Revenue recognition

Question 1

5 step revenue recognition framework

Answer 1

1. Identify the contract
2. Identify separate PO in the contract
3. Determine the transaction price
4. Allocate the transaction price to performance obligations
5. Recognize revenue when each performance obligation is satisfied

Question 2

Identify contract

Answer 2

a) approved by both parties
b) each part’s rights with respect to goods/services to be transferred can be identified
c) payment terms for the goods/services to be transferred can be identified
d) the contract has commercial substance
e) collection of consideration is probable

Question 3

A performance obligation is….

Answer 3

a promise in a contract with a customer to transfer to the customer either:
a) a single good or service that is distinct
b) a series of distinct goods or services that are substantially the same and that have the same pattern of transfer to the customer

Question 4

Distinct if

Answer 4

Customer can benefit from the good or service on its own
+
Entity’s promise to transfer the good or service to the customer is separately identifiable from other promises in the contract.

Question 5

A customer option is considered as a material right if;

Answer 5

The customer would not receive the option to acquire additional goods or services without entering into that contract
+
The price for the additional goods or services does not reflect the stand-alone price

Question 6

Principal vs. Agent

Answer 6

Principal => entity controls goods or services before the transfer to the customer => Gross revenue recognition

Agent => Entity arranges for the provision of goods or services by another party => Net revenue recognition
Indicators agent:
- Another part is primarily responsible for fulfilling the contract
- the entity does not have inventory risk
- The entity does not have price discretion
- The entity’s consideration is in the firm of a commission
- the entity is not exposed to credit risk

Question 7

Variable consideration

Answer 7

• 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

Note: estimated variable considerations can only be included when it it highly probably that a significant reversal will not occur

Question 8

Significant financing component

Answer 8

Entities need to adjust revenue for the time value of money

no adjustment if financing period <1 year

Question 9

Estimation if stand-alone selling price is not observable (3)

Answer 9

Adjusted market assessment approach => Estimate the price that a customer in that 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 (under certain conditions) => estimate the stand-alone selling price by reference to the total transaction price less the sum of the observable stand-alone selling prices.
1. The entity sells the same good or service to different customers for a broad range of amounts
2. the 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

Question 10

Discount to specific PO if;

Answer 10

a) each distinct good or service is regularly sold on a stand-alone basis
b) a bundle of some of those distinct goods or services is regularly sold at a discount;
c) the discount is substantially the same as the discount in the contract

Question 11

How to measure progress (revenue recognition over time)?

Answer 11

Output-based; direct measurement based on the value of the goods delivered relative to those underlived

Input-based; Indirect measurement based on the entity’s efforts or inputs towards satisfying the performance obligation relative to the total expected inputs

Question 12

Adjusting input-based methods if:

Answer 12

a) cost incurred does not contribute to an entity’s progress in satisfying the performance obligation
b) cost incurred is not proportionate to the entity’s progress in satisfying the performance obligation

Question 13

contract assets:
-Unconditional
- Conditional

Answer 13

Unconditional; rights to receive consideration because the company has satisfied its performance obligation with a customer
Dr. Acocunts receivable Cr. Revnue

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
Dr. Contract asset; Cr. Revenue

Question 14

Incremental costs of obtaining the contract

Answer 14

• costs that would not have been incurred had that individual contract not been obtained
• Capitalized if the entity expect to recover these costs
• Amortized on a basis that reflets the transfer of goods or services to the customer
• Practical expedient: immediate expense if amortization period < 1 year

Question 15

Costs to fulfil the contract

Answer 15

• check whether another international standard is applicable
• If not: Costs arising form a contact ae recognized as assets if all the following conditions are met:
  1) The costs relate directly to a specific contract with a customer
  2) The costs generate resources that will be used in satisfying performance obligations in the future
  3) the costs are expected to be recovered
• Amortized/reclassified as an expense when the related goods or services are transferred to the customer