Revenue Recognition Review: ACCT 301 Chapter 6

Comprehensive vocabulary flashcards covering revenue recognition principles, formulas, performance obligations, and specialized arrangements based on ACCT 301 Chapter 6.

Core Revenue Recognition Principle

Recognize revenue when goods or services are transferred to customers, for the amount the company expects to be entitled to receive in exchange.

FASB ASU 2014-09

The standard codified in Topic 606, Revenue from Contracts with Customers, issued jointly by the FASB and IASB.

Topic 606

The specific area of accounting codification governing Revenue from Contracts with Customers.

Transaction Price Allocation (Formula)

$$\text{Allocated Price} = \text{Total Transaction Price} \times \frac{\text{SSP of Obligation}}{\text{Sum of All SSPs}}$$

Stand-Alone Selling Price (SSP)

The price an item would sell for if it were sold separately on its own.

Expected Value of Variable Consideration (Formula)

\text{Expected Value} = \text{\sum (Possible Outcome} \times \text{Probability)}

Constraint on Variable Consideration

The requirement to include variable consideration only to the extent that it is probable a significant revenue reversal will not occur.

Cost-to-Cost Percentage Complete (Formula)

$$\text{Percent Complete to Date} = \frac{\text{Costs Incurred to Date}}{\text{Total Estimated Costs}}$$

Revenue Recognized This Period (Over Time) (Formula)

$$\text{Revenue This Period} = (\text{Total Estimated Revenue} \times \text{Percent Complete to Date}) - \text{Revenue Recognized in Prior Periods}$$

Gross Profit Recognized This Period (Over Time) (Formula)

$$\text{Gross Profit This Period} = \text{Revenue Recognized This Period} - \text{Construction Cost This Period}$$

Point in Time Recognition Indicators

Criteria including obligation to pay, legal title, physical possession, risks and rewards of ownership, and customer acceptance.

Criteria for Over Time Recognition

Revenue is recognized over time if the customer consumes benefits as performed, controls the asset as created, or the asset has no alternative use and the seller has a right to payment for progress.

Distinct Performance Obligation

A good or service that is capable of being distinct (usable on its own) and is separately identifiable in the contract (not highly integrated with other items).

Quality-assurance (standard) warranty

A cost accrual and not a separate performance obligation, recorded to guarantee the product meets agreed-upon specifications.

Extended warranty

A separately priced warranty that is treated as a distinct performance obligation and recognized over the warranty period.

Material Right

An option given to a customer, such as a discount, that they could not otherwise get, treated as a separate performance obligation.

Principal

A party that controls the goods/services and records gross revenue (full sales price) and cost as an expense.

Agent

A party that facilitates transactions and records net revenue, representing only the commission earned.

Adjusted market assessment approach

An estimation method for SSP based on what the seller could sell the item for in its market, referencing competitor prices.

Expected cost plus margin approach

An estimation method for SSP that forecasts the cost to satisfy an obligation and adds an appropriate profit margin.

Residual approach

An estimation method for SSP that subtracts known stand-alone prices of other items from the total transaction price.

Functional IP

Intellectual property with stand-alone functionality (e.g., software, music) where revenue is recognized at the point in time use begins.

Symbolic IP

Intellectual property whose value depends on ongoing seller activities (e.g., logos, brand names) where revenue is recognized over the license period.

Bill-and-hold Arrangement

An arrangement where revenue is recognized when control transfers, despite the seller physically holding the goods.

Consignment

An arrangement where revenue is recognized only when goods are delivered to the end customer.

Breakage

Revenue recognized from gift cards when they expire or when the likelihood of redemption is remote.

Contract Liability

A balance sheet line item (often deferred revenue) created when a seller receives payment before satisfying the performance obligation.

Account Receivable

An unconditional right to payment where only the passage of time remains before payment is due.

Contract Asset

A seller's right to payment for satisfied obligations that is conditional on something other than the passage of time.

Construction in Progress (CIP)

An inventory-like asset account that accumulates project costs and recognized gross profit for long-term contracts.

Billings on Construction Contract

A contra account to Construction in Progress (CIP) used for invoicing on long-term contracts.

IFRS Collectibility Threshold

Under IFRS, 'probable' is defined as a likelihood greater than 50%, which is a lower threshold than U.S. GAAP.