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    Lecture notes about revenue recognition: contracts with customers- 5 step process and other issues.

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    Dayag-2021-Chapter-12

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    Lecture notes about revenue recognition: contracts with customers- 5 step process and other issues.

    Copyright:

    © All Rights Reserved
    Download as PDF or read online from Scribd
    Flag for inappropriate content
    99 views39 pages

    Dayag 2021 Chapter 12

    Uploaded by

    Lyka Jane Umagtam
    Lecture notes about revenue recognition: contracts with customers- 5 step process and other issues.

    Copyright:

    © All Rights Reserved
    Download as PDF or read online from Scribd
    Flag for inappropriate content
    of 39
    Chapter 12 - Revenue Recognition: Contracts with Customers - 5-Step Process and Other Issues Introduction In fnoncialeparing, contusion arves when to agree what revenue & ond what it n't One con be able to decide tho! the ssues astocaled wih reverue recogni con get relatively problematical h tis chapter we Tocus on ihe completes associated wth revenue recogniion ad fhe conceptual nalure cf revenue ‘ond os the basi of accounting far revenue recognition decision. In practice, here are departures from Ihe revenue recoaniion principle {Ihe accrual method). Revenue & somelimes recagnized at other poins in Ine earning proces. alibuing in great measure tothe sgniicantciverly of revenve transactions Uni most recently revenue recagnitian was exacily one of the bigges! gaps between IFRS [PFRS) and US GAAP Finaly. these two standards came closer and tied fo sole all hese diferences on May 28. 2014 when new fevenue recognition standard was issued: PFRS 15 Revenue from Contracls vith Customs andl | should hit he gap between IFRS ond US GAAP The succeeding chapters wil cover Construction Contracts (Chapter 10). Licenses. Royalties, Fronchses, Non-efundable Upiront Fee & Consignment (Chopler 11). Income and Revenue Distinguished Income Emphasized Paragraph 74 of the Framework states that income encompasses both revenue and gains: “Revenue arises in the course of the ordinary aclivities of an entity and is tefered to by a variely of different names including sales, fees, interest dividends, royalties, and rent.” * “Ordinary activities” means normal trading or ordinary activities + "Revenue" presented in the statement of profit or loss should not include items such as proceeds from the sale of non-current assets or sales tay. Paragraph 75 of the Framework states: “Gains represent other items that meet the definition of income and may or may not arise in ihe course of the ordinary activities of an entity. Gains represent incteases in economic benefils and such ore no different in nature from revenue. Hence, they are not regarded os consulting a separate siement in this Framework.” Because the definition of income includes both revenue and gains, these are not defined as separate elements under the Framework. The only distinguishing feature of revenue in the Framework is the reference 10 “ordinary activities of an enlity” in paragraph 74 Therefore, revenve is essentially a classification of income to distinguish between an enlity's ordinary activities and other activities. ‘Advanced Financial Accounting ~ A Comprehensive: Conceptual & Procedural Approach eo voweien (ose er en ete eee penser geo Sed 2 ats FH ‘eer ee onan matpedttanaaneetent cece? , re recumtarmena inte | nh (aa yn Ce a oor ta Soon ae ge ec sy rect Nea ee oa pets 15 has a lewer room for accounting deckons and species 0 ol more things ‘pending on he ronsoction neve fer some camoories. the impos Themojs reat oligo al ecb oat revo cogs (Loe ee ian elasnte pes ding conte! Baten) 2 Semtne amet » ene ote recog oe ine ow nou he conpony mee 2 et oa compen ne revo sondage Pee ope Compile wo wed 3. hows conga, occu forever fom bund fs (sh mae “tts Suter como rtosevers component {Hon sotconpanes a wcokael medion? {how itl eoroones We! fe contd! eth seg csc obionng he ‘Stra Staley xera coh plier conte ond elt 4. Ne eon fencing conpenesin he coo? ne clot, tow odes wine vate fmm Diferent sectos or industries re allected in many diferent ways olong the 5sleD ‘model as ioouces by FFRS 15. There are four (4) impadant indusies Ino! wil foo® robot he bgges challenges: 1 Manulactters (tere Example 12 ond 13: Conroc! modticators) 2. Telecommuniations (ler fo Mlusation 12-8: Kenting individual petormonce blgatons ondalncatig Konsacton pice) 3. Software development and lechnclogy le fo Example 23 and 48 pling Contact into separate obigaions by olocaling the