Revenue from contracts with customers

Question 1

accounting standard related to revenue

Answer 1

IFRS 15 Revenue from Contracts with Customers

Question 2

what is revenue

Answer 2

income arising in the course of an entity’s ordinary activities e.g. sale of goods/services

Question 3

what is NOT revenue

Answer 3

borrowings, amounts contributed by shareholders, gains on disposal, dividend and rental income, interest income

Question 4

what are the 5 steps in the 5 step model

Answer 4

1. identify a contract with the customer
2. identify the performance obligations in the contract
3. determine transaction price
4. allocate transaction price to performance obligations
5. recognise revenue once performance obligations are satisfied

Question 5

what is a contract

Answer 5

rights and obligations between two parties

verbal, written or implied

Question 6

when can contract be accounted for

Answer 6

1. all parties approve
2. each party’s rights under contract can be identified
3. payment terms can be identified
4. contract has commercial substance
5. probable we will collect consideration from the customer

Question 7

what are performance obligations

Answer 7

what we have promised to give customers in return for payment (goods/services in a bundle or over time)

Question 8

what two conditions need to be satisfied for a good/service to be distinct

Answer 8

• customer benefits from good/service on its own or with existing resources
• good/service is not reliant on any other element within the contract

Question 9

if a promised good/service is not distinct, what is it

Answer 9

a bundle

i.e. all goods/services in contract are treated as a single performance obligation

Question 10

example of a bundle

Answer 10

warranty and car

Question 11

what is the transaction price

Answer 11

the amount the entity expects to be entitled to in exchange for promised goods/services

Question 12

what factors can impact transaction price

Answer 12

discounts
incentives
refunds

Question 13

what two methods are used to calculate transaction price

Answer 13

expected value
most likely value

Question 14

what is the case when total transaction price < the sum of the stand alone selling prices of each performance obligation

Answer 14

the customer is receiving a discount for purchasing several goods or services together

Question 15

how should discounts for bulk buying be allocated

Answer 15

proportionately among performance obligations

Question 16

when does control of good/service pass to customer

Answer 16

customer sustains all remaining benefits, all obligations to maintaining asset move to customer

Question 17

when can revenue be recognised

Answer 17

when performance obligations have been satisfied

Question 18

what does it mean if a performance obligation is satisfied over time

Answer 18

entity needs to keep up their end of the bargain to make progress towards the complete satisfaction of the obligation

Question 19

example of performance obligations satisfied over time

Answer 19

warranty -> as long as warranty is available

contract to make building but customer has control on building

Question 20

example of performance obligations satisfied at a point in time

Answer 20

grocery shopping

Question 21

how do we know if a performance obligation is satisfied over time

Answer 21

• 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

Question 22

what are the two methods of measuring performance obligations over time

Answer 22

output methods

input methods

Question 23

what is output methods

Answer 23

measured on direct value of goods or services transferred to date

Question 24

what are input methods

Answer 24

entity’s efforts to date i.e. costs incurred relative to total inputs required to satisfy performance obligations

Question 25

indicators of transfer of control

Answer 25

• 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

Question 26

what are contract costs

Answer 26

costs incurred by an entity towards fulfilling performance obligations are recognised as an asset until the obligation is satisfied

Question 27

examples of contract costs

Answer 27

direct labour
direct materials
management costs
depreciation of equipment related to contract

Question 28

when are contract costs expensed

Answer 28

when the obligation is satisfied

Question 29

what is a principal vs an agent

Answer 29

principal = controls goods/services that are part of contract

agent = acting on behalf of someone, commission based revenue

Question 30

should a repurchase agreement be recognised as a sale in revenue

Answer 30

no

is a means of raising finance

Question 31

what is a consignment agreement

Answer 31

where one party owns the inventory but another party stores the inventory

control falls to whoever can insure it