chapter 7

the seller recognizes revenue associated with the option

WHEN THE OPTION is EXERCISED/EXPIRES

revenue ______ until a contract exists.

cannot be recognized

If the rights received is LESS than the performance obligation, then a °°°°°° exists.

contract LIABILITY

price dependent on future events

variable consideration

As with the installment method, the cost recovery method of recognizing revenue is GENERALLY

not acceptable

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

performance obligation

a promise in a contract with a customer to transfer a good or service to the customer

performance obligation

(3) examples of common parts of contracts that are NOT performance obligations

prepayments, quality-assurance warranties, right of return

Revenue Recognition principle: recognize revenue in the accounting period

when the performance obligation is satisfied

Companies GENERALLY recognize revenue on the basis of the ____

FV of what is received

an entity will recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services

CORE PRINCIPLE of IFRS(PFRS) 15

Non refundable upfront fees are recorded as revenue at the time of payment. True or False?

False: NOT recorded as revenue at the time of payment because these payments are for future delivery of products and services (recognize revenue ONLY when performance obligations are satisfied)

2 standards about revenue recognition came closer and tried to solve all these differences on may 28, 2014 when new revenue recognition standard was issued:

IFRS (PFRS) 15 Revenue from Contracts with Customers

a prepayment is

NOT a performance obligation (ex annual membership fee reg)

IFRS 15 is _________ about the treatment of contract assets/liabilities

NOT prescriptive

For practical considerations, companies are ____ to reflect the time value of money IF the time period for payment is ____

NOT required; LESS than a year

when a perpetual inventory system is maintained, the account repossessed merchandise should be debited to

merchandise inventory- repossessed

To establish whether a performance obligation exists, the company

MUST provide a distinct product/service

the financing component is required by IFRS 15 to be accounted for

SEPARATELY from revenue

The stand-alone selling price is the amount at which the good/service is sold separately under similar circumstances.

STAND-ALONE SELLING PRICE

for a contract that has MORE THAN ONE performance obligation,

an entity should allocate the transaction price to EACH performance obligation in an amount that depicts the amount of consideration to which the entity expects to be entitled in exchange for satisfying each performance obligation.

assuming the contract period is ______, so companies capitalize only (3)

more than 1 yr; direct, incremental, and recoverable

at least 3 indicators out of 5 of transfer of control: the customer has

an obligation to pay the seller legal title to the asset physical possession of the asset

determine how goods or services will be sold and estimate the price those customers are willing to pay

adjusted market assessment approach

3 ways of transaction price allocations

adjusted market assessment approach estimated cost plus margin approach residual approach

is to arrange for principal to provide goods or services to a customer

agent's performance obligation

revenue from contracts with customers adopts

an asset-liability aporoach

project the estimated costs of satisfying a performance obligation and add a normal profit

estimated cost plus a margin approach

other indicators of transfer of control: the customer has (5)

an obligation to pay the seller legal title to the asset physical possession of the asset assumed the risks and rewards of ownership accepted the asset

revenue from Contracts with Customers adopts an °°°°°°

asset-liability approach (account for revenue based on the asset or liability arising from Contracts with Customers)

2 types of warranties

assurance-type warranty extended/service-type warranty

a quality assurance warranty is aka and it is

assurance-type warranty; NOT a performance obligation

revenue recognition usually occurs ________ for a bill-and-hold arrangement

at delivery

exists when a customer purchases goods but requests that the seller not ship the product until a later date

bill-and-hold arrangements

price for many transactions

bundled price

revenue recognition principle provides that revenue is recognized when (2)

it is realized/realizable earned

a good/service is DISTINCT if it is BOTH:

capable of being distinct separately identifiable from other goods or services in the contract

A good or service is distinct if it is BOTH:

capable of being distinct: the customer could use the good or service on its own or in combination with other goods and services it could obtain elsewhere separately identifiable from other goods or services in the contract: the good/service is distinct in the context of the contract because it is not highly interrelated with other goods and services in the contract

IFRS(PFRS) 15 requires that the costs related to obtaining a customer such as success fees, or commissions for obtaining a client be

capitalized and recognized in profit or loss in line with revenue recognition

the most conservative approach

cash method

CONTRACT MODIFICATIONS: examples include: °°°°°°°° Here, it will be necessary to assess whether such a change shall be accounted for: (3)

change the amounts of prepaid minutes or add new services retrospectively(one-off adjustment), prospectively (as a catch-up adjustment to future revenues), or even as for a separate contract

Goods/Services that are NOT distinct are

combined and treated as a SINGLE performance obligation.

rights to receive consideration because the company has satisfied one performance obligation but must satisfy another obligation in the contract before it can bill the customer; should be presented

conditional rights; reported separately as Contract Assets

an agreement between two or more parties that creates enforceable rights and obligations and sets out the criteria for every contract that must be met

contract

If the rights received is GREATER than the performance obligation, then a °°°°°° exists.

contract ASSET

companies divide "fulfillment costs" aka into 2 categories:

contract acquisition costs; those that give rise to an asset, those that are expensed as incurred how do you treat them each?

