Revenue Recognition

Question 1

definition of income under Conceptual Framework?

Answer 1

increases in economic benefits …in the form of inflows or enhancements of assets, or decreases in liabilities that result in increases in equity, other than those relating to contributions from equity holders

Question 2

income encompasses?

Answer 2

Revenue - income generated as part of the ordinary course of business of an entity;
Other items of income that are not revenue: mainly gains, e.g. gain on the sale of a non-current asset;
Revenue is a subset of income.
The distinction between revenue and other income is not entirely clear.

Question 3

Income formula:

Answer 3

Revenue + Gains

Question 4

Scope of AASB 15?

Answer 4

establish principles about nature, amount, timing and uncertainty of revenue and cash flows that entity apply to report useful info to users. Due to issue in determining when revenue to be recognised

Question 5

what are the five steps in recognising revenue?

Answer 5

1. identify contract or contracts with customer
2. identify performance obligations in contract
3. determine transaction price
4. allocate transaction price to performance obligation
5. recognise revenue when entity satisfy performance/obligation

Question 6

Recognition criteria for income?

Answer 6

• increase in future economic benefits related to increase in asset or decrease of liability measured reliably
• thus, occur simultaneously with recognition in assets and liabilities

Question 7

SALE OF GOOD: Revenue recog in relation to contracts with customers requires?

Answer 7

entity to satisfy performance obligations and transfer control of asset to customer

Question 8

SALE OF GOOD: When an entity transfers control of a product to a customer and also gives the customer the right to return the product

Answer 8

entity recognise revenue for transferred products but also refund liability and asset for its rights to recover products from customers on settling refund liability

Question 9

SALE OF GOOD: When an entity delivers a product to another party for sale to end customers:

Answer 9

revenue cannot be recognised if the other party has no control of the product at that point in time

Question 10

RENDERING OF SERVICES: revenue recognition criteria determined by?

Answer 10

reference to performance obligations satisfied over time
- entity consider effects of contractual restrictions and practical limitations in assessing whether asset has alternative use to entity

Question 11

Goods shipped subject to minor conditions: what happens when performance obligation is minor?

Answer 11

can recognise revenue on delivery date of good

Question 12

Goods shipped subject to minor conditions: what happens when performance obligation is major?

Answer 12

If Company A does not meet the obligation, Customer B would not accept the goods and would not pay for them.

Thus, Company A has not transferred the significant risks and rewards of ownership.

Revenue is only recognised when the installation is completed and accepted by Customer B.

Question 13

Consignment sales:

when agree one party (B) sells another parties good (A) to third parties:

Answer 13

A does not recognise revenue until B has on-sold goods

Question 14

Sales with a right of return:

right to return within x days?

Answer 14

• if limited right, then recognise revenue once right expires
• if unlimited right (can return anytime), then do not recognise revenue - rather be accounted as financing transaction (Dr Cash, Cr Borrowing)

Question 15

Purpose of complete set of financial statement?Entities must explicitly state their compliance with AASB and IFRS accounting standards in a note to the financial statements

Answer 15

ensure faithful presentation of its financial position, financial performance and cash flows in accordance with the conceptual framework

Question 16

General features of financial statements:

Fair presentation and compliance with IFRS

Answer 16

• Entities must explicitly state their compliance with AASB and IFRS accounting standards in a note to the financial statements

Question 17

General features of financial statements: Going concern

Answer 17

• assumption all entities adopt going concern basis of accounting
• must disclose any uncertainties that cast doubt upon ability to continue as going concern
• when statements not prepared on going concern basis, must disclose that info and why

Question 18

General features of financial statements: Accrual basis of accounting benefit?

Answer 18

• provide better basis for assessing entity’s past and future performance

Question 19

General features of financial statements: Materiality and aggregation?

Answer 19

-each material class of similar or dissimilar items presented separately

Question 20

General features of financial statements: Offsetting:

Answer 20

• asset/liabilities, income/expenses not to be offset unless required or permitted
• it detracts from users ability to understand entity’s transaction
• appropriate when netting income with related expenses

Question 21

General features of financial statements: Frequency of reporting

Answer 21

• presented at least annually

- if reporting period changes, length less or more than 1 year

Question 22

General features of financial statements: Comparative Info

Answer 22

• info from immediately preceding reporting period need to be disclosed
• so two statements of e.g. P&L, financial position

Question 23

General features of financial statements: Consistency of presentation from one period to next unless?

Answer 23

• sig change in operation
• change in presentation or classification will provide more relevant info
• change in presentation or classification required by another accting standard

Question 24

Statement of profit or loss and other comprehensive income : significance?

Answer 24

• primary source of info for performance

- used to assist users predict entity’s future performance/cash flow

Question 25

Statement of profit or loss and other comprehensive income : what is included in profit or loss?

Answer 25

• AASB 101 adopt ‘all inclusive’ approach to determination of company’s P&L
• all item of income and expense recognised
• exclusions: correction of errors and effects of changes in accting policies; other rules that permit exclusion

Question 26

Other comprehensive income (OCI): comprises of?

Answer 26

• items of income and expense not recognised in P or L
• includes: changes in ARS, actuarial gains and losses on defined benefit plans/foreign operations/remeasuring financial assets

Question 27

Other comprehensive income (OCI): income tax?

Answer 27

• income tax related to each component of OCI required to be disclosed in either statement or notes

Question 28

Other comprehensive income (OCI): what also needs to be diclosed?

Answer 28

• reclassification adjustments relating to components of OCI
• they are amounts recognised in OCI in prev years but reclassified to current period P or L when item is de-recognised

Question 29

what does AASB 101 prescribe?

Answer 29

• line items to appear on statement

- min line items required include revenue, profit, tax expense, total comprehensive income etc.

Question 30

When can additional items/disclosures be included?

Answer 30

if relevant to understanding based on materiality and nature/function of items

Question 31

To enhance understandability of the statement AASB 101 requires

Answer 31

separate disclosure of the nature and amount of certain material income and expense items, including:
- inventory and PPE
- P&L
- Reversals of provisions
Disclosure made either in statement or notes

Question 32

Classification of expenses: what does AASB101 require?

Answer 32

an analysis of expenses, classified by nature or function (whichever more relevant and reliable info)

Question 33

Classification of expenses: e.g. of nature classification?

Answer 33

purchase of material, employee benefits, depreciation, advertising costs

Question 34

Classification of expenses: e.g. function classifcation

Answer 34

cost of sales, cost of distribution, administrative costs