Revenue Recognition Flashcards
5 steps revenue recognition
1) identify contract with the customer
2) identify separate performance obligations in the contract
3) determine transaction price
4) allocate transaction price to performance obligations
5) recognize revenue when each performance obligation is satified
Identify contract with the customer main conditions
- approved by both parties
- each party’s rights with respect to goods/services to be transferred can be identified
- payment terms can be identified
- contract has commercial substance
- collection of consideration is probable
Performance obligation
promise in a contract with a customer to transfer to the customer either
- a single good or service that is distinct
- series of distinct goods or services that are substantially the same and have the same pattern of transfer to the customer
good or service is distinct if
- customer can benefit from the good or service on its own OR customer can use the good or service with other resources readily available to the customer
- entity’s promise to transfer the good or service to the customer is separately identifiable from other promises in the contract
allocate transaction price to performance obligations
allocation to performance obligations based on relative stand-alone selling prices
recognize revenue when each performance obligation is satisfied (over time conditions)
over time if
- customer receives benefits as the entity performs
- entity creates an asset that the customer already controls
- asset does not have alternative use to the entity and enforceable right to receive payment already exists
Contract modification - contract modification approved by both parties?
YES - does the scope of contract increase due to the addition of promised goods or services that are distinct?
NO - no contract modification exists
Contract modification - Does the scope of contract increase due to the addition of promised goods or services that are distinct?
YES - Does the price of the contract increase by an amount of consideration that is reflective of the stand-alone selling prices of these additional goods and services?
NO - Are the remaining goods or services distinct from goods or services transferred on or before the date of the contract modification?
Contract modification - does the price of the contract increase by an amount of consideration that is reflective of the stand-alone selling prices of these additional goods and services?
YES - Contract modification is a separate contract
NO - are the remaining goods or services distinct from goods or services transferred on or before the date of the contract modification?
Are the remaining goods or services distinct from goods or services transferred on or before the date of the contract modification?
YES - Termination of existing contract and creation of a new contract
NO - forms part of existing contract and a single performance obligation
When combination of contracts?
- contracts are negotiated as a package with the intent of meeting a singular business purpose
- consideration that customer has to pay in one contract is impacted by the price or performance of the other contract
- some or all of the goods or services promised in the individual contracts form a single performance obligation
assurance type warranty
product works as intended - recognition of revenue when goods are delivered to the customer and simultaneously recognition of a provision
Service type warranty
additional service - separate performance obligation (allocate a proportion of the transaction price to the performance obligation)
right of return
entity’s promise to stand ready to accept a returned product for reasons other than a defect (NOT a separate performance obligation)
when customer option a material right
- customer would not receive the option to acquire additional goods or services without entering into that contract; AND
- the price for the additional goods or services does not reflect the stand-alone selling price
(If the option provides a material right to the customer, it gives rise to a performance obligation)
Entity acts as a principal
entity controls goods or services before the transfer to the customer => Gross revenue recognition
Entity acts as an agent
Entity arranges for the provision of goods or services by another party => Net revenue recognition
Indicators entity acts as an agent
- Another party is primarly responsible for fulfilling the contract
- Entity does not have inventory risk
- Entity does not have price discretion
- Entity’s consideration is in the form of a commission
- Entity is not exposed to credit risk
Variable consideration
- most likely outcome (best estimate - recommended in scenarios with only two possible outcomes)
- expected value (probability weighted - recommended in scenarios of multiple contracts with similar characteristics and a large number of possible outcomes)
When/when not include variable consideration
Only be included in the transaction price to the extent that it is highly probable that a significant revenue reversal will not occur
Different approaches when stand-alone selling price is not directly observable
- Adjusted market assessment approach = Estimate the price that a customer in the market would be willing to pay
- Expected cost plus a margin approach = Forecast the expected cost of satisfying the PO and then add an appropriate margin for that G/S
- Residual approach = estimate the stand-alone selling price by reference to the total transaction price less the sum of the observable stand-alone selling prices
conditions residual approach
- entity sells the same good or service to different customers for a broad range of amounts
- entity has not yet established a price for that good or service and the good or service has not previously been sold on a stand-alone basis
Discounts allocation
generally allocated to all PO, only is criteria are met to separate performance obligation
Criteria discount allocation
- each distinct good or service is regularly sold on a stand-alone basis
- a bundle of some of those distinct goods or services is regularly sold at a discount
- this discount is substantially the same as the discount in the contract
contract assets unconditional
right to receive consideration because the company has satisfied its performance obligation with a customer (AR ; Revenue)
contract assets conditional
rights to receive consideration because the company has satisfied one performance obligation but must satisfy another performance obligation in the contract before it can bill the customer (contract asset; Revenue)
Contract liabilities
the client prepays so the entity has the obligation to deliver G/S (cash; unearned revenue)
conditions Costs to fulfill the contract to recognize as asset
- the costs relate directly to a specific contract with a customer
- the costs generate resources that will be used in satisfying performance obligations in the future
- the costs are expected to be recovered
onerous contract
contract in which the unavoidable costs exceed the economic benefits expected to be received under the contract (at each reporting date reassessed)
