Revenue Recognition Flashcards
Definition of Revenue
What is income
Revenue is income arising in the course of an entity’s **ordinary activities **
Income represents increases in economic benefits during the accounting period in the form of inflows that result in increases in equity, other than those relating to contributions from equity participants
IFRS 15 Exclusions from revenue (3)
Exclusions from revenue:
- Borrowings – they increase borrowings, not equity
- Shareholder contributions e.g. share issues
- Gains on disposal of assets or revaluations
When is revenue recognised?
A five-step process must be followed per IFRS 5:
A five-step process must be followed per IFRS 5:
- Identify a contract with a customer
- Identify the performance obligations in the contract
- Determine the transaction price
- Allocate the transaction price to the performance obligations in the contract
- Recognise revenue when (or as) the entity satisfies a performance obligation
What is a performance obligation? (2)
- A performance obligation is effectively a promise to transfer distinct goods or services
- When the performance obligation is satisfied, the revenue is eligible for recognition
Construction Contracts
Special attention due to? (3)
Revenue recognition basis is?
- Special attention due to the size, duration, and challenges in accounting for them
- Revenue recognition basis is subjective
IFRS 5: 5 step process for revenue recognition
Applying this to a construction contract
IFRS 15 Treatment of construction contracts
Recognise revenue when control passes
2 ways to determine the amount of revenue earned:
Output method
- E.g. surveys of work completed or units delivered
- The contract can be split into a number of separate components, and revenue is recognised based on the agreed price for each component completed.
Input method
- Revenue measured based on inputs to date e.g. costs incurred relative to total required to complete
- The measurement of progress made on a contract is based on the cost of the work certified as a percentage of the total estimated cost of the contract.
What about loss-making contracts
What are they and what are they called?
What must a business do?
Treated in line with…?
An onerous contract is a contract where the cost to meet the necessary obligations exceeds the economic benefits to be received
i.e. a contract is loss-making
A business must account for onerous performance obligations as soon as they become apparent
Treated in line with impairment criteria
Required disclosures
- Disclose information to _________ _________ to assess the _________ _____ __________ likely to be _______________ with __________ ___________
- Includes ____________ relating to ___________, _______________ __________, _________ of _____________ __________ and _____________ and ___________ ______________
- _______________ ______________ must also be explained
Required disclosures
- Disclose information to allow users to assess the risks and rewards likely to be associated with ongoing contracts
- Includes amounts relating to revenue, impairment losses, value of contract assets and liabilities and descriptive information
- Significant judgements must also be explained
Construction contracts – question approach to calculate financial statement figures
4 steps?
- Calculate expected contract outcome = contract price - total costs
- Calculate profit or loss = percentage completion = (costs incurred to date/total costs) x Revenue - Costs to date = profit
- Calculate work in progress (contract asset = costs to date + profit/ - loss recognised - amounts invoiced)
- Calculate amount receivable = amounts billed to date - amounts receivable
The measurement of progress made on a contract is based on the cost of the work certified as a percentage of the total estimated cost of the contract
AKA the input method
An example of an onerous contract
An example of the output method
