Revenue Recognition

Conceptual views
 ASPE - Earnings approach
 4 conditions to recognize revenue
o Risks and rewards have been transferred
o No continuing involvement
o Measurable
o Collectable
 Earnings process is substantially complete
 
 IFRS asset liability approach - 5 steps
o Identifying the contract: criteria
o Identify separate performance obligations
 Distinct - seller can deliver service and goods separately
 Buyer can enjoy the benefits separately
o Determine transaction price
 Complications - variable consideration
 Expected value method / most likely amount approach
 Sales with warranties
 Sales with right of return
o Allocate transaction price to separate performance obligations
 Adjusted market assessment
 Allocate proportionally based on market price and total price
 Residual approach
o Recognize revenue as performance obligations are satisfied
 
Complications?
 General rule( ie at time of sale or delivery) may not apply
o Bill and hold
o Sales with repurchase agreement - not a sale --> financing activity
o Principal agent relations (eg. Consignment sales)
 
 
Cash and receivables
 Cash discounts
o Gross vs net method
 Sales revenue or other revenues
o Journal entries
 
 Impairment of accounts receivables: NRV
o Direct writeoff vs allowance
o Allowance procedure only vs. mix of procedures
 Allowance procedure only
 Estimate AFDA from receivables
 Mix of procedures
 Use credit sales in interim reports
o Direct vs indirect methods
  Indirect: adjust AFDA and receivables
o Journal entries
 
 Derecognition: a secured borrowing vs sale
o ASPE vs IFRS: with recourse
o Journal entries
 
 Notes receivable
o Discount vs premium vs at par
o Stated rate vs effective market rate (borrower's credit)
o Stated rate: payment - annuity
o Effective rate: PV; interest revenue
o IFRS - effective interest method
o Amortizations
o Journal entries
 
Inventory
 Cost inclusion
o What costs should be included?
 Any costs that are necessary to bring inventory to a condition that can be sold
o Inventory system: Perpetual vs periodic
o Cost flow assumptions: average cost; fifo
 Calculate COGS or ending inventory using combinations of systems and flow
 Impairment LC&NRV
o Item by item (more conservative); by grouping
o Journal entries ; direct method (loss absorbed into COGS), indirect method (Loss and
allowance)
 Estimating inventory: gross profit method
 
 Inventory errors
o Implications (effects on SFP & I/S)
o Beginning inventory + net purchases - COGS = Ending inventory
 
PPE
 Cost inclusion: expense vs capitalize
o at acquisition: all costs that are necessary to bring PPE to its intended use
o Subsequent to acquisition: BETTERMENT - useful life, quantity, quality, lower operating
costs
 If its not those, expense
 Non monetary exchange
o FV - all asset(s) given up
 Recognize gain and loss
o BV - overriding rule - use book value of all the assets given up and compare with the fv
of the new assets - recognize a loss if the FV is lower than BV; never recognize a gain
o Contributed assets
 Capital approach (owner) vs income approach
  Deferral vs cost reduction
 Deferral - debit deferred revenue, amortize benefits
o Measurement after initial recognition
 ASPE - cost model
 Cost less acc. depr. Less acc. Impairment
 IFRS: CM or
 Revaluation model --> general PPE
 Update NBV
 Gain - OCI; unless in the past there was a loss recognized
 Loss - NI; exception ?
 Fair value model --> investment property
 Gain/loss in NI
 Cost allocation
o Complications: partial year, revision of estimate --> update the NBV; account for the
changes prospectively (do not need to change the previous periods)
o Impairment: journal entries
 ASPE - cost recovery impairment model
 Two step: recoverability test - current value and undiscounted future
net CF
 If current > CF --> recoverable; opposite --> impaired
 IFRS - rational entity impairment model
 Recoverable amount: higher of value in use and fair value - cost to sell
 CV - RA
 Cannot recover under ASPE, able to recover in IFRS
o Impairment reversal
o CGU
 Allocation
 
 Derecognition
o How to calculate gain/loss
 Update the NBV
 Journal entries
 
 Change of intent
o Remove from PPE = held for sale
o ASPE vs IFRS
 IFRS - should be current asset
o Measured at lower of carrying value & fair value less cost to sell
o No more depreciation
o May qualify for discontinued operation
 
 
 
Composition
MC: 40
Short answer: 80
Case: 60
  Be specific
 Contingent event
 Subsequent event
 Conceptual framework - trade-offs?
 
MC & Short answer - post midterm