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F1M4 Specific Application of
Revenue Recognition, Repurchase Agreements…
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Repurchase Agreements
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A repurchase agreement is a contract to sell an asset with a promise or option to repurchase it.
There are three types: forward, call, and put.
Must forward it back, can call it back, a customer can put it back.
Accounting treatment depends on the type of arrangement. It is a lease if item loses value over the contract term. It is a Financing arrangement if it keeps or gain value over the contract term and interest may need to be recorded.
"Financial Liability" is used as the suspense account until cash and interest become revenue for financing arrangements.
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Principal vs. Agent
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The Principal has everything: control, risk, and pricing. Therefore, it records the gross revenues.
The Agent only arranges a sale, it has no control, risk, or pricing. Their revenue is only the agent fee or sales commission.
Put Option
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Under a put option, the customer can put it back to the seller's hands.Recording it depends on:
- customer incentives and
- repurchase price relative to original price.
There is incentive if the repurchase price is more than the market value. Since it is more worth to sell it back then to the market.If there is incentive, we look at the repurchase price relative to the original price. It is a Lease if it is less than original price.
It is a Financing arrangement if it is the same or more expensive.If there is no incentive, it is just a regular sales with a right of return.
Consignment
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Consignment is not revenue, it is only revenue when it reaches the customer. Revenue to Consignor is netted for commission.
It is a consignment if the entity has control and can require the dealer to return or transfer their products.
The dealer is also not obligated to pay the entity until a condition like selling it to the customer is met.
Warranties
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Warranties depend on if it optional or required.
Optional warranties are distinct services and it is another performance obligation to allocate transaction price.
Required warranties are not a distinct service. The requirements can come from the law or the contract.
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