Revenue Recognition - Overview of the 5 Step Model

Question 1

5 Steps

Answer 1

1) Identification of the contract
2) Identification of the performance obligation
3) Determination of the transaction price
4) Allocation of the transaction price
5) Revenue Recognition

Question 2

Existence of a Contract - Criteria

Answer 2

1) Commitment (Commited to perform obligations - signature)
2) Identifiable rights (goods or services identifiable)
3) Identifiable payment terms
4) Commercial Substance (has impact on future cash flows)
5) Collectability (rating of customer)

Question 3

Contract - Collectibility

Answer 3

Probability of default
1) <50%: normal revenue recognition applies
2) >50%: restrictive revenue recognition. Until point in time revenue is recognized, costs are expensed as incurred, payments from customer recognized as liability

Question 4

Combination of contracts

Answer 4

When two or more contracts are closely related they may be considered one transaction. In this case these contracts have to be considered within the 5-step model as if they were a single contract
Timing: When contracts are concluded within a time period of 3 months

Question 5

Combination of contracts - criteria

Answer 5

1) Price interdependence (legal contracts are negotiated as a package 2) the amount to be paid in one legal contract depends on the price or performance of the other legal contract
OR
Single performance obligation

Question 6

Performance Obligation, Definition

Answer 6

D: Good or service is distinct if 1) the customer can benefit from the good or service on its own 2) Siemens’ promise to transfer the good or service is separately identifiable from other promises of the contract

Question 7

Performance Obligation, distinct concept - main question

Answer 7

Can the customer benefit from a good or service on its own or together with other readily available resources?

Question 8

Performance Obligation - Distinct within the context of the contract

Answer 8

1) Good or service is not integrated with other goods
2) the good does not modify or customize other promised goods
3) good or service is not highly dependent or interrelated with other goods

Question 9

Calculation of Transaction price

Answer 9

Contract Price
+/- variable consideration (discounts, penalties, price escalation)
+/- significant financing component (if transfer of goods and customer payment is larger than 1 year - only for volume >50m / financing component >5m)
- consideration payable to customer
+noncash consideration

Question 10

Transaction Price - variable component

Answer 10

Positive effect: Probability >90%
Negative effect: >10%
Considered in transaction price
To be re-assessed at the end of each reporting period

Question 11

Variable Considerations - types

Answer 11

+Performance Bonuses
+Price escalation clause
-rights of return
-cash discount
-volume rebates
-penalties

Question 12

Step 4: Allocation of transaction price

Answer 12

Only applicable to contracts with more than one performance obligation

Question 13

Determination of the stand alone selling price

Answer 13

1) Observable price (price under similar circumstances to similar customer)
2) Expected cost plus margin approach (for customer specific orders)
3) Residual approach (Transaction price - other performance obligation prices)
4) Adjusted market assessment approach (estimate what the customer be willing to pay / comparison with competitors)

Question 14

Relative Stand alone selling price

Answer 14

1) Determination of the sum of all stand alone prices
2) relative percentage based on total selling price
3) multiply percentage with transaction price

Question 15

Performance Obligations satisfied over time - Revenue recognition methods

Answer 15

1) PoC - cost to cost
2) Straight line method - straight line over project duration, same amount each period

Question 16

Performance obligation satisfied at a point in time - Indicators for transfer of control

Answer 16

1) Acceptance
2) Entitlement to payment
3) Physical possession
4) Legal title
5) Risks and rewards

Question 17

Classification of Performance - over time

Answer 17

1) Customer simultaneously received and consumes the benefits of contract
2) Siemens’ performance creates an asset without alternative use and has enforceable right to payment
3) Customer controls the asset

Question 18

The Criterion X is met if the consideration Siemens receives from the customer is different from the good or service Siemens Transfers

Answer 18

Commercial Substance

Question 19

Whenever a contract modification occurs during the contract term the modification X be accounted for as a separate contract and the remaining 5 step model must be applied

Answer 19

Might

Question 20

True or False - A consideration payable to a customer also includes penalties that have to be paid

Answer 20

False, Penalties are a type of variable consideration

Question 21

True or False - if a good or service could be sold on a stand alone basis it is considered to be distinct within the context of the contract

Answer 21

False - the capable of being distinct is mostly fulfilled but the distinct within the context of the contract criterion is not necessarily fulfilled

Question 22

True or False - In general, subsequent changes in the transaction price are allocated to all performance obligations on the relative stand-alone selling price basis which was determined at contract inception.

Answer 22

True, changes in the transaction price are allocated to all performance obligations on the relative stand alone basis

Question 23

True or False - After the allocation, the allocated transaction price per performance obligation may not be below the performance obligation’s stand-alone selling price.

Answer 23

False, the allocation of the transaction price is carried out to recognize revenue for a performance obligation according to its value in the context of the contract. As a result, a performance obligation may be valued below its stand alone price