Revenue Recognition Flashcards
How is Revenue Defined?
The income that arises in the course of an entity’s ordinary activities.
Excludes borrowing, shareholders contributions, and gains (disposals).
What are the Key Recognition Criteria for Revenue?
- When it represents transfer of goods/services to a customer
- Based on transfer of control over goods/services
- Contract to transfer represents a promise and is termed a performance obligation
What is the Five Step Model for Recognising Revenue?
- Identify contract with customer
- Identify separate performance obligations
- Determine transaction price
- Allocate transaction price to performance obligations
- Recognise revenue when or as a performance obligation is satisfied
From the First Step, Identifying Contract with Customer, When is the Contract Enforceable?
If,
* Contract approved
* Parties committed and rights identified
* Payment terms identified
From the First Step, Identifying Contract with Customer, When can Contracts be Combined?
Interdependence must exist, combine contacts only if,
* Negotiated as a package
* Consideration interdependent
* Single performance obligation
From the First Step, Identifying Contract with Customer, When is a Contract Modified?
Contract modification,
* Distinct goods/services added
* Contract price increase reflects a “stand alone” value
Else treat as an adjustment to existing contract.
What is the Second Step in Recognising Revenue, Identify Separate Performance Obligations?
Obligation to supply “distinct goods/services”.
Revenue for each “distinct” obligation is accounted for separately.
What are Acceptable Ways of Determining the Transaction Price (Step 3)?
- Expected value (weighted average based on probability)
- Most likely outcome (single most likely outcome, suitable only if 2 possible outcomes)
When is Step 5 Complete?
Recognise Revenue When or as a Performance Obligation is Satisfied.
Indicators of when control has been transferred at a point in time:
* Entity has a right to payment
* Customer has legal title to the asset
* Customer has taken possession of the asset
* Risks and rewards have been transferred
* Customer has accepted the asset
From Step 5, how are Amounts Ascertained?
Output methods (surveys)
Input methods (cost incurred/labour hrs)
What is the Formula for the Output Method?
(Work certified / Contract price) x Estimate total revenues
(Work certified / Contract price) x Estimate total costs
What is the Formula for the Input Method?
(Cost to sate / Total estimate costs) x Estimated total revenue
(Cost to sate / Total estimate costs) x Estimated total costs
What is Disclosure?
Refers to requirement for companies to provide detailed info about revenue streams, contracts with customers, and methods used to recognise revenue.
Ensures transparency regarding nature, amount, timing, and uncertainty of revenue and cash flows.
What is Required in the Description of Disclosures?
- When company typically satisfies its performance obligations
- Significant payment terms
- Nature of goods or services that entity has promised to transfer
- Obligations for returns, refunds and other similar obligations
- Types of warranties and related obligations
