Podcast
Questions and Answers
What is the first step in the 5-step revenue recognition model?
What is the first step in the 5-step revenue recognition model?
- Identify the contract(s) with a customer (correct)
- Identify the performance obligations
- Determine the transaction price
- Recognise revenue when satisfying an obligation
Which of the following characteristics must a contract possess?
Which of the following characteristics must a contract possess?
- It creates enforceable rights and obligations (correct)
- It must have a written document
- It cannot be modified once agreed upon
- It must include a specific payment term
What defines a performance obligation (PO) within a contract?
What defines a performance obligation (PO) within a contract?
- A vague agreement without identified effects
- An informal promise to provide assistance
- A distinct good or service promised in the contract (correct)
- A general understanding of customer service
Which of the following statements about payment terms in a contract is true?
Which of the following statements about payment terms in a contract is true?
What should be considered when determining if goods or services are distinct performance obligations?
What should be considered when determining if goods or services are distinct performance obligations?
What does the concept of commercial substance in a contract refer to?
What does the concept of commercial substance in a contract refer to?
What is a requirement for recognizing revenue related to performance obligations?
What is a requirement for recognizing revenue related to performance obligations?
How can performance obligations be categorized?
How can performance obligations be categorized?
What is the percentage of completion based on the cost-to-cost method?
What is the percentage of completion based on the cost-to-cost method?
What is the amount of gross profit reported at the end of 2019 for the contract?
What is the amount of gross profit reported at the end of 2019 for the contract?
How much was the total revenue recognized from the long-term contract in 2019?
How much was the total revenue recognized from the long-term contract in 2019?
What is the balance in progress billings representing the amount billed in excess of costs and recognized profit?
What is the balance in progress billings representing the amount billed in excess of costs and recognized profit?
What amount represents current liabilities related to progress billings as of 31.12.2019?
What amount represents current liabilities related to progress billings as of 31.12.2019?
What is included in the transaction price when determining revenue from a performance obligation?
What is included in the transaction price when determining revenue from a performance obligation?
Which method can be used to estimate variable consideration?
Which method can be used to estimate variable consideration?
In the car retailer example, how much revenue is recognized for the sale of the car?
In the car retailer example, how much revenue is recognized for the sale of the car?
What does the difference between the cash price and the amount receivable represent?
What does the difference between the cash price and the amount receivable represent?
What is the carrying amount of the receivable on the sale of the car?
What is the carrying amount of the receivable on the sale of the car?
What type of consideration can variable amounts be in?
What type of consideration can variable amounts be in?
What is the finance cost percentage applied to the transaction in the car retailer example?
What is the finance cost percentage applied to the transaction in the car retailer example?
How is the total revenue recognized impacted by the timing of payment?
How is the total revenue recognized impacted by the timing of payment?
What is the main objective when allocating the transaction price?
What is the main objective when allocating the transaction price?
How should the transaction price be allocated if a stand-alone price can be established?
How should the transaction price be allocated if a stand-alone price can be established?
In the example of the mobile phone company, what are the two performance obligations identified?
In the example of the mobile phone company, what are the two performance obligations identified?
When is revenue recognized under IFRS 15?
When is revenue recognized under IFRS 15?
How can performance obligations be satisfied over time?
How can performance obligations be satisfied over time?
What triggers the satisfaction of a performance obligation?
What triggers the satisfaction of a performance obligation?
What portion of revenue is recognized when the handset is delivered in the mobile phone example?
What portion of revenue is recognized when the handset is delivered in the mobile phone example?
What does the term 'transaction price' refer to in revenue recognition?
What does the term 'transaction price' refer to in revenue recognition?
What basis does Binaan Sdn Bhd use to measure progress towards completion of the contract?
What basis does Binaan Sdn Bhd use to measure progress towards completion of the contract?
What was the total cost incurred to date for Binaan Sdn Bhd at the end of the first year?
What was the total cost incurred to date for Binaan Sdn Bhd at the end of the first year?
How much was the total contract price for Binaan Sdn Bhd?
How much was the total contract price for Binaan Sdn Bhd?
Which of the following costs was INCLUDED in the RM6,525,000 of costs incurred?
Which of the following costs was INCLUDED in the RM6,525,000 of costs incurred?
What was the amount billed to date for the project?
What was the amount billed to date for the project?
What must costs incurred contribute to when using a cost-based method?
What must costs incurred contribute to when using a cost-based method?
What was the indirect costs incurred reported by Binaan Sdn Bhd?
What was the indirect costs incurred reported by Binaan Sdn Bhd?
How is the percentage of completion determined by Binaan Sdn Bhd?
How is the percentage of completion determined by Binaan Sdn Bhd?
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Study Notes
Delivery Units and Revenue Recognition Methods
- Revenue can be recognized based on the value delivered to customers through goods or services.
- Performance can be assessed via completed surveys or units produced.
- Cost-to-cost method bases recognition on input costs such as labor hours or incurred expenses.
- Input costs must reflect progress towards fulfilling performance obligations.
Case Study: Binaan Sdn Bhd
- Contract price for construction project: RM20,000,000.
- Estimated cost to complete: RM15,000,000, broken down as follows:
- Direct labor: RM4,250,000
- Materials/subcontractors: RM8,750,000
- Indirect costs: RM2,000,000
- Total costs incurred by end of Year 1: RM6,525,000.
Revenue Recognition Steps
-
Step 1: Identify the Contract
- Must be approved, with enforceable rights and obligations.
- Must specify each party's rights and payment terms.
- Must have commercial substance affecting cash flows.
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Step 2: Identify Performance Obligations (PO)
- Defined as promises to deliver distinct goods or services.
- Performance obligations can be explicit or implicit.
- Distinct goods/services can be consumed independently by customers.
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Step 3: Determine the Transaction Price (TP)
- Expected earnings from promised goods/services.
- May comprise fixed or variable amounts.
- Variable consideration must be estimated based on probability-weighted amounts.
Examples of Transaction Pricing
- Car retailer example:
- Cash price of RM17,150 versus deferred payment of RM20,000.
- Revenue recognized as RM17,150 with finance income of RM1,372.
Allocating Transaction Price
- Transaction price must be allocated to each performance obligation.
- Stand-alone transaction prices should be utilized for allocation when identifiable.
Example of Revenue Allocation
- Mobile phone company scenario includes:
- Handset (stand-alone price of £800) and network service (£60/month).
- Revenue recognized upon delivery of the handset, with remaining revenue recognized over the service period.
Recognizing Revenue
- Revenue recognized when performance obligations are satisfied, typically upon transfer of control.
- Under cost-to-cost method, revenue recognition correlates with the percentage of costs incurred to estimated total costs.
- In Binaan Sdn Bhd's case, 40% of the total estimated costs leads to a revenue recognition of RM8,000,000.
Financial Position Statement
- Accounts receivable at year-end: RM1,750,000 (billings to date minus cash collected).
- Current liabilities: Progress billings of RM3,250,000 (billings to date minus recognized revenue).
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