Revenue Recognition - Step 5: Performance Obligations satisfied over time Flashcards
Revenue recognition methods (4)
1) Straight Line
2) PoC
3) Zero profit margin (only to the extend of performance obligation costs that will be recoverable)
4) Completed performance method (point in time)
Classification of performance obligation at contract inception - over time
1) Customer simultaneously receives and consumes the benefits as Siemens performs
2) Siemens’ performance creates an asset without alternative use
3) the customer controls the asset
Straight line method- calculation
Total planned revenue / term of the performance obligation
Zero Profit margin method - when applied?
Must be applied when the outcome of a performance obligation cannot be measured reasonably
Zero profit margin - recognition of revenue / gross profit
Revenue recognized to the extend of costs incurred that are expected to be recovered. Gross Profit: No GP recognized
Completed Performance Method - Events of transfer of control (3)
Trial Run
Acceptance
Operation
Treatment of Penalties - PoC
1) At contract inception if penalty probability exceeds 90% AND
2) volume of performance obligation is >200m EUR AND
3) amount for the penalty exceeds 10% of the volume of performance obligation
PoC - Treatment of Penalties Cost or Revenue
Revenue: Performance Obligation >200m, amount to be recognized is >10% of volume of performance obligation OR >20m
Cost: Amount <20m OR <10% of total volume of obligation
Provision Types for Performance Obligations over time
1) Onerous contracts (Costs > Rev)
2) Warranties
Accrual Types for Performance Obligations over time
1) Invoices not yet received from suppliers
2) Goods and services billed but not yet delivered or rendered
True or False - Costs to fulfill a contract arise from the costs incurred to build up resources of Siemens that are used to satisfy a performance obligation and are transferred to the customer.
False - Costs to fulfill a contract arise from the costs incurred to build up resources of Siemens that are used by Siemens to satisfy a performance obligation but are not transferred to the customer. If these costs do not fall within the scope of other regulations, e.g., intangible assets, property, plant and equipment or inventories, these costs have to be capitalized as costs to fulfill a contract if certain criteria are met.
Which accounting method? It is not possible to reasonably measure the outcome of the performance obligation, and the costs incurred in satisfying the performance obligation are not expected to be recovered.
Written Agreement with CF R 1
True or False - The simplification rule that control is transferred to the customer when a good is handed over to the freight forwarder (and transport insurance is in place) does not apply when a performance obligation satisfied over time is accounted for using the completed-performance method.
For the purpose of determining the point in time Siemens satisfies a performance obligation by transferring control of a good or service to the customer, which is required when using the completed-performance method, the indicators for the transfer of control have to be considered. However, the simplification rule that control is transferred to the customer when a good is handed over to the freight forwarder (and transport insurance is in place) is only applicable for performance obligations satisfied at a point in time.
True or False - When a performance obligation is accounted for using the straight-line method, the amount of gross profit to be recognized stays the same in each reporting period.
When applying the straight-line method, revenue is recognized on a straight-line basis over the term of the performance obligation. Gross profit, however, is recognized at the end of each reporting period as the difference between revenue recognized and costs of sales incurred. Therefore, the amount of gross profit to be recognized at the end of a reporting period may fluctuate throughout the term of the performance obligation.
True or False - Proposal costs are a common example of costs of obtaining a contract.
Proposal costs are not costs of obtaining a contract (and are therefore not recognized as an asset), as Siemens would have incurred these costs even if Siemens did not obtain the contract. These costs are expensed as incurred unless they are explicitly chargeable to the customer, even if the contract is not successfully concluded. At Siemens, costs to obtain a contract are primarily sales commissions paid to external parties.
