Ch 18: Revenue Recognition

1) unconditional rights to receive consideration bc co. has satisfied its performance obligation with a customer (reported as a receivable on BS) 2) conditional rights to receive consideration bc co. has satisfied one performance obligation but must satisfy another performance obligation in the K before it can bill customer (reported as contract asset on BS)

2 types of Contract Assets and what they are reported on BS as:

1. Assurance-type warranty 2. Service-type warranty

2 types of warranties:

Consideration for products not yet delivered under original K Consideration for products to be delivered under the K modification =Total Remaining Revenue Total Remaining Revenue/Remaining units to be delivered (Blended Price)

Calculation for Prospective Modification

1. The co. has a right of payment for the asset. 2. The co. has transferred legal title to the asset. 3. The co. has transferred physical possession of the asset. 4. The customer has significant risks & rewards of ownership. 5. The customer has accepted the asset.

Change in Control Indicators (5):

1. The customer controls the asset as it is created or enhanced. OR 2. The company does not have an alternate use for the asset created or enhanced and either a) the customer receives benefits as the company performs and so the task would not need to be re-performed, or b) the company has a right to payment and this right is enforceable.

Co. recognize revenue over a period of time if 1 of these 2 items are met:

Less than a year

Companies are NOT required to reflect the time value of money to determine the transaction price if the time period of payment is:

BOTH: 1) goods or services are distinct (co. sells them separately & are not interdependent with other goods and services) and 2) consideration that reflects the standalone spelling price of the promised goods or services

Contract Modificaitons-Separate Performance Obligation conditions:

a) The reason for the bill-and-hold arrangement must be substantive. b) The product must be identified separately as belonging to customer. c) The product currently must be ready for physical transfer to customer. d) Seller cannot have the ability to use the product or to direct it to another customer.

Control in a Bill-and-Hold Arrangements:

discounts, volume rebates, coupons, free products or services (they reduce consideration to be received and the revenue to be recognized)

Examples of Consideration Paid or Payable to Customers:

1. Identify the contract with customers. 2. Identify the separate performance obligations in the contract. 3. Determine the transaction price. 4. Allocate the transaction price to the separate performance obligations. 5. Recognize revenue when each performance obligation is satisfied.

Five-Step Process for Revenue Recognition

Expected Value

For Variable Consideration, use this method if: -a co. has a large number of Ks with similar characteristics -can be based on a limited number of discrete outcomes and probabilities

Most Like Amount

For Variable Consideration, use this method if: -a contract has only two possible outcomes

arrange for the principal to provide these goods or services to a customer ex: Cruise Co. (principal) uses Travel Co. (agent)

In Principal-Agent Relationship, the agent's performance obligation is to:

principal (Hertz & Cruise Co.)

In Principal-Agent Relationship, the control of performing obligations is with:

provide goods or perform services for a customer ex: Hertz (principal) car rental uses Priceline (agent)

In Principal-Agent Relationship, the principal's performance obligation is to:

consignor (manufacturer or wholesaler), consignee (dealer)

In cosignments, the __________ ships merchandise to the __________

No entry for signing the contract

JE for signing of K:

cost-to-cost basis

Most popular input measure used to determine the progress toward completion is:

Interdependent and interrelated

One performance obligation if:

a liability for the net amount due to the consignor (Payable to Consignor)

The consignee does not record the merchandise as an asset on its books. Upon sale, the consignee has:

Inventory (consignments)

The consignor carries the merchandise as inventory throughout the consignment, separately classified as:

receiving notification of the sale & the cash remittance from the consignee

The consignor recognizes revenue after:

a) it has the ability to direct the use of the asset or service AND b) obtain substantially all the remaining benefits from the asset or service

The customer controls the product or service when:

a) Revenue for products in the amt of consideration company reasonable assured to be entitled b) A refund Liability c) An asset for its right to recover product

To account for good or service to customer with a Right of Return recognize:

1) expected value (probability-weighted amt) or 2) most likely value

To estimate variable consideration use:

1) Adjusted market assessment approach 2) Expected cost plus a margin approach 3) Residual approach

Transaction Price Allocation Approaches:

distinct (can be sold separately) and not interdependent (each has standalone selling price)

Two performance obligations if:

1) company obtains rights to receive consideration from the customer and 2) assumes obligations to transfer goods or services to the customer (performance obligation)

When company enters into a contract with a customer:

Bill-and-Hold Arrangements

a contract under which an entity bills a customer for a product but the entity retains physical possession of the product until it is transferred to the customer at a point in time in the future. (buyer is not ready to take delivery but takes title and accepts billing)

Performance Obligation

a promise in a contract to provide a product or service to a customer.

