CPA Program Financial Reporting Module 3

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Questions and Answers

What distinguishes output methods from input methods in measuring progress on performance obligations?

Input methods measure performance based on milestones achieved, while output methods assess labor hours expended.

Output methods recognize revenue based on the value of goods delivered, while input methods focus on the entity's resources consumed. (correct)

Output methods focus on costs incurred, while input methods focus on value delivered.

Output methods assess time elapsed under the contract, whereas input methods evaluate units produced.

When must an entity recognize revenue at a point in time?

When it satisfies all performance obligations of the contract.

When none of the criteria for recognizing revenue over time are met. (correct)

When the customer expresses a desire to receive the asset.

When control over the asset is partially transferred to the customer.

Which of the following is NOT considered an input method for measuring progress on performance obligations?

Costs incurred.

Units delivered to date. (correct)

Resources consumed.

Labour hours expended.

Which costs can be recognized as assets under IFRS 15?

Incremental costs of obtaining a contract. Signup and view all the answers

What happens when an entity is closer to satisfying a performance obligation than in the previous period?

The change in the measure of progress is recognized as revenue in the current period. Signup and view all the answers

Which of the following statements about control transfer is accurate?

The performance obligation is satisfied when control is transferred at a point in time. Signup and view all the answers

Which of the following best describes the term 'incremental costs' in the context of contract costs?

Costs that would not have been incurred if the contract had not been obtained. Signup and view all the answers

Which attribute must be present for IFRS 15 to apply to a contract?

The contract must have 'commercial substance'. Signup and view all the answers

What does the term 'commercial substance' in a contract imply?

The contract should influence future cash flows. Signup and view all the answers

Which of the following statements is true regarding the attributes of a contract under IFRS 15?

Identifying the rights of each party is mandatory. Signup and view all the answers

Which of the following is NOT one of the attributes required for IFRS 15 to apply?

The contract has a written agreement. Signup and view all the answers

What happens if a contract lacks any of the IFRS 15 attributes?

IFRS 15 does not apply and should be reassessed continually. Signup and view all the answers

Which aspect of a contract does IFRS 15 NOT focus on?

The frequency of payments outlined in the contract. Signup and view all the answers

Which of the following best identifies a situation where a performance obligation is satisfied over time?

The performance creates an intangible asset with no alternative use. Signup and view all the answers

Which of the following best describes the concept of 'probability' in the context of IFRS 15?

The assurance of payment collection for transferred goods or services. Signup and view all the answers

If a contract is initially assessed and does not meet the IFRS 15 criteria, what should be done?

The assessment should be updated continuously to check for changes. Signup and view all the answers

What is an implication of a performance obligation that does not meet the criteria for satisfaction over time?

Revenue must be recognized at the point of sale. Signup and view all the answers

Which factor implies that the entity's performance has created an asset momentarily?

Goods cannot be consumed while being produced. Signup and view all the answers

In what scenario would an entity recognize revenue gradually as the performance obligation is completed?

When a service has been substantially completed while still ongoing. Signup and view all the answers

Which of the following statements is true regarding contracts that contain performance obligations?

Some performance obligations may require re-performance for satisfaction. Signup and view all the answers

What is true regarding the simultaneous receipt and consumption of service benefits?

It is commonly identified in routine service obligations. Signup and view all the answers

What must be done when a contract has a significant financing component?

The promised consideration must be adjusted for the effects of the time value of money. Signup and view all the answers

When determining the timing of revenue recognition, which aspect is crucial in distinguishing between over time and point in time revenue?

The control transfer of the asset to the customer. Signup and view all the answers

How should non-cash consideration be treated under IFRS 15?

It should be measured at fair value if it can be reasonably estimated. Signup and view all the answers

Which of the following is NOT a criterion for satisfying a performance obligation over time?

The performance enhances a good that the customer completely owns. Signup and view all the answers

What happens if the financing component is not considered significant?

The transaction price remains unchanged. Signup and view all the answers

What does IFRS 15 require when there is a significant financing component within a contract?

To account for the distinct financing transaction separately. Signup and view all the answers

If the amount of promise consideration exceeds the cash selling price, what should the entity recognize?

Interest revenue if benefiting from financing. Signup and view all the answers

When fair value of non-cash consideration cannot be reasonably estimated, how should it be measured?

Based on the stand-alone selling price of the goods or services. Signup and view all the answers

What is a key consideration for entities when estimating the discount rate for adjusting the transaction price?

It should relate to the prevailing interest rates in the relevant market. Signup and view all the answers

How should revenue be recognized in contracts where there is a significant financing component?

As the cash selling price of the goods or services. Signup and view all the answers

What happens if a liability or asset can be reliably measured but the inflow of economic benefits is not probable?

No action should be taken by the entity. Signup and view all the answers

According to IAS 37, when should a provision be recognized?

When there is a present obligation that probably requires an outflow of resources. Signup and view all the answers

Under IAS 37, what is disclosed as a contingent liability?

