Revenue from Contracts with Customers

Question 1

Revenue from contracts with customers: 5 step process

Answer 1

1. identify the contract
2. identify the performance obligation(s)
3. determine transaction price
4. allocate the transaction price to each performance obligation
5. recognize revenue when each obligation is satisfied

Question 2

Attributes required by an agreement to be a contract

Answer 2

1. approved by all parties
2. rights regarding goods & services to be transferred can be identified
3. payment terms can be identified
4. contract has commercial substance
5. collection of consideration is probable

Question 3

How to determine if a performance obligation is distinct?

Answer 3

Can the customer benefit from the good or service on its own?
Is the promise to transfer the good or service separately identifiable from other promises in the contract?

eg. cell phone & service plan are distinct
nails & wooden boards may not be distinct when you have hired someone to build you a deck

Question 4

Two methods of determining transaction price

Answer 4

1. expected value (probability of a range of outcomes)

2. most likely amount

Question 5

Risk factors of a significant reversal of variable consideration

Answer 5

1. highly susceptible to outside factors
2. uncertainty is unlikely to be resolved for a long time
3. limited (predictive) experience
4. practice of offering broad range of price concessions
5. contract has a large number and broad range of possible consideration amounts

Question 6

Right of return: Two scenarios

Answer 6

1. Vendor can estimate, based on history of returns etc -> revenue and refund liability recognized
2. Vendor cannot estimate amount of revenue probable to be received -> revenue not recognized, deferred until deadline to return has passed.

Question 7

Transaction price: non-cash transactions

Answer 7

• measure at fair value
• if fair value not applicable, measure indirectly in reference to stand alone selling price of G&S promised to customer

Question 8

Define “benefits” in terms of control over an asset.

Answer 8

Potential cash flows obtained by:

• using the asset to produce goods & services
• using the asset to enhance value of other assets
• using the asset to settle liabilities/reduce expenses
• selling/exchanging the asset
• pledging the asset to secure a loan
• holding the asset

Question 9

ASPE: revenue recognized when (3 criteria)

Answer 9

1. Performance achieved
2. Revenue can be measured reliably
3. Collection is reasonably assured

Question 10

ASPE: revenue recognition when there is uncertainty

Answer 10

Defer until cash received or create a separate provision.

Question 11

When using the percentage of completion method to recognize revenue associated with a construction contract, how should a company account for an increase in expected costs to complete a fixed-price contract?

Answer 11

propsectively, as a change in accounting estimate.