Revenue and inventory

Question 1

5 Step model

Answer 1

1. Identify the contract with the customer
2. Identify the performance obligations in the contract
3. Determine the transaction price
4. Allocate the transaction price to each performance obligation
5. Recognise revenue as each performance obligation is satisfied

Question 2

Recognition of contract costs

Answer 2

Costs of obtaining and/or fulfilling a contract must be recognised as a current asset

Total contract costs incurred to date - X
Total profit recognised to date - X
Less: total invoiced to date - (X)
= Contract asset and contract liability

Question 3

Loss making contracts - impairment

Answer 3

A contract asset is impaired when its carrying amount is greater than the receivable, less related costs.

Impairment recognised in the P&L

Question 4

Principle and agent

Answer 4

Principle = own the good/service. Recognise the gross consideration

Agent = arranging the goods/services with a 3rd party. Recognise commission for organising

Question 5

Repurchase agreement

Answer 5

Is a contract where an entity sells and asset but retains the right to purchase back in the future. Customer does not obtain control over the asset (no matter physical location) basically considered a secure loan

Seller must continue to recognise the asset and the liability for any consideration received

Question 6

Bill and hold arrangement

Answer 6

Contract where the seller retains physical possession (likely as the customer doesn’t have space). Can only be at buyers request, no use of seller, ready for transfer, separate asset completely belonging to customer

Question 7

Inventory - cost

Answer 7

Cost = purchase, conversion and other

Purchase is price, taxes, transport, import duties.

Conversion is direct labour, variable production and fixed overheads based on normal capacity.

Other - specific customer requirements

Any abnormal costs are expensed

Question 8

Inventory - estimating costs

Standard cost
Retail method

For various batches of inventory
FIFO
Weighted average

Answer 8

Standard cost = based on normal activity levels
Retail method = cost determined by reducing selling price by an appropriate gross margin

FIFO = the concept that the inventory in had represents the most recent production. The most recent costs first.
Weighted average = total cost of items/units

Question 9

Inventory - Net realisable value

Answer 9

Estimated selling price - (cost of completion + costs to make the sale (distribution, marketing))