F2 Far CPA M1-M2

Standalone Selling Price

The price an entity would sell the promised good or service to a customer on a stand-alone basis

• Used when allocating transaction price to multiple performance obligations

• Must determine for each individual obligation

Discount

Exists when the sum of the stand-alone prices for each obligation within a contract exceeds the total consideration for the contract

• Should be allocated proportionately to all obligations

Output Method

Revenue is recognized based on the value to the customer of the goods or services transferred to date relative to the remaining goods or services promised

• How much value are you going to provide the customer and how much value have provided to the customer?

  • Units produced or delivers, time elapsed, milestones achieved, surveys of performance completed to date, and appraisals of results achieved

    • Based on what we deliverd/ provided

Input Method

Revenue is recognized based on the entity’s efforts or inputs to the satisfaction of the performance obligation relative to the total expected inputs

• Based on what you put into the project relative to the total input needed

  • Costs incurred relative to total expected costs, resources consumed, labor-hours expended, and time elapsed

Contract Asset

Reflects the entities right to consideration in exchange for goods or services that the entity has transferred to the customer

• Entity has performed prior to the customer paying or prior to the payment due date

• NOT A RECEIVABLE, because asset has not been billed

Contract Liability

Must be booked when an entity has an ongoing obligation to transfer goods or services to a customer; prepayment from customer

• Entity has already received consideration (Deposit) or customer owes consideration that is unconditional (the customer pays or owes payment before the entity performs)

Satisfied Over Time

Revenue is recognized over time if one of the criteria are met:

1. Company’s performance creates/ enhances an asset that the customer controls as the asset is created/ enhanced (WIP, Annual service contract)

2. Customer simultaneously receives and consumes the benefits of the company’s performance as the company performs it (Subscription services, service contracts)

3. Company’s performance does not create an asset with alternative use to the company and the company has an enforceable right to receive payment for performance completed to date

Must measure progress toward completion:

1. Output Methods

2. Input Methods (Long-term Construction projects: Cost-to-Cost)

Satisfied at Point in Time

Revenue should be recognized at a point in time when the customer obtains control of the asset

Estimated Total Costs

Total costs for a long-term contract from inception to completion

• Total costs for multiple years

Estimated Costs to Complete

Added to costs incurred to date to arrive at estimated total costs

• Costs for one year

Construction in Progress (CIP) Overtime

Construction costs and estimated Gross Profit earned are accumulated when long-term construction contract revenue is recognized over time

• Inventory account

  • Netted against Progress Billings for balance sheet reporting

Progress Billings

Accumulated billings on construction

• Contra-Inventory account

• Netted against CIP for balance sheet reporting

Construction in Progress (CIP) (Point in Time)

Construction costs are accumulated when long-term construction contract revenue is recognized over time

• Gross Profit is NOT recognized because it is deferred/ delayed until the completion of the contract

• Inventory account

  • Netted against Progress Billings for balance sheet reporting

Incremental Costs of Obtaining a Contract

Costs incurred that would have NOT been incurred if the contract had not been obtained

• Recognized as Capitalized Asset (and amortized) if company expects to recover costs

  • Must obtain the contract to recognize

Agent

Entity arranges for the other party to provide the good or service to the customer

• Revenue recognized is the fee/ commission for performing the function

• Indicators…

  • Another party is responsible for fulfilling the contract

  • Company has NO inventory risk

  • Company has NO discretion in establishing prices for the other party’s goods/ services

Principal

Entity controls the good or service before it is transferred to the customer

• Revenue recognized is the gross consideration an entity expects to receive

• Indicators…

  • Company is responsible for fulfilling the contract

  • Company bears inventory risk

  • Company has right to establish the price of the good/ service

Repurchase Agreement

Contract where a company sells an asset and also either promised to or has the option to repurchase the asset

• Three main types:

  1. Forward (Company’s obligation to repurchase the asset)

  2. Call option (Company’s right to repurchase the asset)

  3. Put option (Company’s obligation to repurchase the asset at the customer’s request

Forward

Type of repurchase agreement where it’s the company’s obligation to repurchase the asset

