Income, Revenue, and Gains

Income

• Income, as defined by accounting standards, means an increase in economic benefits during a financial period, specifically as an increase in assets or a reduction in liabilities.
• It also includes increases in equity, excluding contributions from equity holders.

Revenue

• Revenue arises from an entity's ordinary activities, including sales, fees, interest, or rent.
• This figure is important in the statement of profit or loss.
• Stakeholders often compare this across different businesses and time.
• An entity should recognize revenue that depicts the transfer of promised goods or services to customers reflecting the expected consideration in exchange for these goods or services.

Gains

• Gains meet the definition of income.
• Gains do not always arise in the ordinary course of business activities.
• Example: Consider interest income from a fixed deposit earned by a manufacturing firm.
• Gains are also known as other income or surplus.

Statement of Profit or Loss Presentation

• Revenue is invariably presented as the first line in the statement of profit or loss.
• Gains, when presented after Revenue, may be categorized as Operating, Investing and Financing activities.
• Revenue and Gains both affect operating profit, subtotals, and overall company income.

5-Step Approach to Revenue Recognition and Measurement

• This approach outlines how to recognize and measure revenue.

Step 1: Identify the Contract with the Customer

• There are five criteria that are required to be met before a contract can be established and revenue can be recorded:
  • The contract is approved by all parties involved.
  • Each party's rights regarding the transferred goods and services can be identified.
  • Payment terms, including payment schedule, are clearly defined.
  • Commercial substance is established, such that future cash flows are expected to change due to that contract
  • Collection from the customer must be probable, considering their ability and intention to pay.

Step 2: Identify the Performance Obligation in the Contract

• Identifying the performance obligation in a contract, such as an option.
• An option gives rise to a performance obligation, only if such option provides a material right to the customer that they would not receive without entering into a contract.
• Obligations:
  • Transferring either a good or service is a performance obligation if such goods and services can be considered distinct
  • Can also be a series of distinct goods or services that are substantially the same, and that have the same pattern of transfer to customers.

Step 3: Determine the Transaction Price

• The entity should determine the transaction price for each performance obligation identified in Step 2.

Step 4: Allocate the Transaction Price to the Performance Obligation

• Transaction price is allocated to each performance obligation using a relative stand-alone selling price
• If a stand-alone price isnt available, the entity should estimate based on competitors prices
• Example shown with Dish Washer and Wireless headset with equations for the allocation of the transaction price

Step 5: Recognize Revenue

• Revenue should be recognized when/as the entity satisfies a performance obligation.
• Satisfaction of a performance obligation typically occurs when:
  • The entity has a present right to payment for the asset.
  • The customer has legal title to the asset.
  • The entity has transferred physical possession of the asset.
  • The customer has the significant risks and rewards of ownership of the asset.
  • The customer has accepted the asset.

Scenarios for Performance Obligation

• If the typical conditions are unmet, the performance obligations can be met when:
  • The customer simultaneously receives and consumes the benefits.
  • The entity's performance creates or enhances an asset under customer control.
  • The entity's performance doesn't create an asset with an alternative use to the entity, and has an enforceable right to payment for completed work.

Accounting Treatment

• Remote likelihood approach:
  • A situation is classified as having remote likelihood when the chance of an event happening is very low or highly unlikely (often interpreted as less than 5% probability).

Proportional approach

• The proportional approach allocates revenue based on percentage of completion of the project.

Breakage Treatment

• If breakage (unused customer entitlements) is not clear, unearned revenue is recognized when the contract lapses.
• If breakage is clear and can be reliably estimated, the breakage is allocated over the usage pattern.

Example Exercise with SingSong Pte Ltd

• SingSong Pte Ltd Example: Steps 1 through 5 are used in the exercise example to allocate cost separately to promised good or services.
• Determining if there is a contract: Yes the agreement creates an enforceable right and obligation between both parties.
• Determining the performance obligations, there are four in total: mobile phone, subscription plan, extended warranty and international roaming service.
• Steps 3 & 4 then allocate a transaction price while step 5 is for recognising either overtime or at a certain point

Right of Return/Refund

• Illustration and definition with additional details about liabilities
• If an entity receives consideration from a customer and has reasonable expectations to refund that consideration, then they must recognize a refund liability
• An entity shall update the measurement of the refund liability at the end of each reporting period for any changes in the expectation about the amount of refund.
• If the return/refund cannot be measured reliably, then revenue recognition should be deferred.