Account Sales

a report the consignor periodically receives from the consignee that shows the merchandise received, merchandise sold, expenses chargeable to the consignment, and the cash remitted.

Consignee (dealer)

acts as an agent for the consignor in selling the merchandise

Repurchase Agreements

agreement that allows company to transfer an asset to a customer but have an obligation or right to repurchase the asset at a later date

Transaction Price

amount of consideration that a company expects to receive form a customer in exchange for transferring goods and services.

Contract

an agreement between two or more parties that creates enforceable rights or obligations.

Adjusted Market Assessment Approach

an approach for transaction price allocation that evaluates the market and estimates the price that customers in that market are willing to pay for those goods or services. Might include referring to prices from the company's competitors.

Expected Cost Plus a Margin Approach

an approach for transaction price allocation that forecasts expected costs of satisfying a performance obligation and then add an appropriate margin for that good or service.

Residual Approach

an approach for transaction price allocation that is used if the standalone selling price of a good or service is highly variable or uncertain. estimates the standalone selling price by reference to the total transaction price less the sum of the observable standalone selling prices of other goods or services promised in the K

Cost-to-cost Basis

co. measures the percentage of completion by comparing costs incurred to date with the most recent estimate of the total costs required to complete the K.

Contract Liability (Unearned Sales Rev, Repurchase Liab., Return Liab.)

co.'s obligation to transfer goods or services to a customer for which the co. has received consideration from the customer

Nonrefundable Upfront Fees

companies receive pmts from customers before they deliver a product or perform a service. usually relates to initiation, activation, or setup of a good or service to be produced or performed in the future

Noncash Contribution

donations and gifts is often some type of asset, but could be the forgiveness of debt. Companies recognize revenue for the fair value of the consideration received.

Input Measures

efforts devoted to a K. (costs incurred and labor hours worked)

Contract Assets

if co. satisfies its performance obligation to customer (has right to consideration from customer)

Net approach of recognizing revenue

in a Principal-Agent Relationship, agent recognized revenue received from the commission for providing the services, not the full fare price (amt earned must be predetermined-fixed fee per transaction) FASB says correct method to use

Gross method of recognizing revenue

in a Principal-Agent Relationship, let agent record revenue for full price of the ticket and then charging the cost of the ticket against the revenue (overstates agent's revenue) NOT correct method to use

Prospective Modification

in a contract modification, if new products are not priced at the proper standalone selling price or if they are not distinct use:

Financing Transaction

in a repurchase agreement, if company can repurchase the asset for an amt greater than or equal to its selling price, then the transaction is a:

Consignments

manufacturers (or wholesalers) deliver goods but retain title to the goods until they are sold (common principal-agent relationship)

Revenue Recognition Principle

recognition of revenue when the performance obligation if satisfied.

Asset-Liability Approach

recognizes and measures revenue based on changes in assets and liabilities. Focuses on: a) the recognition and measurement of assets and liabilities and b) changes in those assets or liabilities over the life of the contract

Standalone Selling Price

the best measure of fair value is what the company could sell the good or service for on a standalone basis

Output Measures

track results of a K. (floors of a bldg completed, miles of hwy completed)

Service-Type Warranty: Cash Unearned Warranty Revenue

warranties that provide an additional service beyond the assurance-type. not included in the sales price of the product option to purchase a warranty separately for an additional cost recognize rev in period that S-T warranty is in effect *recorded as a separate performance obligation

Assurance-Type Warranty: Warranty Expense Warranty Liabiltiy

warranties that the product meets agreed-upon specifications in the K at the time the product is sold. included in the sales price of a company's product expensed at the point of sale