Revenue from contracts with customers Flashcards
accounting standard related to revenue
IFRS 15 Revenue from Contracts with Customers
what is revenue
income arising in the course of an entity’s ordinary activities e.g. sale of goods/services
what is NOT revenue
borrowings, amounts contributed by shareholders, gains on disposal, dividend and rental income, interest income
what are the 5 steps in the 5 step model
- identify a contract with the customer
- identify the performance obligations in the contract
- determine transaction price
- allocate transaction price to performance obligations
- recognise revenue once performance obligations are satisfied
what is a contract
rights and obligations between two parties
verbal, written or implied
when can contract be accounted for
- all parties approve
- each party’s rights under contract can be identified
- payment terms can be identified
- contract has commercial substance
- probable we will collect consideration from the customer
what are performance obligations
what we have promised to give customers in return for payment (goods/services in a bundle or over time)
what two conditions need to be satisfied for a good/service to be distinct
- customer benefits from good/service on its own or with existing resources
- good/service is not reliant on any other element within the contract
if a promised good/service is not distinct, what is it
a bundle
i.e. all goods/services in contract are treated as a single performance obligation
example of a bundle
warranty and car
what is the transaction price
the amount the entity expects to be entitled to in exchange for promised goods/services
what factors can impact transaction price
discounts
incentives
refunds
what two methods are used to calculate transaction price
expected value
most likely value
what is the case when total transaction price < the sum of the stand alone selling prices of each performance obligation
the customer is receiving a discount for purchasing several goods or services together
how should discounts for bulk buying be allocated
proportionately among performance obligations
when does control of good/service pass to customer
customer sustains all remaining benefits, all obligations to maintaining asset move to customer
when can revenue be recognised
when performance obligations have been satisfied
what does it mean if a performance obligation is satisfied over time
entity needs to keep up their end of the bargain to make progress towards the complete satisfaction of the obligation
example of performance obligations satisfied over time
warranty -> as long as warranty is available
contract to make building but customer has control on building
example of performance obligations satisfied at a point in time
grocery shopping
how do we know if a performance obligation is satisfied over time
- customer simultaneously receives and consumes the benefits e.g. monthly payroll
- customer controls the asset
- entity has right to payment for performance completed to date
what are the two methods of measuring performance obligations over time
output methods
input methods
what is output methods
measured on direct value of goods or services transferred to date
what are input methods
entity’s efforts to date i.e. costs incurred relative to total inputs required to satisfy performance obligations
indicators of transfer of control
- entity now entitled to payment of goods/services
- customer has legal right to the asset
- customer has physical possession of the asset
- customer takes on associated risks and rewards
what are contract costs
costs incurred by an entity towards fulfilling performance obligations are recognised as an asset until the obligation is satisfied
examples of contract costs
direct labour
direct materials
management costs
depreciation of equipment related to contract
when are contract costs expensed
when the obligation is satisfied
what is a principal vs an agent
principal = controls goods/services that are part of contract
agent = acting on behalf of someone, commission based revenue
should a repurchase agreement be recognised as a sale in revenue
no
is a means of raising finance
what is a consignment agreement
where one party owns the inventory but another party stores the inventory
control falls to whoever can insure it
