Set 1 - FR Chapter 13 - Revenue from Contracts with Customers Flashcards
IFRS
What are the 5 steps for recognizing revenue?
- Identify contract
- Identify performance obligations
- Determine the transaction price
- Allocate the transaction price to each performance obligation
- Recognize revenue when each obligation is satisfied
Identify the contract - criteria - how can contracts be identified?
- Contract has been approved by all parties (can be implied or formal)
- Rights regarding goods and services to be transferred can be identified
- Payment terms can be identified (can be implied or formal)
- Contract has commercial substance (risk, timing or amount of cash flow will change in future)
- Collection is reasonably assured (customer has willingness and ability to pay)
Contract modifications - criteria for treating as a separate contract (2 and both have to be met)
- change in scope of contract is due to addition of goods/services AND
- price of contract is adjusted to add the stand-alone price of the new good/services added
If contract modification NOT treated as a separate contract, what 3 options are there for existing contract? and what conditions?
termination - if remaining contracted goods and services are distinct
mixed approach - if SOME remaining goods and services are distinct
continuation - if NONE remaining goods are services are distinct.
When are contracts combined? Any of three criteria.
- contracts negotiated as package with single commercial objective
- amount of consideration paid in contract depends on price or performance of other contract
- goods or services promised are a single performance obligation
How are performance obligations identified?
- Promise to transfer either a good or service (or bundle) that is distinct
OR - a series of distinct goods or services that are substantially the same and have same pattern of transfer to the owner
Items to consider when determining if good/service is distinct (criteria 2)
- good or service does not significantly modify another good or service promised
- it is not highly dependant upon, or interrelated with, other goods in the contract
- entity does not provide signficant integration of good or service with other goods or services promised.
Determining the transaction price - what are the two methods of variable consideration?
- expected value - used when there are multiple outcomes. Prob. of each outcome assessed.
- most likely amount
Amount only recognized is subsequent reversal is unlikely.
What factors could lead to a reversal of variable consideration?
- outside factors are a large influence
- uncertainty about amount of consideration not resolved for a long time
- experience with similar contracts limited
- entity has a practice of changing T+C in similar transactions
- large range of consideration outcomes
Right of return - how is this accounted for? How is COGS shown?
- if estimate of return can be made, revenue recognized up to amount expected to be received. Refund liability set up for any expected refunds.
- if estimate cannot be made, revenue not recognized.
COGS recognized in-line with expected revenue. Any inventory expected to be returned set up as asset at carrying amount less costs to recover.
What happens if payment is due a year after revenue being recognized?
Financing components exists. Recognize revenue as fair value, then interest components using PV calculator.
How is non-cash consideration recorded? And consideration payable to customer?
FV of non-cash item if available. If not available, use the stand-alone selling price of good or service offered to customer in exchange for the consideration.
Consideration payable to customer recorded as a deduction revenue UNLESS payment is for a distinct good/service transferred from customer to entity.
Next, we must determine the stand-alone price. If stand-alone price is not readily available, what are three methods for determining it?
- Adjusted market assessment approach. estimating what a customer would pay, based upon competitors prices.
- Expected cost plus margin.
- Residual approach. The known prices are deducted from the total price - what is left over is allocated to the unknown segments. Discounts allocated first before using this approach.
When is residual approach allowed?
If one of the following is met:
- entity sells same good or service to different customers for wide range of amounts OR
- entity has not yet established a price for the good or service and it hasn’t previously been sold on a stand-alone basis
How are discounts allocated? And variable consideration?
Proportionately. UNLESS there is observable evidence the discount only applies to one obligation:
- vendor regularly sells the distinct item on a stand-alone basis
- vendor also regularly sells those items at a discount
- discounts in contract is substantially the same as discounts normally offered.
Discounts allocated first before using residual approach.
Variable consideration allocated as attributable to performance obligation.
