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ACCT351 (ch.4)
Revenue
| Question | Answer |
|---|---|
| What are the general approaches for recognizing revenue under IFRS and ASPE? | IFRS: contract-based approach ASPE: earnings approach |
| what is the contract based approach for revenue recognition? | focuses on contractual rights/obligations of buyer and seller |
| what is the earnings based approach for revenue recognition? | focuses on process of adding value to final product or service delivered to customer |
| what is the 5 step model for the contract based approach (IFRS) | 1. identify contract(s) with customer 2. identify contract performance obligations 3. determine transaction price 4. allocate transaction price to performance obligations in contract 5. recognize revenue when entity satisfies a performance obligation |
| how should transaction price be determined when a contract allows a non-cash consideration? | standalone selling price of promised goods and services should be used to determine the transaction price |
| how should the price of performance obligations be allocated when there are multiple performance obligations in a single price? | price should be allocated based on relative proportions of standalone selling prices of each component |
| what are the 3 other valuation methods when multiple performance obligations exist in a single-price contract? | - adjusted market assessment approach - expected cost plus margin approach - residual approach (limited permissible circumstances) |
| what is a critical event? | a performance obligation being satisfied at a point in time (i.e. when you pay at a store, not when you walk out) |
| what are the 4 criteria to recognize service revenue? (must meet one) | - customer receives and consumes benefits entity reports - entity's performance creates/enhances an asset the customer controls - entity's performance doesn't create asset with alternative use to entity and entity has enforceable right to payment |
| what is the zero margin method for revenue recognition, and when should it be used? | recognizing revenue equal to costs incurred. Used when reliable progress measures are unavailable, and there is a reasonable expectation costs will be recovered |
| What are contract costs? | direct costs to obtain and fulfill a contract (only direct costs that wouldn't have been incurred without contract) |
| how should contract costs be treated? | contract costs should be capitalized and amortized over the life of the contract |
| what are consignment sales? | manufacturer (consigner) ships goods to retailer (consignee), but manufacturer retains legal rights to the product. (consignee agrees to take care of product and attempt to sell, but no guarantee is made) |
| how is inventory treated in a consignment sale? | inventory remains on consigners books until sold by consignee. this is when obligation is created to reimburse consigner sales price less commissions + fees in the contract |
| when is revenue recognized for consigner and consignee? | both should recognize revenue at the time of sale |
| what are sales with right of return? | sales allowing customer to return for various reasons for a full refund, credit for future purchases, etc. |
| what must companies estimate when they sell with right of return? | number of returns expected (estimate made at time of sale) |
| what is a refund liability? | $ amount of returns expected (credit less of sales revenue) |
| what is a refund asset? | $ amount of inventory expected to receive from returns (debit less of COGS) |
| what is a bill and hold arrangement? | customer purchases goods but doesn't take possession until a later date |
| what are the 5 conditions for recognition in a bill and hold arrangement? | 1. control of goods has been transferred to customer 2. reason for bill and hold is substantive 3. product is identified separately 4. product ready for physical transfer to customer 5. entity can't have ability to use/resell product to other customer |
| what is a barter transaction? | payment for goods and services is made using non-cash considerations |
| how should considerations received in a barter transaction be reported? | at it's fair value |
| what is the percentage of completion method? | recognizing revenue and costs over the course of a long term project based on % complete |
| what basis does percentage of completion use to measure progress? | $ value of inputs (costs to date/estimated costs to complete) |
| what is the construction in progress (CIP) account? | a balance sheet account representing accumulated costs to date on a project plus recognized profit. (normal debit asset) |
| what is the billings on construction (BOC) account? | a balance sheet account representing total amounts billed to a customer. (normal credit contra to CIP) |
| how are CIP and BOC presented on the balance sheet? | net of each other (CIP-BOC) as either "recognized revenue in excess of billings" (asset), or "billings in excess of recognized revenues" (liability) |
| what is recognized revenue in excess of billings? | contract asset arising when construction process exceeds billings |
| what is billings in excess of recognized revenues? | contract liability arising when billings exceed construction progress |
| are contract assets/liabilities current or non-current? | they can be either depending on the remaining length of the contract |
| what journal entry is required to close contract accounts upon project completion? | billings on construction $--- Construction in progress $--- |
| what is the completed contract method? | defers all recognition of expenses and revenues associated with a contract until the entire project is complete (ASPE only) |
| when can the completed contract method me used? | under ASPE only when costs can't be reasonably estimated, or if a contract is determined by a single act rather than a continuous sequence of significant events |
| what is an onerus contract? | when cost estimates increase surpassing contract price, making the contract unprofitable |
| what should be done in the case of an onerus contract to alert financial statement readers of the potential loss? | total amount of expected loss over the contract should be recorded as a liability in the current year. The least costly option available should be considered (even if it's cancelling the contract for a penalty) |
| what is additional loss to recognize? | loss expected at a certain point on work not yet complete |
| what happens to additional loss to recognize when the contract is complete? | is gets reversed |
| when should a contract be deemed unprofitable? | if at any time the expected total costs to complete exceed contract price (loss must be taken in the year the contract is determined unprofitable) |
| how is it treated when a specific asset is purchased for completion of a contract? | revenue from the asset is measured using the zero-margin method, and installation services revenue is measured using another appropriate model |
| should contract assets/liabilities be reported together or separate from receivables under the contract? | separately |
| what are the first 5 of 10 disclosures required for contracts with customers? | 1. revenue/impairment losses 2. b-down of rev. categories 3. reconciliation of opening/closing contract assets/liabilities (including how PO satisfaction relates to payment timing) 4. description of PO 5. transaction prices allocated to unsatisfied PO |
| what are the last 5 of 10 disclosures required for contracts with customers? | 6. details in determining PO & alloc. trans. prices 7. how determined PO sat. timing 8. methods, assumptions, etc. to determine/allocate trans. prices 9. assets recognized from contract costs 10. applic. of practical expedient allowed by standard |
| what is the earnings approach to revenue recognition, and how does it vary between IFRS and ASPE? | focuses on how an entity adds value during completion of a business transaction IFRS: focuses on balance sheet (assets/liabilities) ASPE: focuses on processes entity undertakes to earn revenue (income statement approach) |
| what are the 4 conditions for revenue recognition under the earnings approach? | 1. seller transferred risks/rewards of ownership to buyer 2. seller has no managerial involvement or control of goods 3. reasonable assurance for consideration measurement and extent of returns 4. collection of consideration is reasonable assured |
| what is the key difference between IFRS and ASPE for revenue recognition? | IFRS: 5-step method (% completion for long-term contracts unless immeasurable progress) ASPE: earnings approach (% completion or CC for long-term contracts depending on which is more appropriate) |
| what is the key difference between IFRS and ASPE for barter transactions? | IFRS: fair value ASPE: FV when commercial substance (if not acquisition measured at carrying value of assets given up) |
| what is the key difference between IFRS and ASPE for discount rate for payments over time? | IFRS: specific guidance ASPE: payments over time are discounted at prevailing market rate |
| what is the key difference between IFRS and ASPE for disclosure requirements? | IFRS: specific and detailed ASPE: less specific and detailed |
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