Revenue Recognition Flashcards
When should profit from a long term contract be recognized in revenue recognition cycle?
Profit recognition from a long-term construction contract is based on satisfaction of the performance obligation. Profit is usually recognized over time, so there must be some means of measuring progress toward completion of contract.
How is revenue from long-term contracts recognized.
Revenue from long-term are recognized using two different approaches. Keyword on determining the approach is “when” not necessarily how much revenue is recognized.
What are the two ways to recognize revenue from long-term contracts?
- Recognizing revenue while the obligation is being satisfied (a.k.a over time) involves measuring progress toward completion by using an inputs approach (eg costs incurred) or an outputs approach (eg units produced). Most long-term construction contracts are measured over tome because the work that generates the revenue is performed over the term of the contract
- Recognizing revenue upon satisfaction of the performance obligation (a.k.a at a point in time) usually when the contract is completed. Long term construction contracts are measured at a point in time only if they do not qualify to be measured over time because they usually result in uneven income recognition.
How to recognize revenue over time with profitable long-term contracts?
The formula is as follows:
- Total contract price - Total estimated costs = Total contract profit
- Costs incurred to date/total estimated costs = percentage complete
- Total contract profit * Percentage complete = Total profit recognized to date
- Total profit recognized to date - profit previously recognized = profit recognized in current period
What is the core revenue recognition principle?
- Revenue is only to be recognized upon the transfer of promised goods and services to customers.
- The amount of revenue recognized represents the consideration the entity expects to receive in exchange for those goods and services.
What is the 5-step revenue recognition process?
- Identify contracts with customers.
- Identify separate performance obligations.
- Determine total consideration.
- Allocate total consideration.
- Recognize revenue when or as performance obligations are satisfied.
How do you determine if goods and services provided in a contract are distinct?
In finding out if the services provided in a contract are distinct, the following questions must check the “NO” criteria before you can arrive at a distinct performance obligation.
- Does the seller need to provide additional resources before the customer cause the good/service?
- Does the good/service significantly modify other goods/services in the contract?
- Are the goods/services in the contract highly interdependent?
When performing a JE for billings from long-term construction contracts, what accounts would be debited in the billings entry when revenue is recognized over a period of time and at a point in time?
The construction receivable accounts would both be debited for revenue recognized over a period of time and that recognized at a point in time.
What is the revenue recognition for contract modifications?
In order to determine the revenue recognition for contract modifications, it must meet the following requirements.
- Does the modification change the scope/price of the contract?
- Does the modification include additional goods/services that are distinct and have standalone selling prices?
- Does the modification make the remaining goods/services distinct from those already provided?
How do you recognize revenue from long-term contracts?
Revenue from long-term contracts is recognized when a performance obligation is satisfied or while the performance obligation is being satisfied if the goods or services promised are transferred to the customer over time.
