Please enable JavaScript.
Coggle requires JavaScript to display documents.
Int. Acc. FA LECT 2&3: Revenue recognition part 2 (STEP 1 IDENTIFY…
Int. Acc. FA LECT 2&3: Revenue recognition part 2
STEP 1 IDENTIFY CONTRACT
contract?
Agreement between two or more parties that creates
enforceable rights or obligations.
Agreement can be oral, written, or implied by business practice.
Apply revenue guidance if ALL of the following are met
The parties to the contract have approved the contract and are committed to perform their respective obligations;;
The company can identify each party’s rights regarding the goods or services to be transferred
The contract has commercial substance (impact on CF)
The company can identify the payment terms for the goods and services to be transferred.
It is probable that the company will collect the consideration to which it will be entitled.
Disregard revenue guidance if
Contract is wholly unperformed
Each party can unilaterally terminate the contract without compensation.
STEP 1 IDENTIFY CONTRACT
What is the basic accounting behind this?
Company obtains rights to receive consideration (asset) and assumes obligations to transfer goods or services (liability).
Contract assets or liabilities are recognized only when one or both (or all) parties perform.
Revenue cannot be recognized without a contract
What happens when contracts are modified?
1) Account for this as a new contract if there is a separate performance obligation.
a) The promised goods/services are distinct, AND
b) Company has the right to receive an amount of consideration that reflects the standalone selling price of the promised goods or services.
2) Modify the contrac prospectively if there is NO separate performance obligation.
STEP 2 SEPARATE PERFORMANCE OBLIGATIONS
Performance obligation?
Promise in a contract to provide a distinct product or
service to a customer
Can be explicit, implicit, or customary business practices.
Multiple performance obligations can exist in one contract.
Often involves products with a service that can also be sold separately.
E.g., cars sold with navigation/diagnostics services that are also offered separately.
STEP 3 TRANSACTION PRICE
Amount of consideration that a company expects to receive from a customer in exchange for transferring goods and services.
Important factors to consider:
Variable consideration
Time value of money
Non-cash consideration
Consideration paid or payable to customers