Professional Documents
Culture Documents
Background
Both the IASB and the FASB have indicated that the
state of reporting for revenue was unsatisfactory.
18-1 LO 1
Revenue Recognition
18-3
Performance Obligation is Satisfied LO 1
Overview of the Five-Step Process
18-4 LO 1
Overview of the Five-Step Process
18-5 LO 1
Overview of the Five-Step Process
Step 5: Recognize
Airbus recognizes revenue of €100 million for the
revenue when
sale of the airplanes to Cathay Pacific when it
each performance
satisfies its performance obligation—the delivery of
obligation
the airplanes to Cathay Pacific.
is satisfied.
18-6 LO 1
Extended Example of Five-Step Process
18-7 LO 1
Extended Example of Five-Step Process
1. The contract has commercial substance: Tyler gives cash for the
coffee.
2. The parties have approved the contract: Tyler agrees to
purchase the coffee and BEAN agrees to sell it.
3. Identification of the rights of the parties is established: Tyler
has the right to the coffee and BEAN has the right to receive $3.
4. Payment terms are identified: Tyler agrees to pay $3 for the
coffee.
5. It is probable that the consideration will be collected: BEAN
has received $3 before it delivered the coffee.
18-8 LO 1
It appears that BEAN and Tyler have a valid contract with one another.
Extended Example of Five-Step Process
18-9 LO 1
Extended Example of Five-Step Process
18-11 LO 1
Extended Example of Five-Step Process
BEAN must determine whether the sale of the coffee and the sale of
the two bagels involve one or two performance obligations.
18-12 LO 1
Extended Example of Five-Step Process
18-14 LO 1
Extended Example of Five-Step Process
18-15 LO 1
Extended Example of Five-Step Process
18-16 LO 1
Extended Example of Five-Step Process
18-17 LO 1
Step 3: Determine the transaction price.
18-19 LO 1
Extended Example of Five-Step Process
The bag of Motor Moka beans and the large cup of coffee are
distinct from one another and are not highly dependent on or highly
interrelated with the other.
18-20 LO 1
Extended Example of Five-Step Process
18-21 LO 1
Extended Example of Five-Step Process
18-23 LO 1
Extended Example of Five-Step Process
18-24 LO 1
LEARNING OBJECTIVE 2
The Five-Step Understand and apply the five-
step revenue recognition
Process Revisited process.
18-25 LO 2
Contract with Customers—Step 1
Accounting
Revenue cannot be recognized until a contract exists.
Company obtains rights to receive consideration and
assumes obligations to transfer goods or services.
Rights and performance obligations gives rise to an (net)
asset or (net) liability.
Company does not recognize contract assets or liabilities
until one or both parties perform under the contract.
18-26 LO 2
Contract with Customers—Step 1 ILLUSTRATION 18.3
Basic Revenue
Transaction
The journal entry to record the sale and related cost of goods sold is as follows.
July 31, 2019
Accounts Receivable 5,000
Sales Revenue 5,000
Cost of Goods Sold 3,000
Inventory 3,000
18-27 LO 2
Contract with Customers—Step 1 ILLUSTRATION 18.3
Basic Revenue
Transaction
Margo makes the following entry to record the receipt of cash on August 31, 2019.
August 31, 2019
Cash 5,000
Accounts Receivable 5,000
18-28 LO 2
Separate Performance Obligations—Step 2
18-29 LO 2
Separate Performance Obligations—Step 2
ILLUSTRATION
18-30 LO 2
Separate Performance Obligations—Step 2
ILLUSTRATION
18-31 LO 2
Determining Transaction Price—Step 3
Transaction price
Amount of consideration that company expects to receive
from a customer.
In a contract is often easily determined because customer
agrees to pay a fixed amount.
Other contracts, companies must consider:
► Variable consideration
► Time value of money
► Non-cash consideration
► Consideration paid or payable to customers
18-32 LO 2
Determining Transaction Price—Step 3
Variable Consideration
Price dependent on future events.
► May include price increases, volume discounts,
rebates, credits, performance bonuses, or royalties.
Companies estimate amount of revenue to recognize.
► Expected value
► Most likely amount
18-33 LO 2
Determining Transaction Price—Step 3
ILLUSTRATION 18.4 Estimating Variable Consideration
Most Likely Amount: The single most likely amount in a range of possible
consideration outcomes.
May be appropriate if the contract has only two possible outcomes.
18-34 LO 2
Variable Consideration ILLUSTRATION 18.5
Transaction Price
18-35 LO 2
Variable Consideration ILLUSTRATION 18.5
Transaction Price
18-36 LO 2
Variable Consideration
18-38 LO 2
ILLUSTRATION 18.7
Time Value of Money Transaction Price -
Extended Payment Terms
Questions: (a) How much revenue should SOK Company record on July 1,
2019? (b) How much revenue should it report related to this transaction on
December 31, 2019?
18-39 LO 2
ILLUSTRATION 18.12
Time Value of Money Transaction Price -
Extended Payment Terms
Questions: (a) How much revenue should SOK Company record on July 1,
2019? (b) How much revenue should it report related to this transaction on
December 31, 2019?
Entry to record interest revenue at the end of the year, December 31, 2019.
Notes Receivable 54,000
Interest Revenue (12% x ½ x R$900,000) 54,000
Companies are not required to reflect the time value of money if the time period
for payment is less than a year.
