CHAPTER 6 - Revenue Recognition

What is the main goal of revenue recognition?

To record revenue when goods/services are transferred to the customer for the amount the company expects to receive.

What are concessionary terms?

Terms in a sales contract that are more favourable than normal for the buyer.

Why do concessionary terms matter?

They may mean control has not fully passed or the seller still has extra obligations, so revenue recognition may be affected.

What are the two revenue recognition approaches?

IFRS: asset-liability/contract-based approach
ASPE: earnings approach

What does the IFRS asset-liability approach focus on?

The contract and the related assets/liabilities created, such as accounts receivable, cash, or unearned revenue.

What does the ASPE earnings approach focus on?

Whether revenue has been earned.

When is revenue recognized?

When the performance obligation is satisfied, meaning control passes from the seller to the customer.

What are the 5 steps of revenue recognition under IFRS 15?

1. Identify the contract

2. Identify performance obligations

3. Determine transaction price

4. Allocate transaction price

5. Recognize revenue when performance obligation is satisfied

When do you apply IFRS 15 to a contract?

when the contract has commercial substance, both parties approve it, rights and payment terms are clear, and collection is probable.

What does commercial substance mean?

the contract is expected to change the risk, timing, or amount of cash flows.

When do you disregard IFRS 15?

When the contract is wholly unperformed and both parties can cancel without compensation.

Why does Step 1 matter?

If the contract does not meet the criteria, you cannot continue with the revenue recognition steps.

What is a performance obligation?

A promise to provide a distinct good or service to the customer.

When is a good or service distinct?

When the customer can benefit from it on its own or with other available resources.

When are goods/services treated as one performance obligation?

When they are highly interrelated or customized together.

What is a material right?

A future benefit the customer would not normally receive, such as loyalty points or a special discount.

How are material rights, such as loyalty points, treated?

As a separate performance obligation, so some revenue is deferred until points are used or expire.

What is breakage?

The portion of gift cards, points, or credits that customers are expected not to use.

What is the difference between assurance and service warranties?

• Assurance warranty: guarantees product quality and is recorded as a liability.

• Service warranty: provides extra service beyond the assurance-type warranty and is a separate performance obligation.

What are the two methods for estimating variable consideration?

Expected value: probability-weighted amount.
Most likely amount: single most likely outcome.

How is revenue recorded when there is a right of return?

Revenue is recorded only for products expected to stay sold, and a refund liability is recorded for expected returns.

What is a contract liability?

When the company receives payment before satisfying its performance obligation, like unearned revenue.

What is a contract asset?

When the company has performed but does not yet have an unconditional right to payment.

How do you allocate the transaction price to multiple performance obligations?

Based on relative stand-alone selling prices.

What is stand-alone selling price?

The price a good or service would sell for on its own.

What are indicators that control has transferred?

• Right to payment

• legal title transferred

• physical possession transferred

• risks and rewards transferred

• customer acceptance

What is a bill-and-hold arrangement?

When the customer is billed but the seller still holds the product.

When can revenue be recognized in a bill-and-hold arrangement?

Only if the product belongs to the customer, is ready to ship, is separately identified, and cannot be used or sold to someone else.

What is a repurchase agreement?

When the seller sells an asset but has a right or obligation to buy it back later.

How are repurchase agreements usually recorded?

Usually as a financing transaction, not a true sale, if control has not transferred.

What is the difference between a principal and an agent?

• Principal: provides the good/service and records gross revenue.

• Agent: arranges the sale and records only commission revenue.

What is a consignment sale?

Goods are sent to a dealer, but the original owner keeps title until the goods are sold.

When does the consignor recognize revenue?

When the consignee sells the goods and sends the money back to the consignor.

Main IFRS vs. ASPE difference for revenue recognition?

• IFRS: contract-based, 5-step model focused on control.

• ASPE: earnings approach focused on risks/rewards, measurability, and collectibility.