Chapter 18: Revenue Recognition (Other revenue recognition issues ( Bill…
Chapter 18: Revenue Recognition
Overview of revenue recognition
Most revenue transactions pose few problems for revenue recognition. This is because, in many cases, the transaction is initiated and completed at the same time. However, not all transactions are that simple.
New revenue recognition standard
The new standard,
Revenue from Contracts with Customers
, adopts an asset-liability approach as the basis for revenue recognition
recognizes and measures revenue based on changes in assets and liabilities
(a) the recognition and measurement of assets and liabilities
(b) changes in those assets or liabilities over the life of the contract
companies account for revenue based on the asset or liability arising from contracts with customers
Revenue recognition principle.
Recognize revenue in the accounting period when the performance obligation is satisfied.
The five-step process
Contract with customers
A contract is an agreement between two parties
that creates enforceable rights or obligations.
Apply Revenue Guidance to Contracts If:
The contract has commercial substance;
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; and
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 to Contracts If:
The contract is wholly unperformed, and
Each party can unilaterally terminate the contract without compensation.
Revenue from a contract with a customer cannot be recognized until a contract exists.
a company does not recognize contract assets or liabilities
one or both parties to the contract perform
Until performance occurs, no net asset or net liability occurs.
Separate Performance Obligation.
new and separate contract
account for the effect of the change in the period of change as well as future periods. should not change previously reported results.
Seperate performance obligations
performance obligation is a promise in a contract to provide a product or service to a customer
the company must provide a distinct product or service
Determining the transaction price
Transaction price is the amount of consideration that a company expects to receive from a customer in exchange for transferring a good or service
Expected value: Probability-weighted amount in a range of possible consideration amounts.
Most-Likely amount: The single most likely amount in a range of possible consideration outcomes
allocates variable consideration if it is reasonably assured that it will be entitled to that amount
Time value of money
Consideration paid or payable to customers
Allocating the transaction price
Satisfying performance obligation
Other revenue recognition issues
Right of return
Bill and hold agreements
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
depends on circumstances:
determines when it has satisfed its performance obligation to transfer a product by evaluating when the transfer of control of that product
Recognise as Revenue
Principal agent relationships
Warranties that the product meets agreed-upon specifcations in the contract at the time the product is sold. Included in sales price
do not record a separate performance obligation. should be expensed in the period the goods are provided or services performed. the company should record a warranty liability
. Warranties that provide an additional service beyond the assurance-type warranty. Doesnt included in sales price
separate service and are an additional performance obligation. Companies should allocate a portion of the transaction price to this performance obligation. The company recognizes revenue in the period that the service-type warranty is in effect
Non-refundable upfront fees
Presentation & disclosures