Kế toán, kiểm toán - Chapter 6: Revenue recognition

CHAPTER 6:REVENUE RECOGNITION2Chapter 6: Revenue RecognitionAfter studying this chapter, you should be able to:Understand the economics and legalities of selling transactions from a business perspective.Identify the five steps in the revenue recognition process.Identify the contract with customers.Identify the separate performance obligations in the contract.Determine the transaction price.Allocate the transaction price to the separate performance obligations.Understand how to recognize revenue when the company satisfies its performance obligation.Analyze and determine whether a company has earned revenues under the earnings approach. Identify other revenue recognition issues.Describe presentation and disclosure regarding revenue.Identify differences in accounts between IFRS and ASPE and potential changes.3Revenue Recognition4Understanding Sales TransactionsAccounting for revenues is often very complexMuch of complexity is caused by the structure of the sales transactionsTo properly account for sales transactions, accountants must understand the business of the entity and the nature of the transactionKey questions for understanding the sales transactions from a business perspective are: What is being given up?What is being received?Normally specified in sales agreements5What is being sold?Sales transactions often involve transfer of goods, services, or both (known as deliverables)Accounting is different under each situationSale of goods: tangible assets with a finite point when control transfers to buyer (generally with transfer of legal title and possession)Sale of services: legal title and possession irrelevantSale of goods and/or services combinations: complexity in measuring each component of bundled sales or multiple deliverables6What is being received?Most business transactions are reciprocal, something is given up and something is receivedConsideration being received for goods and/or services sold is either:Cash or cash-like (monetary)Non-monetary (another good/service, also known as barter)Generally assume that the transaction is at arm’s length (between unrelated parties) such thatValue of deliverables soldValue of consideration received=7Concessionary TermsIt is critical to understand if sales are done under normal terms, or are special/unusual and contain concessionary terms such as: Lenient return/payment policySelling price is deeply discountedContinued involvement by the sellerMore accommodating credit policy“Bill and hold” transactionsInclusion of “extras”Concessionary terms may create additional obligations, or may indicate that control has not passed to the buyer8LegalitiesRights and obligations of sales transactions are described and governed by lawContract law is most relevant as each sales transaction represents a contract with the customerContract creates enforceable obligations and establishes the terms of the dealSales contract generally determines the point when legal title and possession of goods sold pass on to the customer:FOB shipping pointFOB destinationImplicit obligations not specifically outlined in the sales contract (i.e. constructive obligation) may also be enforced under common or other law9Sales TransactionsRevenue/sales is described as:inflow of economic benefits (e.g. Cash, receivables, etc)arising from ordinary activitiesThere are two approaches to recognizing sales/revenues: Asset-liability approach (contract based approach)Earnings approach10Asset-Liability Approach11Five-Step Process to Revenue RecognitionContinued1213Five-Step Process to Revenue RecognitionIdentifying the Contract with Customers – Step 1A contract is an agreement between two or more parties that creates enforceable rights or obligations. Can be written, oral or implied14Identifying the Contract with Customers – Step 1Upon entering into a contract with a customer, a company obtains rights to receive consideration from the customer and assumes obligations to transfer goods or services to the customer. A company does not recognize contract assets or liabilities, nor is a journal entry performed, until one or both parties perform their contracted obligations15Identifying Separate Performance Obligations – Step 2Performance obligation is a promise to provide a product or servicePromise may be explicit, implicit or possibly based on customary business practice1617Identifying Separate Performance Obligations – Step 2Determining the Transaction Price – Step 3Transaction price is the amount of consideration that a company expects to receive from a customer in exchange for transferring goods or servicesTransaction price is usually stated within the contractMust consider the following: Variable considerationTime value of moneyNoncash considerationConsideration paid or payable to the customer18Allocating the Transaction Price to Separate Performance Obligations – Step 4Transaction prices are allocated to performance obligations based on relative fair valuesFair value is what the company could sell the good or service for on a standalone basis (standalone selling price) If this information is not available, best estimates are used19Recognizing Revenue when each Performance Obligation is Satisfied – Step 5A company satisfies its performance