Revenue Recognition Flashcards
What is the core principle of Topic 606 in the accounting standards codification?
An entity should recognize revenue to depict the transfer of promised goods and services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for goods and services.
What are the 5 steps of the revenue recognition model?
1 - Identify the contracts with the customer
2 - Identify the performance obligations of the contract
3 - Determine the transaction price
4 - Allocate the transaction price to the performance obligations
5 - Recognize revenue when (or as) the entity satisfies a performance obligation.
An agreement between two or more parties that creates enforceable rights and obligations
Contract
An entity’s right to consideration in exchange for goods and services that the entity has transferred to a customer when that right is conditioned on something other than the passage of time.
Contract asset
An entity’s obligation to transfer goods or services to a customer for which the entity has received consideration from the customer.
Contract liability
A promise in a contract with a customer to transfer to the customer either a good or service (or a bundle of goods or services)s that is distinct, or a series of distinct goods or services that are substantially the same and have the same pattern of transfer to the customer
Performance obligation
Inflows and other enhancements of assets of an entity or settlements of its liabilities (or a combo of both) from delivering or producing goods, rendering services, or other activities that constitute the entity’s ongoing major or central operations.
Revenue
The price at which an entity would sell a promised good or service separately to a customer
Standalone selling price
The amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer, excluding amounts collected on behalf of third parties
Transaction price
A contract does not exist if each party to the contract has the _____________ to terminate a wholly unperformed contract without compensating the other party or the collectability threshold is not met.
unilateral enforceable right
An entity can only apply the revenue recognition model if all the of following criteria are met (5):
1- The parties have approved the contract and are committed to performance
2- The entity can identify each parties rights regarding goods and services to be transferred
3- The entity can identify the payment terms
4- The contract has commercial substance
5- It is probable that the entity will collect the consideration to which it will be entitled to when the goods and services are transferred.
The __________ is a determination if the contract is valid and represents a substantive transaction on the basis of whether a customer has the ability and intention to pay the promised consideration in exchange for the goods or services.
Collectability threshold
An entity should only recognize any consideration received as revenue when either (2):
1 - The entity has no remaining obligations to transfer goods or services to the customer and substantially all of the consideration has been received by the entity and it is nonrefundable OR
2-The agreement has been terminated and the consideration is non-refundable
An entity should recognize any consideration received from a customer as a liability until it has _______.
No remaining obligations to transfer goods or services to the customer
The practical expedient that allows an entity to apply revenue recognition guidance to several contracts with similar characteristics when the entity reasonably expects the effects on the financial statements would not differ materially from applying this guidance on individual contracts within those contracts is called the _________.
Portfolio approach
