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MODULE 3, Determine the transaction price (TP), Professional Judgement,…

- - - - sum of the probability - weighted amounts in a range of possible consideration amounts
        
        add the probability weighted amounts together
        
        Calculate the revenue associated with each scenario
        
        revenue for each scenario * probability related to its occurrence
  - - - highest probability
- - - - No need to adjust for financing component
    - - Step 1 - Assess if contract contains a financing component
      - Step 2 - Assess significance
        
        If significant
        
        adjust for time value of money
        
        Effective interest rate dont use
        
        Market Rate - dont use
        
        Incremental Borrowing Rate - USE
- - - - NO
        
        Account as a Purchase from supplier
      - YES
        
        Reduce the transaction price by excess above the FV
- - - - disaggregated revenue from contracts with customers
        
        Disaggregated revenue
        
        categories
        
        uncertainty of revenue
        
        cashflows affected by economic factors
        
        amount
        
        nature
        
        timing
        
        examples
        
        type of good or service
        
        major product lines);
        
        geographical region
        
        example, country or region);
        
        market or type of customer
        
        government and non-government customers
        
        type of contract
        
        fixed-price and time-and-materials contracts
        
        contract duration
        
        short-term and long-term contracts
        
        sales channels
        
        goods sold directly to consumers and goods sold through intermediaries
      - contract balances
      - performance obligations
      - The transaction price allocated to remaining performance obligations.
    - - Subjectivity in recognising and measuring provisions makes them a potential tool for entities to manage their earnings
        
        earnings management
        
        Definition - manipulation of revenue and expense to smooth out profit fluctuations
        
        Disclosure requirements aim to reduce the use provisions for earnings management
        
        Exemption -disclosure of some or all of the information required … can be expected to prejudice seriously the position of the entity in a dispute with other parties on the subject matter of the provision,contingent liability or contingent asset
        harm the business if other ppl have info
      - no need to disclose the nature of the obligation sin the notes
- - - - reflect/adjust for
        
        Risk specific to liability
        
        Market assessment
      - not reflect risks already accounted for in cash flow estimates or taken in to consideration when estimating the future cash flows
      - Pe tax
  - - - may be the best estimate of the liability
    - - the obligation is estimated by weighting all possible outcomes by their associated probabilities. The name for this statistical method of estimation is “expected value”
        
        all possible outcome * associated probabilites
- - - - PRESENT OBLIGATION
        
        LEGAL OBLIGATION
        
        legally enforceable
        
        Statutory Requirement
        
        Binding Contract
        
        duty or responsibility
        
        Third party is owed something
        
        No other realistic alternative but to settle the settle the obligation
        
        CONSTRUCTIVE OBLIGATION
        
        Valid expectation created that entity will fulfil obligation
        
        Accepts responsibilities
        
        Established pattern of past practice
        
        Published policies
        
        Current Statement / announcemnt /business practices
        
        not legally suable but loose goodwill , reputation and credibility
    - - reliable measured
        
        RELIABLE ESTIMATE OF OBLIGATION
        
        single obligation
        
        YES
        
        use INDIVIDUAL MOST LIKELY outcome
        
        NO
        
        Use WEIGHTING of ALL possible outcomes by their PROBABILITIES
      - probable ( likely)
        
        PROBABLE FLOW OF ECONOMIC BENEFITS
        
        normal recognition critera
- - - - no asset recognised
      - no disclosure required
  - - - Legal case that you might win where the outcome is uncertain
      - receiving a full cash refund as a warranty claim, but depends on demonstrating the product is faulty first, and this is in dispute.
- - - - present obligation from past events
        
        not recognised as a liability but recognised as a contingent liability
        
        settlement : outflow of economic benefits
        
        not probable
        
        cannot be measured
      - reliably measure contingent liability
        
        business combination , IFRS 3
        
        take into Net identifiable asset calculation
    - - because it fails the recognition criteria of a liability
      - because it fails the definition of liability
  - - - past event
      - Present obligation
      - settlement : outflow of economic benefits
        
        recognition criteria
        
        probable and contingent
- - - - contingent liability - disclose in notes
    - - Contingent Liability - Ignore
  - - - contingent asset - disclose in notes
    - - Contingent Asset- Ignore
  - - - Exception when it can be reliably measure contingent liability
        
        business combination , IFRS 3
        
        take into Net identifiable asset calculation
- - - - Expected cost plus a margin approach
        
        METHOD FOR ESTIMATING
        
        add an appropriate margin
        
        Forecast expected costs of satisfying a performance obligation
        
        factors that influence the stand alone selling price estimate
        
        entity specific factors
        
        internal cost structure
        
        pricing
      - Residual approach
        
        METHOD FOR ESTIMATING
        
        Calculate total transaction price - sum of observable stand alone selling prices
        
        Estimate the satand alone selling price
        
        factors that influence the stand alone selling price estimate
        
        high variable selling price
      - Adjusted market assessment approach
        
        METHOD FOR ESTIMATING
        
        Evaluate the market
        
        Estimate the price customers would pay
        
        factors that influence the stand alone selling price estimate
        
        Market conditions
        
        supply and demand
        
        competitor pricing
        
        market share
- - - - < 12 months
        
        practical expedient available
      - 12 months
        
        adjust for the time value of money
- - - - adjusted
        
        recognised and unrecognised revenue
  - - - Not adjusted
        
        already recognised revenue
      - adjusted
        
        future revenue under existing contract
        
        future revenue after modifications
- - - - change in price
        
        Contract price increases
        
        adjusted STAND ALONE selling price of additional goods/services
      - change in scope
        
        scope increases
        
        additional distinct goods or services
- - - - costs relate directly to the contract
      - Costs generate or enhance resources that will be used to satisfy PO
      - costs are expected to be recovered ( included in profit margin)
  - - - EXPENSE
        
        if amortization period < 12 months
      - ASSET
        
        if recoverable ( included in profit margin)
- - - - factors indicating SEPERATELY IDENTIFIABLE
        
        Does not provide service of integrating G&S with other G&S in contract
        
        G&S does not modify or customise another G&S in contract
        
        G&S is not highly interrelated or dependent on other G&S
        
        SINGLE PO if words like
        
        written obligation contains the promise of an additional service then also 1 PO
        
        customised
- - - - IF ONE of the following is met
        
        Entity's performances creates or enhances as asset already controlled by the customer
        
        Performance does NOT create asset with an alternative use for the entity and entity has a right to payment
        
        customer simultaneously receives & consumes all the benefits
  - - - Customer has legal title to asset
      - Transfer of physical possession of asset
      - Entity has present right to payment
      - Customer has significant risks and rewards of ownership
      - Customer has accepted asset