of a service?
Cost of service + reasonable profit
How are warranties dealt with?
Offering separate obligations (years) treated separately
To check manufactured properly (months) treated as warranty provision
What criteria might a performance obligation satisfy?
Customer receives and consumes benefits as satisfied - gym membership
Performance creates/enhances asset as asset is created/enhanced - construction
Performance doesn’t create asset with alternative use but can receive payment - development of website
What methods can be used to measure completion?
Output - sales
Input - costs incurred
How is revenue recognised if the outcome cannot be estimated reliably?
Extent of costs expected to be recoverable from customer
What is a contractual asset/liability?
Revenue - amounts invoiced to date
What are the practical applications of IFRS 15?
Consignment sales - sale recognised when product sold to 3rd party
Bill/hold arrangements - goods delivered when final instalment received
Repurchase agreement - financing arrangement
Subscriptions to publications - revenue recognised on straight line over period of despatch. If value varies, estimated sales
Servicing fee - revenue related to servicing fee deferred and recognised
Licensing - according to agreement
Agent v Principle - P has gross value, A reflects commission only
What is included in inventories?
Good purchased and held for resale
Finished goods
WIP
Raw materials
How are inventories valued?
Lower of cost and net realisable value
Cost - purchase, conversion, to bring to present location and condition
NRV - contracted price less cost of completion and marketing, selling and distribution costs
Why might NRV fall below cost?
Increase in costs or fall in selling price
Physical deterioration
Strategic decision
Errors
Fall in value charged to P&L
Massive write down disclosed separately
What are the 3 contemporary business models?
Platform business - connects buyers with sellers
Subscription-based - pay monthly fees
On-demand services - independent contractors to deliver instant consumer services
What is the UK GAAP comparison for revenue recognition and inventories?
Revenue recognised on basis of risk and reward, relies on probability of transfer of economic benefit (FRS102)
Inventories measures at adjusted cost and impairment losses can be reversed if circumstances leading to impairment no longer exist (FRS102)
