Revenue Recognition Flashcards
When can revenue be recognised?
Revenue is recognised as earned at the point of sale:
The product/service has been provided to the buyer
The buyer has recognised his liability to pay for the goods/service and the seller has recognised that ownership has transferred from him
Buyer has indicated his willingness to hand over cash
The monetary value of the goods has been established
recognition is when it is probable that future economic benefit will flow to the entity and these can be reliably measured
What is the 5 step approach to revenue recognition?
Identify the contract
Identify the performance obligations
Determine the transaction price
Allocate the transaction price to the performance obligations
Recognise revenue when a performance obligation is satisfied.
How do you identify the contract?
Account for revenue if
parties have approved the contract and committed to it
You can identify each party’s rights
You can identify the payment terms
The contract has commercial substance
It is probable that consideration will be paid in exchange for goods or services
A contract is an agreement between two or more parties that creates rights and obligations……may be in writing, orally or through custom and business practice
How do you identify the obligations?
Eg sell one computer and agree to one year’s free support and maintenance
Obligations may be stated explicitly in the contract, created through custom OR through a company’s policies
For agents, revenue is recognised based on the fee or commission
How do you determine the price?
Consideration in exchange for transferring goods/services to a customer may be fixed, variable or both.
£££££ $$$$$ €€€€€
Amounts collected on behalf of third parties are excluded.
£££££ $$$$$ €€€€€
consider the timing of the payment….if payment is in the future……there is a financing benefit.……so revenue has to be shown at it present value
Amounts paid to a customer will be a reduction in the purchase price, e.g. bulk discounts
How do you allocate transaction price?
The total transaction price should be allocated to each performance obligation – fine for single item contracts
Multiple product or service contracts - an entity will allocate the price to the performance obligations in the contract by reference to:
their relative standalone selling price
Adjusted market assessment approach – same as competitors; or
Expected cost plus a margin approach
Discounts generally should be allocated across d different components of the contract
How do you recognise revenue?
Revenue recognised when performance obligation is satisfied by transferring the promised good/service to the customer, and the customer has control of the asset
Indicators of control:
Right to receive payment
Customer has legal title
Customer has physical possession
Customer has significant risks & rewards
Customer has accepted the asset
On 1 December 20X1, Virginia receives an order from a customer for a photocopier as well as 12 months technical support. Virginia delivers the photocopier (and transfers title) to the customer on the same day.
The customer paid $1,008 upfront. The photocopier usually sells for $720 and the support for $288.
Apply the 5 steps to the above scenario
You should assume Virginia has a year end 31/12/X1
Step one = there is agreement between Virginia and the customer for the provision of the photocopier
Step two = 2 performance obligations have taken place, a. the supply of the photocopier, b. the supply of technical support
Step three = determine the payment price = in total $1,008
Step four = allocate the transaction price to the performance obligation……based on standalone prices, photocopier $720 and support $288
Step five = recognise revenue when or as a performance obligation is satisfied…..control of the photocopier has passed to the customer so $720 can be recognised on 1 Dec 20x1 and the $288 for technical support revenue = 1/12 x 288 = 24 in the year ending 31 December 20x1
What is sale and return?>
Record sale at a point when agent/dealer obtains control of asset.
Indicators of control:
Legal title
Agent/dealer has significant risks and rewards of ownership.
Agent accepted delivery of assets.
Have the risks and rewards transferred?
Must consider whether:
dealer can return with no penalties
price paid by dealer determined at time of delivery
dealer can use car with no penalties
insurance costs borne by dealer.
If risk and rewards have transferred what are the manufacturers and sellers double entry?
MANUFACTURER
DR Receivables
CR Revenue
No inventory
SELLER
DR Purchases
CR Payables
Record Inventory
If risk and rewards have not been transferred what are the manufacturers and sellers treatment on statement?
MANUFACTURER
No Sale
Inventory Held in SOFP
SELLER
NO Entries
What are the indicators of a sale?
Sale price = market value
No commitment for seller to repurchase
Risk of change in asset value borne by the buyer
Seller has no rights to determine use
What are the indicators of not a sale?
NO Sale
Commitment of seller to repurchase
Risk of changes in asset value borne by the seller, i.e sale at an undervalue and repurchase at an undervalue.
Seller retains right to determine asset use.
What is the treatment if an asset has been sold?
Dr Bank
Cr Asset
Dr/Cr P/L – loss/gain
