STEP 3. DETERMINE TRANSACTION PRICE Flashcards
What is the transaction price?
The transaction price is 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 – e.g. sales taxes.
What are the factors that determine the specific consideration?
i. Customer’s credit risk (where appropriate)
ii. Variable consideration (including constraints on estimates of variable consideration)
iii. The existence of a significant financing component in the contract
iv. Non-cash consideration
v. Consideration payable to a customer.
What is the Customer’s credit risk?
Customer credit risk is the risk that an entity will be unable to collect the amount of consideration that it is entitled to under the contract.
The transaction price is not adjusted for the effects of the customer’s credit risk.
When consideration is variable?
Variable consideration can arise due to:
* Discounts, rebates, refunds, and credits
* Price concessions, incentives, and performance bonuses
* Penalties
* Consideration that is contingent on the occurrence or non-occurrence of a future event.
When the contract contains variable consideration, how is estimated transaction price?
When a contract contains variable consideration, the transaction price is estimated with one of the following method:
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Expected value method:
the sum of the probably weighted amounts for a range of possible outcomes.
(Appropriate where there are a larger number of contracts with similar characteristics) -
Most likely amount:
the single most likely amount out of a possible range of outcomes.
(Appropriate where there are only two possible outcomes)
What limits put IFRS 15 when estimating variable consideration?
IFRS 15 limits the estimate of variable consideration to the amount that is ‘highly probable such that a subsequent change in the estimate would not result in a significant revenue reversal.’
What are the factors thah may indicate that a significant revenue reversal may occur?
Factors that may indicate a significant revenue reversal may occur include:
* Extent of factors that are outside the control of the entity (i.e. market volatility)
* Uncertainty in the estimate is not expected to be resolved in the short-term
* The entity’s practice and/or experience with similar contracts
* The is a large number and broad range of possible consideration amounts.
Are the estimate of variable consideration reassessed?
The estimate of variable consideration, as it affects the transaction price, is reassessed (and updated where necessary) at each reporting date.
When is recognised a refund liabilities?
When an entity expects to refund some (or all) of the consideration received from the customer, a refund liability is recognised for the amount that the entity reasonably expects to refund to the customer.
An asset is also recognised representing the items expected to be returned.
The amount is reassessed (and updated if necessary) at each reporting date with a corresponding adjustment to revenue.
When IFRS 15 requires the transaction price to be adjusted to reflect significant financial component?
If the timing of payments specified in the contract provides the customer or the entity with a significant benefit of financing, IFRS 15 requires the transaction price to be adjusted to reflect this.
IFRS 15 also requires that any financial component is recognised as a financial asset, together with interest.
How is revenue recognised if, at contract inception, the period between the transfer of the goods and services and subsequent payment from the customer is one year or less?
The revenue is recognised at the gross undiscounted amount
What are the factors to consider when identifying a significant financing component?
Factors to consider in identifying a significant financing component include:
a) The difference between the promised consideration and value of the promised goods or services
b) The combined effect of:
* the expected length of time between transfer goods and services and payment
* The prevailing interest rates in the relevant market.
When significant financing component might not exist?
A significant financing component might not exist where:
* The customer has paid in advance and transfer of the goods and services is at the customers discretion;
* A substantial amount of the consideration is variable, and the amount (or the amount and timing) of that consideration varies based on factors that are outside the control of both parties (e.g. royalties);
* The difference in (a) above is for reasons other than the provision of finance.
When non-cash consideration may be relevant?
This may be relevant where:
* The customer contributes goods or services to facilitate the entity’s fulfilment of the contract. If the entity obtains control of the contributed goods and services they are accounted for as non-cash consideration.
* There are elements of contingent consideration (performance bonuses and awards) settled in the customer’s shares or share options
How are being measured non-cash consideration?
Non-cash consideration is measured at fair value.
If the fair value of the non-cash consideration is not able to be reliably determined, the value of the goods or services transferred is used (indirectly).