Example from January 1, 20x4 journal entries

• Overview of entries with a wholesaler sold 1,000 pieces of apparel to a retailer at $5 a piece on credit
• Journal entries with debit and credit for accounts receivable, revenue, cost of goods, inventory, sales return, refund liability, recoverable assets

Sales Return (SR)

• Illustration describing accounting and estimates for Sales Returns
• (1) Estimate Sales Return and follow steps to complete
• (2) Record actual return and follow steps to complete
• (3) close the return liability & recoverable assets balance by using these steps to ensure they are properly reflected in Journal

PPE - Chapter 4

• Describing what PPE is, that are tangible items held for production, for rental to others and are expected to be used during more than one period.
• Property held to earn rental is classified as property
• Non-property PPE is classified as PPE only ehn rented such as Machines.
• Recognize a PPE ass an asset if and only if its probable economic benefits will flow to the entity and the cost can be reliably measured

Examples of PPE

• Land and land improvements such as machinery, buildings, vehicles, etc
• Freehold Land is not depreciable because of unlimited life
• Leasehold Land is depreciable and land improvements are depreciable as well

Revaluation Model

• Revaluation can only occur if the fair value of PPE item can be measured reliably
• Using fair value to get revalued amount and then subsequent accumulated depreciation of re evaluating date

Revaluations Requirements

• Revaluations must be carried out with sufficient regularity so that the carrying amount does not differ materially from that which would be determined using fair value at the reporting date
• Carrying Amount can either increase or decrease due to revaluation

Principles of Revaluation

• Revaluations must be regular.
• Both upward and downward revaluations are allowed.
• If carrying amount increases, record in Other Comprehensive Income (OCI).
• If carrying amount decreases, record under profit or loss, unless OCI balance exists or previous revaluation loss.

Determining Fair Value Measurement

• The transaction should enable market participants to use the asset in its highest and best use.
  • Physically possible.
  • Legally permissible.
  • Financially feasible.
• Increase in valuation of asset carrying amount then it is recognized in Other Comprehensive Income → Revaluation Surplus
• Decrease in in valuation of asset carrying amount then it is Recognised in Profit or Loss
• Example of Pte Ltd where it aquired it at 10 and then revaluated and followed by another year
• Discussing loss and journaling entry and more revaleuation
• How to determine the new cost and accumulated depreciation for depreciable PPE, after a revaluation

Method 1 for revaluation for depreciable PPE

• Restate proportionately with formula for new cost and new accumulated depreciation using fraction * revaluate
• Example given for reference
• Accumulated depreciation and Loss on Revaluation as well

Method 2 for revaluation of depreciable PPE

• Treat is a New asset and new accumulated depreciation is 0 with the formula
• Revaluation Model

Revaluation Model is the starting point for future depreciations

• This can be done by use a formula and dividing by remaining useful life at revaluation.
• Depreciations expensed are laid out in visual

Disposal of PPE under the Revaluation Model

• Steps that must be taken into account
• Remove all records related to PPE, including Cost/Gross Amount and Accumulated Depreciation
• Record the Net Proceeds from the Disposal (Net Proceeds = Sale price - Cost Paid for Disposal)
• Account for gain or loss and take appropriate action
• Eliminate Revaluation Reserve associated with the disposed PPE by transferring the amount directly to Retained Earnings when the asset is derecognised
• Example showing all these factors into place, such as leasehold loss and the Depreciation EXPENSED including other accounting
• How to treat gain on revaluation, as long as its recognized in profit

Statement of Profit or Loss

• It is recognized to follow a certain step and the amount will be reflected in the statement of changes in equity

Impairment Of Assets

• Check indicator on impairment for each accounting period.
• If carrying amount (CA) exceeds its recoverable amount.
• SFRS requires an entity to conduct impairment tests, to ensure that assets are not carried at amounts that exceed their recoverable amounts.
• CA > RA
• Internal and external indicators of asset damage-
• Physical damage to an asset
• Significant decline in market value of asset
• Lower than expected economic performance of a segment
• Significant changes in Technological
• Significant increase in interest rates used in discounting assets' value in use

Recoverable amount

• The higher of fair value less costs of disposal
• value-in-use (the present value of future cash flows)
• Where impairment for a specific period, debit the impairment loss and credit accumulated impairment loss to record the increase
• Then look at revalued Asset or not as well

Cash-generating unit (CGU)

• If internal management reporting is organized to measure performance on a store-by-store basis
• If the business is run on a store-by-store basis.
• Impairments loss for CGU
• When to reduce carrying amount of a unit and how

Illustration by CGU

• With goodwill and without with the impairment
• Table showing how the carrying amount has changed and the results of the allocation impairment results with certain equation examples

Chapter 4.2 - PPE measurements

• Outlining various measures and encouragements to disclose PPE if needed

Chapter 5: Intangible Assets

• SFRS defines intangible assets as identifiable, non-monetary assets without physical substance.
• The item itself is not touchable or visible. Does not have a fixed exchange value to cash but dependent on economic conditions that item must be separate from an entity.

3 Criteria To be an Intangible Asset

• Identifiably;
  • can be separated from an entity.
  • arises from contractual, must be transferable despite legal rights.
• Control over a resource:
  • the entity needs to have power to obtain benefits.
  • Restrict other from accessing beneifts.
  • an entities legal rights.
• Future economic benefits exists
  • Including revenue.
  • product/ services.
  • reduction in operating cost.
• If fails any one recognition criteria expenditure on item to be recorded and recognized as profit/loss.

