Revenue and Inventory/ Government Grants

Question 1

What is the 5 step process for recognising revenue?

Answer 1

Identify contract

Identify separate performance obligation

Determine transaction price

Allocate transaction price to performance obligation

Recognise rev when performance obligation done

Question 2

Describe features of identifying contract

Answer 2

Parties have approved and agreed payment terms.

Question 3

When considering performance obligation- What does the principle/agent do? How is warranty treated

Answer 3

Principle provides service before transferred

Agent arranges the service (estate agent)

If warranty is extra service it is a separate performance obligation, if it is a assurance/guarantee then it is a provision.

Question 4

What 2 issues should be considered when determining transaction costs? (mention non-cash consideration)

Answer 4

1. Variable consideration (bonus/penalty)? Entity should estimate amount and only included in transaction price if highly probable
2. Is there financing? this occurs even when not obvious and should be disregarded if less than 1 year. If there is financing then entity should adjust transaction amount for effects of time value of money (1/1+x)^n

Non-cash consideration measured at FV or selling price

Question 5

Give formula for Specific Performance Obligation

Answer 5

(Standalone Selling Price of that Obligation / Total Selling Prices) x price paid

work out proportion of single item to total then multiply by price paid

Question 6

What two ways do you recognise revenue and when?

Answer 6

Recognise rev when obligation satisfied.

1. Overtime- Recognise rev over time. Contract satisfied when customer benefits, controls the asset being created, or the entity cannot repurpose the asset and can demand payment.
2. At the time- recognise rev when asset transferred.

Question 7

Define consignment sale and Bill and hold arrangement

Answer 7

1. When original seller gives asset to another to sell on their behalf. (Artist to gallery)
2. When entity bills customer but delivery is delayed, entity must determine if control has been transferred

Question 8

How is inventory valued

Answer 8

Lower of cost and NRV (selling price- cost)

Question 9

Give the two forms of Government Grant and give the IAS that relates to this

Answer 9

Revenue related to income and capital related to assets (money towards a machine)
IAS20- only recognise grant if reasonable assurance that entity will comply to grant conditions

Question 10

Give 2 methods of accounting for grants

Answer 10

1. Netting off method: NCA cost - Grant = X (depreciate this)
2. Deferred income:
   Record NCA cost and grant as deferred income (liability- SFP).
   Depreciate normally but transfer part of grant to SPL (amount/UL)
   On SPL show depreciation and grant income reducing cost of NCA
   On SFP reduce deferred income till 0

Question 11

How do you treat a revoked grant due to failing to meet conditions? (2)

Answer 11

Revenue grant- reduce deferred income and recognise balance of repayment as expense

Capital grant- increase carrying amount of asset by repayment and recognise netted depreciation or reduce deferred income by balance and recognise balance as expense (deferred income)

Question 12

Under FRS give 2 ways grants should be recognised:

Answer 12

Performance model- recognise when future conditions apply

Accrual model- recognise relating to revenue or asset.