rorsaction pice} 4 Real eslole ond propety development (cle to Chapler 11: Revenue ove timetpcit in ime) | | | | ‘Adverse A Congress Copal rcdal Apreh Mandtacuing Comperes Mandachrer) There is @ brood ronge at what con be monuiocired ond what conacts ‘monuloctues enerno- They can manuacive Siete in lxge onus ht xe ‘basically symbafc and nat foo specific. However. manufacturers of specific equioment ‘or oodsin general with ng pero of a production con be flected cramaticaly \Winal shouldbe considered for manutoctures? ‘Should they reccgnie revenue over tre or port in ime® i over me, how ore ‘ey ging to meosure the progies towards compleion® How should they account forconttact modtications, e.g. for delveing ‘dation tems of goods + Do they prove post-defvery rebates? Volume dicounls? Year-end bonvies 0 Customers based on tolal volume crdered dying the yeor? Then they ore rcbotiyofecied by PRS 1. ‘Should they spit tne contract nto more performance obfgations? This cous be tne cose when they provide some waranty period forthe products ~ should he ‘waranty be accounted for separately? Ae they roving anyother services for Inet product (0 they incur cerain oss fr abcring the contract. ke bonuses to sles team Maybe Iher should copitaite them, and not excense them imnediotely os © before Telecommunicatons (ilustation 12-8) and Software Development and Technology (Exercise 23 and 48) eal sale ~ Constuction Companies and Property Developers (Chople 1) PFRS 1S replace he folowing stondors ond hlrpetatons: PAS 18 Roverve, AS 11 Consuction Contacts ‘9C 31 Revenue Borer Transactonlnving Advertsing Sevices FRC 13 Cusome Loyay Programs FRI 15 Agreements for he Constucton of Real sate and PARC 18 Tonster of Assets ro Customers Tne core pinche of PFRS 151s tnt an entiy wil recognae reverve to depict he trrser of promised goods or senices to customers in an amount thal eelicts the Corsidetaion (payment) 1 wricn the enty expects to be enlted in exchange foe nose goods or series. 1+ PERS 15 contains guidance er rsoctons ne! previoully adcresed (service revenue, contact madiictins + PERS ISimproves guidance for mutipe-element onengement: ‘+ PARS 1Srequies enhonced esclosues bout revenue Freer er ee a ere CHAPTER [2 ee tionnRlaton PFS TS an ‘ther tsver Te SSep Roce t aaa cote omnce Brattoweronere somal 38 Heswetcweeete | [intone mate, Sonor cn conkoes. |S Repurchase coreerents Examples 43.4 rE {teeter ond vais (hapter 1) posencel 7.franchie (Chapter 11) Scene hap) “9 { everue fom Contac wih Cusflomers cdot on assel-blty approach, Companies vrivnccount for revenve based on chonges in axel of Fables orsing om ‘onfacts with customer, + TheIASE decided hat focusing on: Tne recegetion and measurement of sels ond bites ond 2 changes in hose sets o abies over the He of the contract Bxngs mare Gectine lo the meossement of revenue, comeared Yo the “vsks ond reward eilerain poe standores + prerequted o analyte contrac with customers 1 Conocsindcate tems ond macsurement of consderaron. 2. Winaut contacts, comporis cannot know whether promises willbe meh However PFS 1S requies capilolng ond recognising to profit oF losin line with reverue ecogniton. The Revenue Recognition Objective of Revenue Recognition Recogrte even fo depic! he tanser of goods services fo customers in omourt ‘hat elects he corsigetaton tha! the company receives. or expects fo rece. ‘exchange or hese goods services. ‘Mrevenue recognition starts with a contract between o seller and o custome. \ prepety evaluated these transactions were hot accomparied by wilten and see ‘ogesment ey ae considered conkoc's er pupeses ol revenue recognition ————— eee “aan Pat Azanting “A Comper: Conran &Precdal pprocdh REVENUE RECOGNITION Raven frase ontrdswith Cutest ~ Other aes Ls The key i hot imply ar expey, on otangement entered that specifies the legal Highs end oblgations ofa seer anda cuslomet Contacls between a seller and a customer contin one (usktion 12-1 and 12-2) or ‘more perfomance ablgaion: (Musttion 12-3). which ore promises by the seler 0 Transler qoocs or services to custome. he seller recogntesrevenve when if safsfles a performance obligation by ransfering ~ the promised good or semlee, Consider thot "kansfer have occured, 50 thot the uilomer has contol athe good or service Cont! means thot the customer has act influence over the use of the good oF service onc cblas is bene, For many conhacis, folowing tis onorooch very simple. In portcue. fa coniract Includes ony one performance ebigatin.typcaly Ihe compony decide when the {eles dives the good or provides ne srvce fo @ customer. and then make sre hat Ihe sete recognies venus at tat tne Revenue Recognition Pincipe Recognive revenve in the