• Repurchase Price > Original Selling Price = Financing Arrangement

  • Recognize Asset, Liability, and Interest Expense

• Repurchase Price < Original Selling Price = Lease

Call Option

Type of repurchase agreement where its the company’s right to repurchase the asset

• Repurchase Price > Original Selling Price = Financing Arrangement

  • Recognize Asset, Liability, and Interest Expense

• Repurchase Price < Original Selling Price = Lease

Put Option

Type of repurchase agreement where it’s the company’s obligation to repurchase the asset at the customer’s request

• If repurchase price is less than the original selling price:

  • Treat as a lease (if customer has significant incentive); or

  • a sale with the right of return (if customer does NOT have significant incentive

• If repurchase price is greater than the original selling price:

  • Treat as a financing arrangement (if Repurchase Price > Expected Market Value of the Asset); or

  • A sale with the right of return (if Repurchase Price < Expected Market Value of Asset and customer does NOT have a significant incentive)

Bill-and-Hold Arrangements

Contracts where company bills a customer for a product that it has not yet delivered to the customer

• Do NOT recognize revenue until the customer obtains control of the product when product is shipped to or be delivered

  • Exception for when you can recognize revenue, if all criteria are met:

    1. Must be a substantive reason for arrangement

    2. Product is separately identified as belonging to the customer

    3. Product is currently ready for transfer to customer

    4. Company CanNOT use product or direct to another customer

Prospective Approach

Using new information in the current year as well as in the future years

• Change in Accounting Estimates

  • Must be disclosed in notes to the financial statements if it affects future periods

  • Changes in ordinary estimates not material do not need to be disclosed

Consignment

When the dealer or distributor has NOT obtained control of the product; entity is still in control of the asset

• Revenue is recognized:

  • When the dealer/ distributor has sold the product to customer; or

  • When the dealer/ distributor obtains control of the product (after a specified period of time expires)

Refund Liability

Represents the amount a company does not expect to be entitled to receive

• Recognize Liability if:

1. Company receives or will receive consideration from a customer; and

2. Company anticipates having to refund portion or all of that consideration

• Price is based on the amount you expect to be entitled to receive

Retrospective Approach

Adjust Beginning Retained Earnings, net of tax

• Change in Account Principle

Change in Accounting Principle

A change from one acceptable accounting method to another acceptable accounting method

• Retrospective Approach

Change in Accounting Entity

Occurs when the entity being reported on has changed composition that are apart of consolidated financial statements

• Uses Retrospective Approach

  • Adjust Beginning RE net of tax with cumulative effects and restate years presented

• Changes may be caused by:

1. Mergers

2. Acquisitions

3. Divestitures

Error Correction (Prior Period Adjustment)

Corrections of errors in recognition, measurement, presentation, or disclosure in the financial statements or changes from a Non-GAAP accounting method to a GAAP accounting method (Cash basis to accrual basis)

• Requires restatement of financials

Accrual Basis Accounting

Matches revenue with expenses in accordance with GAAP; requires adjusting journal entries to make sure company is recording revenues and expenses in the correct periods, regardless if cash was received or paid

Accrue

To record revenue or an expense without the exchange of cash

• Revenue —> Book receivable and book revenue

• Expense —→ Book expense and book payable

Summary of Significant Accounting Policies

Summary of all significant policies including disclosures of:

• Measurement bases used in the financial statements

• Specific accounting principles and methods used during the priod

Subsequent Event

Event or transaction that occurs after the balance sheet date but before the financial statements are issued or available to be issued

1. Recognized Subsequent Events (Type I)

2. Non-Recognized Subsequent Events (Type II)

Recognized Subsequent Event (Type I)

Provide additional information about conditions that existed at the balance sheet date

• Must be recognized or adjusted in the financial statements and disclosed in the financial statements

• Examples: Settlement of litigation, Loss on Uncollectible Receivable

Non-recognized Subsequent Events (Type II)

Events that provide information about conditions that did NOT exist at balance sheet date

• Do NOT recognize; financial statements are not required to be adjusted

• If event is important, it should be disclosed in the footnotes

  • Business combination, loss of inventory due to natural disaster