Revenue (Chapter 6)

Question 1

What is the definition of revenue?

Answer 1

Increases in economic benefits during the accounting period in the form of inflows, enhancements of assets or decreases in liabilities that result in increases in equity.

Question 2

In which two sections of financial statements are revenue and gains reported?

Answer 2

1. Profit & Loss (Revenue)

2. Other comprehensive income (Gains)

Question 3

Revenue is reported in Profit and Loss in which three categories?

Answer 3

1. Revenue from normal trading
2. Interest & Dividend Income
3. Changes in the FV of Financial Instruments

Question 4

What revenue items are reported in Other Comprehensive Income?

Answer 4

1. Gains on revaluation of PPE

2. Changes in FV of equity investments.

Question 5

What does the standard IFRS 15 cover?

Answer 5

Revenue from contracts with customers.

Question 6

When is revenue recognised?

Answer 6

When there is a transfer of control to the customer from the entity supplying the goods/services.

Question 7

What is the 5 Step Model for Revenue Recognition?

Answer 7

1. Identify Contract
2. Identify Performance Obligations
3. Determine transaction price
4. Allocate transaction price to performance obligations
5. Recognise revenue when performance obligation is satisfied.

Question 8

How do we measure revenue if the outcome cannot be reliably measured?

Answer 8

Revenue is recognised on the basis of recoverable costs - i.e. how much do we know for sure that the customer is going to pay us?

Question 9

How do we account for costs of a contract that are incurred regardless of the contract being obtained?

Answer 9

These costs are incurred as an expense.

Question 10

When can the costs of obtaining a contract be recognised as an asset?

Answer 10

When the entity expects to recover the costs as a result of fulfilling the contract.

Question 11

What are the three criteria needed for contract costs to be recognised as an asset?

Answer 11

1. costs relate to identifiable contract
2. costs generate/enhance resources that will be used to satisfy the performance obligations in the future.
3. costs are expected to be recovered.

Question 12

How should agent revenue be accounted for?

Answer 12

Agent may only take fee/commission of the revenue. The rest of the revenue is then treated as a liability to the principal.

Question 13

What is a forward contract in a repurchase agreement?

Answer 13

Entity has an obligation to repurchase asset.

Question 14

What is a call option for a repurchase agreement?

Answer 14

Call option is the right to repurchase the asset

Question 15

What is a put option for a repurchase contract?

Answer 15

Entity must repurchase the asset if requested to do so by the customer.

Question 16

How do we account for forward contracts and call options?

Answer 16

Forwards and Calls are recorded as a loan (financing arrangement) as we still control the asset. (substance over form).

Question 17

How do we account for a put option?

Answer 17

If repurchase price < original selling price - unlikely to buy back as customer loses money. This is an outright sale with right of return.

If repurchase price > original selling price - treat contract as financing arrangement.

Question 18

What is a consignment arrangement?

Answer 18

Whereby the customer does not control the product at delivery date.

Question 19

How do we account for a consignment arrangement?

Answer 19

Inventory remains in books of the entity and revenue is not recognised until control passes.

Question 20

True or False: if the customer can return unsold goods for a refund they do not control the asset.

Answer 20

True.

Question 21

What is a bill and hold arrangement?

Answer 21

Goods are sold but remain in the possession of the seller for a specified period of time.