Recognization

All acquired though purchase recognized because all 3 recongiziton critierias.

• Trademark.
• Copyright.
• Franchise.
• Purchased goodwill.
• Other.
• Represents a unique value of the company as a whole where its unidentifiable where Its can not be separated.
• Brand developed though advertising, training, etc but it is identifiable, but there are measurement issues:
  • Research cost is NoT an intangible asset.
• Expenditure incurrenceed from searching For new ideas application of research.
• Development Cost

Development Costs

• Technical feasibility of completing the intangible asset for use or sale If any one of the six specific recognition criteria is not met it is expensed off and cant be reinstated in statement

How do measure an purchased asset

Initial Cost = Purchase + Any necessary cost

What about for internally generated intangible asset

• Sum of directly attributable costs incurred in relation to the asset.
• Measurements of intangible assets, you can use either or Cost model and Revaluation model

Revaluation method

• Must have subsequent data
• Cannot be applies if not measured correctly

Realculation Effect On Intangible Asset

• For upward and downward entries
• gain or loss on revaluation must follow
• When carried at a revalued amount, any accumulated amortisation at the date of revaluation is either: a) Restated proportionately with the change in the gross carrying amount of the asset, so that carrying amount of the asset after revaluation equals its revalued amount.

Removal

• How it effects re calculated by removing to adjust total cost

Useful Life

• Public Information on estimates of similar industry
• The expected usage of the asset by the entity concerned
• Technological, commercial or other types of obsolescence
• expected actions by others.

Accounting for Amortization & Impairment

• Intangible assets With finite & indefinite Useful lives
• How to apply to impairments
• Be it tangible or intangible, assets are subject to the impairment test
• Non-asset can't be high then recoverable the amount written off a s expense.

Degognition Of Asset

• Determine gains Loss
• Gain or loss recognized in the statement
• Financial Separate

More on Info Of Intangible

• Additional Disclosures for cost if they did to meet
• What the amortization was, and the reason for there decisions

Chapter 6: Investment Property

• Investory. held to sell and or product
• PPE : Is tangible, to lease out
• Note if property can be classified if rental non property it cant be
• investment properties. Land buiding ect to earn to captial gains then for
• Sales for course of busienss
• owner occupied are PPE properties head for classified invenmtory it will then be properties
• How do judge if insignificant - its 5% or below What if leased to subsideray - well at the invidual firm it listed as IP if

Recognition To Measure IP

• Fair value model to find at a later date in orderly for them to be a the measurement Depreciation automatically How to measure when they cant be reliable Transfer

Transfers From Investment Property

• Use At carrying amount when its
• With an adittionsl with fair value -Any net surplus stays until dispose, upon which the balance is transfer Examples to follow for steps for PPE and IP of Cost Modal

Steps to follow of

Step 2 transfer PPE to investment the property and a few more rules and guidelines

How do we dereconigzes Asset

• Remove and record proceeds
• Check reevalutaion before

List of disclosure requirements for IP

Cost Model or Fair Value Model; Criteria used in identification of Investment Property; Methods and significant assumptions applied in fair value estimation; Extent to which Fair Value is based on valuation by an independent professional valuer; Amount included in profit or loss statement for:

• Rental income;
• Direct operating expenses. The existence and restrictions on the realisability of the Investment Property; and Material contractual obligation, if any.

Summary of Property Accounting

• List of disclosure requirements for IP Cost Model or Fair Value Model; Criteria used in identification of Investment Property; Methods and significant assumptions applied in fair value estimation; Extent to which Fair Value is based on valuation by an independent professional valuer; Amount included in profit or loss statement for: Rental income; Direct operating expense arising from Investment Property A The existence and restrictions on the realisability of the Investment Property; and Material contractual obligation, if any.

7: Non-assets

• What is it classified as sale?*
• Recovered use
• It is avaiable The entity have the intation and absilty
• The sale is proboble
• Appropriate has plan for cell. The
• Must be priced fair The one is not longer to

Measurement

• Lower than fair
• A gain is recognized
• Not deptaciated
• seperate

It changed its mind

• At a lower ammount.
• For and be sold in the date to still sold.
• A value dectating

Decontined?

Disposal and more action

• The folling NOT Considered Measurement Requiements
• Lowerr of canry and cost Presentation
• Is there a form of operation/

Incomes

• Operations revenure
• All give info Accountablity

Chapter 8

• Provisions = As a subset of an entity’s total liabilities, SFRS define provisions as a liability of uncertain timing or amount

• A past obligating event has occurred -the entity is presently obligated

• Obligation can be legal or construction

• A provision is only recognized if the entity makes a reliable estimate and an out flow of resources

What to call pay to settle

• if then they all will have to be evaluated

Type of warranty and the rule of them

Warranty is part Expensen

Reimburesment and provison

• Where then it will be virtually certify

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Provision isn't some

• If have to do with litigation

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• An entity has it

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