eccounting period when the perfomance ebiigation is sotsied Iutaton 12-1: Al @ Glance: The Application ofthe Fvestep Process for Revenue ‘ecogntion ‘Assume tho} Concorde Corporaten sgn ¢ contioct fo sal planes fo ReSA Anes for 0990000 Sop: Wei te con! wih acute cont an eseemantbelveen to patie: that cates enorceabie rights eign onset ut he cfana for every eoroct not MO met 7 Intnecote, Concorde has pned a concto deve cplnes fo ReSA Anes. Slop: dni he septate petrmance obligation wihin conkae Aperomonce obigaton« promis no contac! witha customer to tander a goodorsemce lo mecistoner ‘nth casa. Concert has ony one perfomance obtgatonto deer cplanes Io ReSA Alpes. I Concove oto ogeed to meinion the pones. © separ ‘aloeance bigot recorded ft rome, Step 2 Deleine he Ransacton pee ‘orocton pice isthe amount ef consideration holo company expects receive fom o silos in exchonge le Fonteing 0 god or tence a 9 Cuomo frcusegomoinscolcledonbeha ota pars loth cose. the renacton pices shop frwar ti P400.000 000 step 4 Alocoe the tantacton pce to he reps pearance signs. Foo canvect Ino! has more then ore peromonce bigaten, on ently ‘Poul elcate he rorsacton pce te eoen petomance etigatin on mount “Tavncd Fnac eating A Cmprebrios Coral &Proedral haprocdh cu= ss rowtich he ety e981 10 BO Eng to delver opines iy poemancelstn toed escape a aot te Sars iy a _ ,¢ obligation—tne delivery of thy. hat to Dre Ceti for P1000 that kin 2 PUD. How would Kim Ooty’ mato 122 nae sin atc 8 erates te 0 wT Cccauntfortne sale lei Cee? ‘ep: tent he coat mh ioe at cone the contac yr be wie, ea tto he case, onde Cee oes 0 Ine separ pefomance obigaflons winin&conhac eee “goto to deve helody shat putts eleon-Kim Dowty deer ty py Poo 16K, ‘em Drs hve sngl patlomanes ‘ep: eteine Be Rorsacton re. mos seritie toreceve FIND Fam Oe Cetie step &Alocaleneromocton cet he separte pefomance ebizatons ‘he fu Wansoeten ‘hin ony one pedomonce ciation Km Derothyafocales pce tao fo enero the ly shal stop 5: tecogricerevenae when 6s) och pedemanceobigoton aise. ce eatgote fen ies eo ht De puns entes tra ie! ‘ir Dry ois seoma ous soten ooh stecoes he fond | “treciton aeotoses 1a (cesta os Revenue recogntion gels more complicoted when a contact contains mere than one erlrmance obigation. Fra! we conse imple contrac! hal nches only one performance obligation ond {sid of single point in ime when goods or services oe tonslened to a custome The pertomance obligation is saisfed when contel of the goods or services ‘ronsfeved fom the seer fo the customer, ond vsuly is obvious tha transfer occu ‘tthe ine of every. 'n Kim Docthy example above. foriestance he periomance obligation i sisted af ‘he ime ofthe sale (oi in fime) when the lad ha i ranstemedt fo Drei Cerise aS ‘Adrned Fnac Atig A Congreve: Come & Pro 1 that on Dacembet 1, 2088 er as wel as 12 monins of fers ts too" tile to. IO I the computer ses fer ttoon 12-3: Muse Fefomance Obigatons- A Asin eceves on err fom a catomet fr @ come fecniclsoppot Anion dash compte fd Hor Ecatoner ona sae dy The estas pc S400 HO Fast enh octal super eso Pa Shp key he conto! th cute ihe on opeanent between Aton ond cater fe tho row food Shp 2: ket Ie sept petomance ogo win contact thro tropmfomance bgt roms win he cent ‘the wpxiyl acomputer “ine spay ol echrea suo Step 2 Dslrmine Ihe Kontacton pce Ine tls tonsacton pce 0,400 ‘Sep &:Alocole he tonsacon price lo he perlormance obigaions nthe conroct sed on slndolore soles pices P35020 souls be Glecoted 10 Ine sale of the omouler and Pad nud be alocale to he Hechncal supp" Step 5 Recoonte verve when or) each pearance obigaon sais ‘Conta! over the conipuler tas bsen posed othe custome. 0 he full revenue of "73400 snauld be recognized on December 20x (pol i me). ‘ha lowing jou eniry- la POINT TIE, December, 20x a In Summary erm Pin Tne 1 Revenge snouo be recognted et @ pot! in lime when # does not qully for ‘tecognting revenue overtime. The parimance ebigotio is sled when contol of he goods or tenices it fransfened om ie sell o he usher © ual raerafedatels covcus onc colncdes with delvery. 1. Otherinccors of rans of coma. to custome hos |. An obigatan 9 poy ne seer 2 legate one ose 2 hye possession oe oe 4 Asumed hos and rewards of oxnesip. 5 Accepted ns ost ronlored nv so ne sca Oo Sofa nme Na et s20dorsewice ihe cslomerhos hore ndcaan | * Met Ie conte @ Seen sen eros secon ek whet rothas been transtened end revenue can be recognized, “ “vanced Financial Acontng ~A Conproboatvs ansaphald Prcelcad aoa Be } $ see mae pat pre 20, Sree aos Fee ee ne ey chil DM . ame pecembet 31. 2x8 srodsed ve Tee 1229] ver ne gt ond wre Honore aac capansortine Tne tenn

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