REVENUE FROM CONTRACTS WITH CUSTOMERS Recognize revenue when or as each performance obligation is satisfied

Learning Objectives  Revenue can be recognized either:

o At a point in time
1. Explain the core revenue recognition principle  Customer obtains control of the asset
2. Discuss the five-step framework prescribed by IFRS 15  Customer has the obligation to pay
3. Explain the accounting for contract modifications for the asset
4. Discuss other issues in revenue recognition  Customer has legal title to the asset
 Entity has transferred physical
Revenue recognition principle possession of the asset
 Customer has the significant risks and
- To recognize revenue in the accounting period when the rewards of ownership.
performance obligation is satisfied. o Over a period of time
 Progress towards the satisfaction of the
The five-step framework obligation
 customer receives and consumes the
1. Identify the contract with customer
benefits as the seller performs
2. Identify the separate performance obligations
 customer controls the asset as it is
3. Determine the transaction price
created
4. Allocate the transaction price to the identified performance
 the company does not have an
obligations
alternative use for the asset
5. Recognize revenue when or as each performance obligation is
satisfied CONTRACT MODIFICATIONS
Identify the contract with customer  change in the contract’s scope, price or both
 accounting for contract modifications:
 A contract can either be orally or in writing.
o account for modification as a new contract
 Must be approved by both parties.
 the promised goods or services are distinct
 Does not exist if both of the following are true:
 the company has the right to receive an
 Neither the seller nor the customer has performed any
amount of consideration that reflects the
obligations in the contract, and
stand-alone selling price of the promised goods
 Both the seller and the customer can terminate the
or services
contract w/out penalty.
o account for the modification as a modification of the
 Until performance occurs, no asset nor liability occurs. existing contract
 Consideration must be probable of collection
 additional goods or services are not distinct
 Not probable, no revenue is recognized.  consideration for the additional goods or
 Consideration received is recognized as liability and
services does not reflect their stand-alone
recognized as revenue only when:
selling prices
 The entity has no remaining obligation
account for contract modifications prospectively
 All/ substantially all of the consideration received is
non-refundable. FINANCIAL STATEMENT PRESENTATION
Identify the separate performance obligations Contracts with customers are presented as:
 An obligation of a seller to the customer to transfer: 1. contract asset
o A good or service that is distinct 2. accounts receivable
o A series of goods or services that are substantially the 3. contract liability
same
 Distinct if both of the ff. criteria are met: CONTRACT ASSET VS. ACCOUNTS RECEIVABLE
o Customer can benefit in its own
o The goods is separately identifiable CONTRACT ASSET ACCOUNTS RECEIVABLE
 If not separable, goods or services are combine into one Entity’s right to receive payment from the customer
performance obligation. right to receive is conditional on if the right to receive is
something other than the passage UNCONDITIONAL except for the
Determine the transaction price of time passage of time
- future performance
 The amount of consideration to which an entity expects to be
under the contract
entitled in exchange for transferring promised goods or services to
a customer.
 Amount at w/c revenue will be measured.
CONTRACT LIABILITY
 Includes the ff.
o Fixed and or variable amounts  synonymous to unearned income
 Probability weighted expected value  recognition:
 Most likely amount o when the customer paid in advance, or
o Effect of the time value of money o when a no cancelable contract requires advance payment
 Only if there is a significant financing
component in the contract OTHER ISSUES
 Does not need to be considered if the length of
time is less than one year. 1. Right of return
o Fair value of any noncash consideration 2. Principal-agent relationships
3. Repurchase agreements
Allocate the transaction price to the identified performance obligations 4. Gift cards
5. Bill and Hold
 Based on relative stand-alone selling price of the goods or services. 6. Non-refundable upfront fees
o The allocation is made at the beginning of the contract 7. Long-term construction contracts
and is not adjusted for subsequent changes in the stand-
8. Licensing/Royalties
alone selling price.
9. Franchise operations
o If the stand-alone price is not determinable: 10. Consignment arrangements
 Adjusted market assessment approach
 How customers are willing to pay RIGHT OF RETURN
 Expected cost plus margin method
 Projected cost + mark-up Cash sales Credit sales
 Residual approach Time of sale
 Total TP less the sum of the Cash xx AR xx
observable standalone selling prices Sales xx Sales xx
 Allowed only if the stand-alone SP is Refund liab xx Allow. For SR xx
highly uncertain.
 COGS xx COGS xx
Est. Invty. Ret. xx Est. Invty. Ret. xx
Invty xx Invty xx
Actual return of defective inventory items
Ref liab xx Allow. SR xx
Cash xx AR xx
Ret Invty xx Ret Invty xx
Est. Invty Returns xx Est. Invty Returns xx

PRINCIPAL-AGENT RELATIONSHIP

REPURCHASE AGREEMENTS

 Right to repurchase the asset

 Not a sale, but a secured loan

GIFT CARDS

 Deferred revenue account when gift card is sold

 The seller will only recognize revenue when:
o The gift card is used/redeemed; and
o “remote likelihood” that the customer will
use the gift card

BILL-AND-HOLD ARRANGEMENTS

 Customer purchases goods but requests that the seller

not to ship the goods at a later date
 Revenue cannot be recognized until the customer
obtains control of the goods
 Customer obtains control if:
o Substantive reason for the arrangement
o Goods have been separately identified as
belonging to the customer
o Goods are currently ready for transfer to the customer
o Entity cannot use or direct the goods
to another customer

UPFRONT FEES

 Advance payment
 Recognized as revenue only when those future goods or services are
provided

Page 2 of 3