18-40 LO 2
Determining Transaction Price—Step 3
Non-Cash Consideration
Goods, services, or other non-cash consideration.
Companies sometimes receive contributions (e.g.,
donations and gifts).
Customers sometimes contribute goods or services,
such as equipment or labor, as consideration for goods
provided or services performed.
Companies generally recognize revenue on the basis
of the fair value of what is received.
18-41 LO 2
Determining Transaction Price—Step 3
18-42 LO 2
ILLUSTRATION 18.8
Consideration Paid or Payable Transaction Price –
Volume Discount
VOLUME DISCOUNT
Facts: Sansung Company offers its customers a 3% volume discount if they
purchase at least ¥2 million of its product during the calendar year. On March 31,
2019, Sansung has made sales of ¥700,000 to Artic Co. In the previous 2 years,
Sansung sold over ¥3,000,000 to Artic in the period April 1 to December 31.
Questions: How much revenue should Sansung recognize for the first 3
months of 2019?
18-43 LO 2
ILLUSTRATION 18.8
Consideration Paid or Payable Transaction Price –
Volume Discount
Questions: How much revenue should Sansung recognize for the first 3
months of 2019?
Cash 679,000
Accounts Receivable 679,000
If Sansung’s customer fails to meet the discount threshold, Sansung makes the
following entry upon payment.
Cash 700,000
Accounts Receivable 679,000
Sales Discounts Forfeited 21,000
18-44 LO 2
Allocating Transaction Price to Separate
Performance Obligations—Step 4
18-45 LO 2
Allocating Transaction Price to Separate
Performance Obligations—Step 4 ILLUSTRATION 18.9
Transaction Price—
Allocation
18-46 LO 2
Allocating Transaction Price
ILLUSTRATION 18.12
Multiple Performance
Obligations—Product,
Installation, and Service
18-47 (continued) LO 2
Allocating Transaction Price
ILLUSTRATION 18.12
Multiple Performance
Obligations—Product,
Installation, and Service
18-48 (continued) LO 2
Allocating Transaction Price
ILLUSTRATION 18.12
Multiple Performance
Obligations—Product,
Installation, and Service
18-49 (continued) LO 2
Allocating Transaction Price
ILLUSTRATION 18.12
Multiple Performance
Obligations—Product,
Installation, and Service
18-50 (continued) LO 2
Allocating Transaction Price
ILLUSTRATION 18.12
Multiple Performance
Obligations—Product,
Installation, and Service
18-51 (continued) LO 2
Allocating Transaction Price
ILLUSTRATION 18.12
Multiple Performance
Obligations—Product,
Installation, and Service
18-52 (continued) LO 2
Allocating Transaction Price
ILLUSTRATION 18.12
Multiple Performance
Obligations—Product,
Installation, and Service
Handler recognizes revenue from the sale of the equipment once the
installation is completed on November 1, 2019. In addition, it recognizes
revenue for the installation fee because these services have been
performed.
18-53 (continued) LO 2
Allocating Transaction Price
ILLUSTRATION 18-12
Multiple Performance
Obligations—Product,
Installation, and Service
18-54 (continued) LO 2
Allocating Transaction Price
ILLUSTRATION 18-12
Multiple Performance
Obligations—Product,
Installation, and Service
18-55 LO 2
Recognizing Revenue When (or as) Each
Performance Obligation Is Satisfied—Step
5
Company satisfies its performance obligation when the
customer obtains control of the good or service.
18-56 LO 2
Recognizing Revenue When (or as) Each
Performance Obligation Is Satisfied—Step
5
Recognizing revenue from a performance obligation over
time
Measure progress toward completion
► Method for measuring progress should depict transfer
of control from company to customer.
► Most common are cost-to-cost and units-of-delivery
methods.
► Objective of methods is to measure extent of progress
in terms of costs, units, or value added.
18-57 LO 2
Recognizing Revenue When (or as) Each
Performance Obligation Is Satisfied—Step
5Step in Process Description Implementation
ILLUSTRATION 18.15
Summary of the
Five-Step Revenue
Recognition Process
18-58 LO 2
Recognizing Revenue When (or as) Each
Performance Obligation Is Satisfied—Step
5Step in Process Description Implementation
18-59 LO 2
Recognizing Revenue When (or as) Each
Performance Obligation Is Satisfied—Step
5Step in Process Description Implementation
ILLUSTRATION 18.15
Summary of the
Five-Step Revenue
Recognition Process
18-60 LO 2
Recognizing Revenue When (or as) Each
Performance Obligation Is Satisfied—Step
5Step in Process Description Implementation
4. Allocate the If more than one The best measure of fair value
transaction performance obligation is what the good service could
price to the exists, allocate the be sold for on a standalone
separate transaction price based basis (standalone selling price).
performance on relative fair values. Estimates of standalone selling
obligation. price can be based on
1. adjusted market
assessment,
2. expected cost-plus a margin
approach, or
ILLUSTRATION 18.15 3. a residual approach.
Summary of the
Five-Step Revenue
Recognition Process
18-61 LO 2
Recognizing Revenue When (or as) Each
Performance Obligation Is Satisfied—Step
5Step in Process Description Implementation
18-62 LO 2
Copyright
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18-63