obligation when the customer obtains control of the good or serviceIndicators of control: The company has a right to payment for the assetThe company has transferred legal title to the assetThe company has transferred physical possession of the assetThe customer has significant risks and rewards of ownershipThe customer has accepted the asset20Summary of the five step revenue recognition process21Continued22Summary of the five step revenue recognition processEarnings ApproachRevenues for the sale of goods are recognized when the following criteria are met:Risks and rewards of ownership are transferred to the buyerSeller has no continuing involvement in, nor effective control over the sold goodsCosts and revenues can be reliably measured; andCollectibility is probable23Other Revenue Recognition IssuesThere are several situations where revenue recognition issues arise. This is based on IFRS 15 as ASPE has little specific guidance in these areasThe situations are: Right of returnRepurchase agreementsBill and HoldPrincipal-agent relationshipsConsignmentsWarrantiesNon-refundable upfront fees24Right of ReturnSales with rights of return have long been a challenge in the area of revenue recognitionIf there is an expectation that items may be returned, an estimate must be made and accounted for the initial transaction2526Right of ReturnContinued27Right of ReturnRepurchase AgreementsIf a company enters into a repurchase agreement, it will allow them to transfer an asset to customer but have an obligation or right to repurchase the asset at a later dateRaises the question, “did the company actually sell the asset?”Generally reported as a financing transaction (borrowing)28Bill-and-Hold ArrangementsA contract under which one entity bills a customer for a product but the entity retains physical possession of the product until it is transferred to the customer at a point in the futureMay occur when the purchasing company has limited available space for the product, delays in their production schedule, more than sufficient inventory in its distribution channel29Principal-Agent RelationshipsPrincipals obligation = provide goods or services to the customerAgents obligation = arrange for the principal to provide goods or services to the customerIn these situations, amounts collected on behalf of the principal are not revenue of the agentUsually commission is paid and the agent would record this as their revenue30Consignment SalesConsignor ships inventory to the consignee The consignee acts as an agent to sell the inventoryPossession has transferred; however legal title remains with the sellerRisks and rewards have not transferredGoods are held by seller as “Inventory on Consignment”Not held as inventory on consignee’s booksWhen merchandise sold, the consignee remits cash to the consignor (after deducting commission and other chargeable expenses)31Consignment Sales – EarningsGoods shipped to ConsigneeInventory on Consignment $$$ Finished Goods Inventory $$$Payment of FreightInventory on Consignment $$$ Cash $$$Notification of SaleAccounts Receivable $$$Relevant Expenses $$$ Consignment Sales $$$Cost of Goods Sold $$$ Inventory on Consignment $$$(Note: cost includes freight)Receipt of Cash from SaleCash $$$ Accounts Receivable $$$No EntryNo EntryNotification/Payment of SaleCash $$$ Payable to Consignor $$$Remittance to ConsignorPayable to Consignor $$$ Commission Revenue $$$ Cash $$$Consignor’s BooksConsignee’s Books32WarrantiesCompanies often provide one of two types of warranties to customers: Warranties that the product meets agreed-upon specifications in the contract at the time the product is soldThis type of warranty is included in the sales price of a company’s product (assurance type warranty)Warranties that provide an additional service beyond the assurance-type warrantyThis type of warrant is not included in the sales price of a company’s product (service type warranty)33Non-refundable Upfront FeesCompanies sometimes receive payments (upfront fees) from customers before they deliver a product or perform a serviceGenerally relate to the initiation, activation or setup of a good or service to be provided or performed in the futureIn most cases the upfront payment is non-refundable34Presentation and DisclosureContract assets and contract liabilities must be recorded on the balance sheetThere are two types of contract assetsUnconditional rights to receive considerationConditional rights to receive considerationA contract liability is a company’s obligation to transfer goods or services to a customer for which the company has received consideration from the customerIf it is probable that the transaction price will not be collected, this is an indication that the parties are not committed to their obligationsAs long as a contract exists the amount recognized as revenue is not adjusted for customer credit risk35Presentation and DisclosureThe disclosure requirements for revenue recognition are designed to help financial statement users understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customersTo achieve this, companies disclose quantitative and qualitative information about the following:Contracts with customersSignificant judgementsAssets recognized from costs incurred to fulfil a contract36