Revenue for test 3

Question 1

Step 3: Determine the transaction price

Answer 1

1. The promised amount of consideration is variable
2. The contract has a significant financing component
3. Trade and settlement discounts

Question 2

transaction price

Answer 2

the amount to which an entity expects to be entitled in exchange for the transfer of goods and services.

Question 3

Variable consideration (Discount or right of return)

Answer 3

1. Estimating the amount of variable consideration the entity will be entitled to.
2. Constraining the estimated variable consideration
3. Refund Liability

Question 4

Estimating the amount of variable consideration the entity will be entitled to

Answer 4

1. If the consideration promised in a contract includes a variable amount, an entity shall estimate the amount of consideration to which the entity will be entitled in exchange for transferring the promised goods or services to a customer
2. Determine the best estimate of the variable consideration that the entity expects to receive

Question 5

Constraining the estimated variable consideration

Answer 5

An entity shall include in the transaction price the variable consideration estimated, only to the extent that it is highly probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved

Question 6

Refund Liability

Answer 6

1. Measured at the amount of consideration received to which the entity does not expect to be entitled to.
2. Shall be updated at the end of each reporting period for changes in circumstances

Question 7

Examples of refund liability

Answer 7

1. A customers right to return goods and be refunded for the returned goods.
2. A customers right to a settlement discount for payment within a certain period.
3. A customers right to a volume discount for a certain volume of purchases within a particular period of time.
4. The customers obligation to pay additional consideration if the product achieves a certain level of effectiveness.

Question 8

SIGNIFICANT FINANCING COMPONENT

Answer 8

1. The difference, if any, between the amount of promised consideration and the cash selling price of the promised goods or services; and
2. The combined effect of:
   2.1 the expected length of time between when the entity transfers the promised goods or services to the
   customer and when the customer pays for those goods or services and
   2.2 the prevailing interest rates in the relevant market

Question 9

Measuring and recognising the financial component

Answer 9

1. The significant financing component (will be recognized as interest over the period between performance and payment).
2. And the transaction price (will be used to recognize revenue from contract with customers as per the 5-step revenue recognition model)
3. For a deferred/arrear payment: Promised consideration – significant financing component = transaction price

Question 10

Exceptions for significant financial component

Answer 10

1. The customer paid in advance and the timing of the transfer is at the discretion of the customer
2. A substantial amount of the consideration varies on the occurrence or non-occurrence of a future event that is not within the control of the customer or entity

Question 11

One-year practical expedient (SFC)

Answer 11

An entity does not have to account for the significant financing component if the period between when the entity transfers a promised good or service to a customer and when the customer pays for that good or service will be one year or less.

Question 12

Advance payment vs Arrear/Deferred Payment

Answer 12

1. When a customer pays in arrears, the entity is providing finance to the customer and will therefore recognize an interest income.
2. A significant financing component can also exist when the customer pays in advance and the performance (delivery of goods/services) takes place in the future.
3. In this case it is the customer who is providing finance to the entity. The entity will therefore recognize an interest expense.

Question 13

Contract costs

Answer 13

The incremental costs of obtaining a contract must be recognised as an asset if the entity expects to recover those costs.

Question 14

Incremental costs

Answer 14

costs that it would not have incurred if the contract had not been obtained. Capitalization is amortized on a systematic basis

marketing costs, legal costs, sales commission paid, etc.

Question 15

Costs to fulfill a contract

Answer 15

1. the costs relate DIRECTLY to a contract (or a specific anticipated contract);
2. the costs GENERATE or ENHANCE resources of the entity that will be used in satisfying performance obligations in the future; and
3. the costs are expected to be RECOVERED

Question 16

Costs not recognised as an asset and are Expended in IFRS 15

Answer 16

1. General and administrative costs (unless these costs are explicitly chargeable to the customer under the contract)
2. cost of wasted material, labour or other resources
3. costs that relate to satisfied or partially satisfied performance obligations (i.e. costs that relate to past performance); and
4. costs for which the entity cannot distinguish whether the costs relate to unsatisfied performance obligations or satisfied performance obligations or partially satisfied performance obligations

Question 17

Sale with a right of return

Answer 17

1. The right of return allows a limited period during which the customer can return the products and obtain a full or partial refund of the amount paid/payable by the customer
2. measured an amount that reflects the consideration to which the entity
   expects to be entitled
3. only recognizes revenue for the consideration which it does not expect to be reversed as a result of a return.

Question 18

SALE WITH WARRANTY

Answer 18

1. A warranty is a commitment made by the entity to repair or replace the product if it becomes defective during a specified time after the sale of the product
2. an assurance-type warranty and a service-type warranty

Question 19

service-type warranty

Answer 19

1. offers the customer a service in addition to the assurance that the product meets the agreed upon specifications and will function as intended.
2. a separate performance obligation as per IFRS 15
3. If the customer has the option to purchase the warranty separately

Question 20

assurance-type warranty

Answer 20

1. assures the customer that the product was not defective at the time of sale. It assures the customer that the product meets the agreed upon specifications and will function as intended.
2. a provision/liability recognized as per IAS 37
3. If the customer does not have the option to purchase the warranty separately but not if the period of the warranty is longer than normal. It is also required by LAW

Question 21

SALE ON CONSIGNMENT

Answer 21

an entity transfers its products (goods) to third party (eg: a dealer) who then sells the product on to the final customer.

Question 22

BILL AND HOLD ARRANGEMENTS

Answer 22

1. entity therefore bills the customer for the sale of the product and then holds the product on the customers behalf until the customer comes to collect it
2. The reason for the bill-and-hold arrangement must be substantive
3. The product must be identified separately as belonging to the customer.
4. The product currently must be ready for physical transfer to the customer; and
5. The entity cannot have the ability to use the product or to direct it to another customer

Question 23

NON-REFUNDABLE UPFRONT FEES

Answer 23

1. An entity sometimes charges a customer a non-refundable upfront fee
2. Examples of such fees are joining fees paid by a customer to a health club (gym) or an activation fee payable a customer to a net work provider
3. upfront fee is an advance payment for future goods or services and should only be recognized as revenue when those goods and services are provided.