Revenue Recognition 1

Question 1

ASC 606 and IFRS 15 were developed to

Answer 1

use a single comprehensive accounting model for revenue from contracts with customers.

Question 2

At their core, 606 and 15 state that

Answer 2

Rev should be recognized when there is a transfer of goods or services to customers and the amount received is what the firm expected.

Question 3

Revenue is recognized by applying these five step processes:

Answer 3

Mnemonic IIDAR

1) Identify Contracts with Customers
2) Identify Performance Obligations in the contract
3) Determine transaction price
4) Allocate transaction price to performance obligation
5) Recognize revenue when (or as) each performance obligation is satisfied through a transfer of control.

Question 4

Step 1: What are the five conditions of a valid contract?

Answer 4

Mnemonic CARPP

1) Contract has commercial substance
2) Contract has been approved
3) Rights and obligations are identified
4) Payment terms are identified
5) Collection is Probable

Question 5

Step 2: What create separate performance obligations?

Answer 5

1) Capable of being distinct
2) Distinct within the context of a contract
3) Material

Question 6

Step 3: What 6 factors determine the Transaction Price

Answer 6

1) Fixed Consideration
2) Variable Consideration
3) Consideration Payable to Customer
4) Refund Liability
5) Time Value Money
6) Noncash Considerations

Question 7

What is fixed consideration?

Answer 7

It’s a fixed transaction price that is easily determinable in the contract and is not contingent upon other events.

Question 8

What is variable consideration?

Answer 8

A) It’s dependent on a future event or varies due to discounts, incentives, etc.

B) Amount of consideration MUST BE estimated

Question 9

Regarding variable consideration and the amount of consideration that must be estimated, what are the two methods of estimation?

Answer 9

1) Expected Value Method (quantify possibilities based on all possible outcomes)
2) Most Likely Amount Method (Quantify by using the single most likely amount in a range of possible outcomes)

Question 10

Regarding Consideration Payable to Customer, how is it calculated?

Answer 10

It’s based on the expected consideration payable to customer which reduces the transaction price and increases liabilities

Selling Price - Consideration Payable = Transaction Price Recorded as Sales Revenue

Question 11

Step 4: What is the process for allocating transaction prices?

Answer 11

1) Determine the standalone selling price of each DISTINCT PERFORMANCE OBLIGATION
2) Allocate the transaction price based upon the relative standalone selling prices

Question 12

What determines the standalone selling price of each performance obligation?

Answer 12

1) Observable (BEST Evidence), or

2) Estimated

Question 13

What are the three estimate methods to determine standalone selling price?

Answer 13

1) Adjusted market assessment approach
2) Expected cost plus a margin approach
3) Residual approach

Question 14

Step 5: When do you recognize revenue?

Answer 14

1) At point in Time

2) Over time