Int. Acc. FA LECT 2&3: Revenue recognition part 3 (STEP 3 TRANSACTION…
Int. Acc. FA LECT 2&3: Revenue recognition part 3
STEP 3 TRANSACTION PRICE
: discounts, rebates, credits, performance bonuses or royalties.
Simply put: the amount the company receives will depend on future events.
Important: Company should only allocate variable consideration if reasonably assured that it is entitled to this.
: Probability-weighted amount in a range of possible consideration amounts.
May be appropriate if a company has a large number of contracts with similar characteristics.
Can be based on a limited number of discrete outcomes and probabilities.
Most likely amount
: The single most likely amount in a range of possible consideration outcomes.
May be appropriate if the contract has only two possible outcomes
The single most likely amount in a range of possible consideration outcomes (e.g., only two possible outcomes).
TRANSACTION PRICE= Amount of consideration that a company expects to receive from a customer in exchange for transferring goods and services.
STEP 3 TRANSACTION PRICE: TIME VALUE OF MONEY
Time value of money
: sometimes payment occurs later than product/service delivery (>1 year).
If the contract involves a significant financing component (e.g., sell product in exchange for a note).
Determine fair value by measuring the consideration received (e.g., value of the note) or discounting the payment using an imputed interest rate.
STEP 3 TRANSACTION PRICE: NON-CASH CONSIDERATION
: company receives goods, services, or other non-cash consideration.
fair value of the received consideration
Share prices are usually available – company recognizes revenue as the fair value of the shares
IF this can’t be estimated, recognize the fair value of the sold goods/performed services.
Value of this service might not be reliably estimated – company A recognizes revenue as the fair value of the merchandise.
STEP 3 TRANSACTION PRICE: CONSIDERATION PAID OR PAYABLE TO CUSTOMERS
expects similar purchases over the remaining year based on prior experience.