08 - Revenue Recognition and IFRS 15

A comprehensive set of practice flashcards focused on the key concepts of revenue recognition as per IFRS 15, providing insights into auditing processes, contract terms, and performance obligations.

What is the core principle of IFRS 15?

An entity recognizes revenue to depict the transfer of promised goods or services to customers for consideration the entity expects to be entitled.

How many steps are in the IFRS 15 revenue recognition model?

Five steps.

What is step 1 in the IFRS 15 revenue recognition model?

Identify the contract with the customer.

What are the criteria for identifying a contract under IFRS 15?

All parties must approve the contract, rights can be identified, payment terms can be identified, it has commercial substance, and collection of consideration is probable.

What is step 2 in the IFRS 15 revenue recognition model?

Identify specific performance obligations.

What makes a good or service distinct under IFRS 15?

A good or service is distinct if it can be sold separately and has a distinct function.

What is step 3 in the IFRS 15 revenue recognition model?

Determine the transaction price.

What is variable consideration in the context of IFRS 15?

Variable consideration is included in the transaction price to the extent that it is highly probable there will be no significant reversal.

What is step 4 in the IFRS 15 revenue recognition model?

Allocate the transaction price to performance obligations.

What does 'unbundling' refer to in revenue recognition?

Estimating the stand-alone price for performance obligations.

How do you allocate revenue in an example where a machine and service agreement are sold together?

Allocate based on the stand-alone prices of machine and service.

What is step 5 in the IFRS 15 revenue recognition model?

Recognize revenue as obligations are satisfied.

How can performance obligations be satisfied, according to IFRS 15?

At a point in time or over time.

What are output methods in measuring progress?

Measuring the value to the customer of the goods and services transferred.

What are input methods in measuring progress?

Measuring the cost to the entity of the goods and services transferred.

What if progress towards a performance obligation cannot be measured?

Revenue can only be recognized to the extent costs incurred can be recovered.

What should be recognized for payments in arrears?

A receivable for work completed and invoiced, and a contract asset for work completed but not yet invoiced.

What is a contract liability under IFRS 15?

Consideration received but not yet earned.

When does a significant financing component exist in a contract?

When there is more than 12 months between revenue recognition and cash settlement.

What is the treatment for contracts with significant financing components in advance payments?

Recognize cash received as a contract liability and accrue finance cost.

What costs can be capitalized under IFRS 15?

Costs of obtaining or fulfilling a contract if expected to be recovered.

What is an onerous contract?

A contract where unavoidable costs exceed the expected economic benefits.

What disclosures are required under IFRS 15?

Revenue separately from other sources, analyzed by category and operating segment.

What general audit risk is most common regarding revenue?

Overstatement of revenue.

What are basic audit procedures for revenue recognition?

Confirm stand-alone prices and test the assumptions underpinning the calculations.

How should warranties be treated under IFRS 15?

Standard warranties recognized under IAS 37; extended warranties recognized as separate performance obligations.

What is the principal vs agent distinction?

An entity is an agent if its performance obligation is to arrange for goods or services by another party.

What should be done for licenses granted under IFRS 15?

Determine if the license is a separate performance obligation.

How are repurchase agreements treated under IFRS?

If it’s a financing arrangement, do not recognize revenue; if it’s a lease, treat under IFRS 16.

What is the treatment for sales with a right of return?

Recognize revenue and a refund liability based on expected returns.

What must be confirmed for consignment arrangements?

Who controls the product and terms for transferring control.

What is a bill-and-hold arrangement?

When a product is billed but delivery is delayed with the customer’s agreement.

What audit procedures are needed for customer loyalty schemes?

Inspect contracts and confirm assumptions for allocating revenue to the option.

What are non-refundable upfront fees classified as?

Separate performance obligations if they result in the transfer of goods or services.

What should be done for upfront fees recognized?

Determine if any related performance obligations have been satisfied.

What must revenue be recognized when performance obligations are satisfied?

At the point in time or over time based on the nature of the performance obligations.

What defines a performance obligation?

A promise to transfer a good or service to a customer.

What is the importance of the transaction price?

It reflects the amount to which an entity expects to be entitled for transferring goods or services.

How is revenue recognized in contracts with significant financing components?

By adjusting the transaction price for the time value of money.

What does it mean to measure progress towards completion?

To assess how much of the performance obligation has been fulfilled based on output or input.

What criteria must be met for recognizing revenue from contracts?

All parties approved the contract with identifiable rights and payment terms.

What happens if there’s a risk of revenue understatement?

Examine the incentives for management bias towards lower reported revenues.

What is the calculation method for revenue from construction contracts?

Using either output or input methods to determine recognized revenue.

Why is consistency important in revenue recognition methods?

It ensures comparability and reliability in financial reporting across periods.

How should management’s choice of accounting policy for warranties be supported?

Through review of sales agreements and performance obligations recognition.