advanced financial accounting chapter six revenue

1. Chapter six
Revenue

2. Revenue recognition
is straightforward in most business transactions,
but it is open to manipulation.
Income, defined as includes both revenues and
gains.
Revenue : is income arising in the ordinary course
of an entity's activities.
• Revenue, is usually the largest amount in statement
of profit or loss so it is important that it is correctly
stated.

3. Revenue from contracts with customers
• Under IFRS 15 the transfer of goods and services is
based upon the transfer of control, rather than the
transfer of risks and rewards as in IAS 18.
• Control of an asset is described in the standard as the
ability to direct the use of, and obtain substantially all
of the remaining benefits from, the asset.
• IFRS 15 applies to all contracts with customers except:
 Leases
Insurance contracts
 Financial instruments and other contractual rights and
obligations.
 Non-monetary exchanges between entities in the same line of
business.

4. • Income. Increases in economic benefits during the
accounting period in the form of inflows or
enhancements of assets or decreases of liabilities that
result in an increase in equity.
• Contract. An agreement between two or more parties
that creates enforceable rights and obligations.
• Contract asset. An entity's right to consideration in
exchange for goods or services that the entity has
transferred to a customer when that right is
conditioned on something other than the passage of
time.
• Receivable. An entity's right to consideration that is
unconditional – i.e only the passage of time is required
before payment is due.

5. Recognition and measurement
• Generally, revenue is recognized when the entity has
transferred promised goods or services to the
customer.
• five steps for the recognition process.
revenue is recognized and measured using a five step
model.
1. Identify the contract with the customer.
2. Identify the separate performance obligations.
• A contract includes promises to provide goods or services to a
customer. Those promises are called performance obligations.
3. Determine the transaction price.
4. Allocate the transaction price to the performance obligations.

6. • 5. Recognize revenue when (or as) a performance
obligation is satisfied.
• Contract costs
• The incremental costs of obtaining a contract (such as
sales commission) are recognized as an asset if the entity
expects to recover those costs.
• Costs incurred in fulfilling a contract. are recognized as an
asset if they meet the following criteria:
i. The costs relate directly to an identifiable contract.
ii. The costs generate or enhance resources of the entity.
iii. The costs are expected to be recovered.

7. Performance obligations satisfied over time
• Methods of measuring the amount of performance
completed to date encompass output methods and
input methods.
1. Output methods recognize revenue on the basis of
the value to the customer of the goods or services
transferred.
• They include surveys of performance completed,
appraisal of units produced or delivered.
2. Input methods , recognize revenue on the basis of the entity's
inputs, such as labor hours, resources consumed, costs
incurred.

8. • Some indicators of the transfer of control are:
The entity has a present right to payment for the asset.
The customer has legal title to the asset.
The entity has transferred physical possession of the asset.
The significant risks and rewards of ownership have been
transferred to the customer.
The customer has accepted the asset.

9. Common types of transaction
Warranties :
• It constitutes a distinct service and is accounted for
as a separate performance obligation. This would apply
to a warranty which provides the customer with a
service in addition to the assurance that the
product complies with agreed-upon specifications.

10. Principal versus agent
• Principal : if it controls the promised good or service
before it is transferred to the customer.
• When the performance obligation is satisfied, the
entity recognizes revenue in the gross amount of
the consideration to which it expects to be entitled
for those goods or services.
• Agent: if its performance obligation is to arrange
for the provision of goods or services by another party.
• the recognition of revenue in the amount of any fee or
commission to which it expects to be entitled in exchange
for arranging for the other party to provide its goods or
services.

11. • Indicators that an entity is an agent rather than a
principal include:
1. Another party is primarily responsible for fulfilling the
contract.
2. The entity does not have inventory risk before or after the
goods have been ordered.
3. The entity's consideration is in the form of a commission.
4. The entity is not exposed to credit risk

12. Repurchase agreements
• Under a repurchase agreement an entity sells an asset and
promises, or has the option, to repurchase it.
• Repurchase agreements generally come in three forms.
1. An entity has an obligation to repurchase the asset
(a forward contract.)
2. An entity has the right to repurchase the asset
(a call option).
3. An entity must repurchase the asset if requested to do so
by the customer
(a put option).
In the case of a forward or a call option the customer does
not obtain control of the asset,

13. • The entity will account for the contract as:
• lease if the repurchase price is below the original selling
price.
• financing arrangement if the repurchase price is equal to or
greater than the original selling price
• If the repurchase price is lower than the original selling
price and it is considered that the customer does not
therefore have significant economic incentive to
exercise the option.
* the entity should account for the agreement as a lease.
• If the repurchase price is greater than or equal to the
original selling price and is above the expected market
value of the option,
• the contract is treated as a financing arrangement.

14. • the customer has a significant economic incentive
to exercise the put option because the repurchase
price exceeds the market value at the repurchase date.
## control does not pass to the customer.
• When a product is delivered to a customer under a
consignment arrangement, the customer does not
obtain control of the product at that point in time,
so no revenue is recognized upon delivery.

15. Indicators of a consignment arrangement
1. The product is controlled by the entity.
2. The entity can require the return of the product, or
transfer it to another party.
3. The customer does not have an obligation to pay for the
product.
** apply that control of the inventory has been transferred
to the dealer.
• The inventory should be recognized in the dealer's
statement of financial position, together with a liability
to the manufacturer.
• Any deposit should be deducted from the liability and
the excess classified as a trade payable.

16. • control of the inventory has not been transferred to
the dealer.
1. inventory should not be included in the dealer's
statement of financial position.
2. Any deposit should be included under 'other
receivables'.

17. Bill-and-hold arrangements
• Under a bill-and-hold arrangement goods are sold but
remain in the ownership of the seller for a specified period,
perhaps because the customer lacks storage facilities.
• For a customer to have obtained control of a product in a
bill and hold arrangement,
• the following criteria must all be met:
1. The reason for the bill-and-hold must be substantive.
2. The product must be separately identified as belonging to the
customer.
3. The product must be ready for physical transfer to the customer.
4. The entity cannot have the ability to use the product or to transfer
it.

18. Presentation and disclosure
• The presentation and disclosure requirements are
important in relation to contracts where performance
obligations are satisfied over time,
• where there are likely to be contract assets and liabilities
to be accounted for at the end of the reporting period.
• Presentation
• Contracts with customers will be presented in an entity's
statement of financial position as a contract liability, a
contract asset or a receivable, depending on the
relationship between the entity's performance and the
customer's payment.

19. • A contract liability is recognized and presented in the
statement of financial position where a customer has paid
an amount of consideration prior to the entity performing
by transferring control of the related good or service to the
customer.
• When the entity has performed but the customer has not
yet paid the related consideration, this will give rise to
either a contract asset or a receivable.
• Where revenue has been invoiced a receivable is
recognized. Where revenue has been earned but not
invoiced, it is recognized as a contract asset.

20. Disclosure
• The objective is for an entity to disclose sufficient
information to enable users of financial statements to
understand the nature, amount, timing and uncertainty of
revenue and cash flows arising from contracts.
• The following amounts should be disclosed” …

21. Performance obligations satisfied over time