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

contract liability

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

contract liability

the customer has direct influence over the use of the good or service and obtains its benefits

control

(4) different approaches to revenue recognition which depend on the receipts of cash

cost recovery(sunk-cost method) installment sales profit recovery cash

t/f: option for additional goods/services is a performance obligation if it confers a material right to the customer

customer options; true

recognize revenue OVER time when 3:

customer simultaneously receives / consumes as the entity performs entity creates an asset and customer controls it during the process created asset has no alternative use to the entity plus the entity has enforceable right to payment for performance up to date

difference between the contract sales price and the cogs

deferred GP or unrealized GP

variable consideration includes (5)

discounts, rebates, credits, performance bonuses, royalties

companies _________________ contract assets/liabilities until to the contract perform

does not recognize; one or both parties

are offered as an additional service that covers new problems arising after the customer takes control of the product

extended warranties aka service type warranty

(2) examples of common parts of contracts that ARE performance obligations

extended warranties, options that provide a material right

a quality - assurance type warranty is a performance obligation t/f

false- NOT

t/f: prepayment is a performance obligation

false- not a performance obligation

if obligation/right to repurchase is for an amount greater than or equal to selling price then transaction is a

financing transaction

the GENERAL rule on revenue and gain recognition is the time(point) of sale when the two criteria mentioned... are being met. This method is known as

full accrual method

represent other items that meet the definition of income and may or may not arise in the course of the ordinary activities of an entity; represent increases in economic benefits and such are no different in nature from revenue

gains

under costs to fulfill a contract: other costs that are expensed as incurred examples are

gen and admin expenses NOT explicitly chargeable to customer under contract costs of labor, waste, or other resources to fulfill the contract NOT reflected in the PRICE of the contract

5 step process for revenue recognition

identify the contract with customers identify the separate performance obligations in the contract determine the transaction price allocate the transaction price to the separate performance obligations recognize revenue when each performance obligation is satisfied

examples of variable consideration: (5)

incentive payments royalties volume discounts rebates right of return

it includes both revenue and gains

income

companies recognize an asset for the INCREMENTAL COSTS if these costs are

incurred to obtain a contract with a customer, therefore if walay contract na ma obtain e di wala pd incremental costs duhhh

generally used to describe any type of sale for which payment is required in periodic installments over an extended period of time

installment sales

(2) popular methods is generally employed to defer revenue recognition until the cash is received

installment sales method cost recovery method

an option for additional goods or services is a performance obligation if

it confers a material right to the CUSTOMER, and this is called "customer options for additional goods/services"

Usually recognize revenue OVER TIME if:

it involves subscriptions: because buyers consume the benefits of ACCESS to the service over time so recognize deferred revenue {to recognize UNearned revenue, revenue na kailangan pang i-provide mao nang liability sya sa SELLER} (January 1 entry the date it sells the subscription and buyer agrees but has not yet received the benefits): Cash ××× Deferred Revenue ××× • uses "proportion of time" as its measure of progress toward completion (entry at the end of each of the 12 months- over a period of time following the sale): Deferred revenue ××× Service/Subscription Revenue ×××

(2) conditions MUST be present in the recognition of income

it is probable that economic benefits will flow to the entitiy as a result of an increase in an asset/a decrease in a liability economic benefits can be measured reliably

This occurs when some of the contract price depends on the outcome of a future event:

variable consideration

may either be cash or credit sales; the time of sale of revenue recognition is applied to this particular type of sale

regular sales

(2) types of sales in the course of ordinary activities

regular sales installment sales

transfer control of an asset to a customer but have an obligation or right to repurchase

repurchase agreements

is the standalone sp is highly variable or uncertain as to its occurrence, then a company may estimate the standalone sales price by reference to total

residual approach

arises in the course of the ordinary activities of an entity and is referred to by a variety of different names

revenue

revenue recognized OVER TIME means

revenue is spread between the periods during the contract duration

revenue recognized at a point in time means

revenue recognized upon completion

Usually recognize revenue at a SINGLE point int time if:

sale is immediately accompanied with delivery

examples of incremental costs:

sales commissions, DM/DL/COSTS directly related to the contract such as costs of contract management and supervision, insurance and depreciation of tolls and equipment), costs that enhance resources like intangible design or engineering costs

Therefore, goods/services that are distinct should be accounted for

separately meaning there are two performance obligations and not just one

best measure of FV is what the company could sell the good or service for on a standalone basis usually referred to as

standalone selling price

COSTS RELATED TO OBTAINING A CUSTOMER/CLIENT: examples are °°°°°° IFRS (PFRS) 15 requires

success fees, or commissions for obtaining a client capitalizing them and recognizing them in profit or loss in line with revenue recognition

we consider transfer to have occurred when

the customer has control of the good or service

(2) general approaches may be taken in recognizing GP on INSTALLMENT SALES

time of sale time of collection

the amount of consideration a company expects to receive from a customer

transaction price

the amount of consideration a company expects to receive from a customer; walay labot dri ang amounts collected on behalf of third parties

transaction price

the seller recognizes revenue when it satisfies a performance obligation by

transferring the promised good or service

(2) types of contract assets:

unconditional rights and conditional rights

2 types of contract assets

unconditional rights to receive consideration conditional rights to receive consideration

rights to receive consideration because the company has satisfied performance obligations with a customer; should be reported as a

unconditional rights; receivable on the statement of financial position

a contract liability is GENERALLY referred to as (4)

unearned sales revenue, unearned service revenue, any appropriate account title

is viewed similar to a renewal option for future products and services at a reduced price

upfront fee