A present obligation where the outflow of resources is not probable. Signup and view all the answers

When should no disclosure be required according to IAS 37?

When the likelihood of an outflow of resources is remote. Signup and view all the answers

What is a contingent liability as per IAS 37?

A present obligation without a probable economic sacrifice. Signup and view all the answers

In which scenario is a provision never recognized under IAS 37?

When there is a present obligation and reliable measurement is impossible. Signup and view all the answers

Which of the following statements about liabilities under IAS 37 is correct?

A present obligation with remote outflow does not necessitate a provision. Signup and view all the answers

What is required when there is a present obligation that is confirmed but not probable to require an outflow of resources?

Disclosure as a contingent liability. Signup and view all the answers

What criterion must be met for incremental costs of obtaining a contract to be recognized as an asset?

The entity expects to recover the costs incurred. Signup and view all the answers

According to IFRS 15, when should the costs related to obtaining a contract be amortized?

In accordance with the pattern of transfer of goods and services. Signup and view all the answers

Which of the following statements is true regarding the expense of amortization of costs related to contracts?

Amortization should reflect the expected benefits from the contract. Signup and view all the answers

What happens to the costs of obtaining a contract if the contract is deemed unsuccessful?

They may be avoided from being recognized altogether. Signup and view all the answers

Under which condition will contract costs be recognized as assets according to paragraphs 95 and 96?

If they enhance the entity’s resources and meet specific criteria. Signup and view all the answers

Incremental costs of obtaining a contract fall under which category according to IFRS 15?

Assets that need to be amortized over time. Signup and view all the answers

Which financial reporting standard addresses the incremental costs of obtaining a contract?

IFRS 15 Signup and view all the answers

What is a key factor to consider when determining if incremental costs can be classed as an asset?

There is a reasonable assurance that the costs will be recovered. Signup and view all the answers

Study Notes

Module 3 - Revenue from Contracts with Customers; Provisions, Contingent Liabilities and Contingent Assets

This module material is based on the CPA Program, Financial Reporting (6th Edition), published by John Wiley & Sons Australia, Ltd (2020).
The material is for teaching and studying the CPA Program Financial Reporting.
IFRS 15 improves financial reporting of revenue by
- providing a robust framework to address revenue recognition
- increasing comparability of practices across entities, industries, jurisdictions and capital markets.
- simplifying financial statement preparation by reducing guidance required.
- prompting enhanced disclosures for greater user understanding of revenue (nature, amount, timing and uncertainty)

Part A: Revenue from Contracts with Customers (P.117)

IFRS 15 is applicable to all contracts with customers, excluding lease contracts (IFRS 16), insurance contracts (IFRS 17), financial instruments (IFRS 9), consolidated financial statements (IFRS 10), and joint arrangements (IFRS 11).
IFRS 15 outlines accounting for various contract types, including those with:
- right of return periods
- warranties
- options for customers to purchase additional goods or services at a discount.
- customer prepayments/non-refundable upfront fees.
- licensing and repurchase agreements.
- consignment and bill-and-hold arrangements.
Technological advancements significantly impacted entities, notably telecommunication companies, with revenue recognition practices requiring adjustments.
- Handsets included in monthly payment plans now require revenue allocation between the handset sale and monthly plan in compliance with IFRS 15.
IFRS 15 employs a five-step revenue recognition model, specifically addressing contract identification, performance obligations, transaction price, allocation and satisfaction.

Part B: Provisions (P.142)

IAS 37 applies to all provisions, except those arising from executory contracts (and onerous contracts).
Provision is defined as uncertain liability of uncertain timing or amount.
Recognition requires a present obligation from a past event, high probability of outflow, and reliable estimate of the obligation amount.
The calculation employs expected value if the provision concerns many items, or most likely outcome for individual obligations

Part C: Contingent Liabilities and Contingent Assets (P.151)

Contingent assets arise from uncertain future events, whose existence only confirmed by the occurrence or non-occurrence of the uncertain event.
Contingent liabilities are also dependent on uncertain future occurrences. Their recognition depends on the probability and reliability of the liability measurement, not solely on the presence of an obligation.

3. Disclosures (P.138)

Disclosing disaggregated revenue from contracts with customers, including product types, geographical areas, customer type & contract duration.
Disclosing contract balances, performance obligations, and transaction price.

3. Contract Costs (P.136)

Incremental costs of obtaining a contract can be recognised as assets if their recovery is probable. Costs are incremental if they would not have been incurred without the contract.
Costs to fulfill contracts recognised as assets if they meet specific criteria including being directly related to the contract, generating resources needed for future performance, and expected recovery.

3. Contingencies and Professional Judgment (P.154 and P.149)

Accounting for contingencies requires professional judgment in determining if an obligation is a provision, or if it's merely a possible obligation.
Specific examples include earnings management.

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Description

This quiz covers Module 3 from the CPA Program on Revenue from Contracts with Customers, highlighting key elements of IFRS 15. It aims to enhance understanding of revenue recognition and improve financial reporting practices. Engage with the content to test your comprehension of these concepts.