ACC 250 CH 6

Long Term Contracts

Revenues

Inflows or enhancements of assets or settlements of liabilities from delivering goods or rendering services that constitute an entity's ongoing major operations

Five-Step Revenue Recognition Process

Standardized method for recognizing revenue consisting of identifying the contract identifying performance obligations determining transaction price allocating transaction price and recognizing revenue when obligations are satisfied

Contract

Agreement establishing legal rights and obligations between seller and customer

Contract Existence Criteria

Requirements that must be met including approval by both parties identified rights payment terms commercial substance and probable collection of payment

Performance Obligation

Promise to transfer a distinct good or service to a customer

Distinct Good or Service

Item that is capable of being distinct and separately identifiable within a contract

Transaction Price

Total amount a seller is entitled to receive from a customer in exchange for goods or services

Revenue Recognition at a Point in Time

Transferring control of a good or service to a customer all at once

Control Transfer Indicators

Evidence such as obligation to pay legal title physical possession assumption of risks and rewards or acceptance by the customer

Revenue Recognition Over Time

Recognizing revenue continuously as a customer consumes benefits controls the asset as it is created or when an asset has no alternative use and payment rights exist

Output-Based Estimate

Progress measurement method based on the proportion of goods or services transferred to date

Input-Based Estimate

Progress measurement method based on effort expended relative to total expected effort

Quality-Assurance Warranty

Seller obligation to repair or replace defective products that is included in the base product price and not considered a separate performance obligation

Extended Warranty

Additional protection that is purchased separately or provides service beyond basic quality assurance and qualifies as a separate performance obligation

Material Right

Customer benefit or option that would not be received without entering into the contract and is treated as a separate performance obligation

Variable Consideration

Portion of a transaction price that fluctuates based on future outcomes such as bonuses rebates or royalties

Expected Value Method

Estimating transaction price by calculating the sum of probability-weighted amounts across multiple outcomes

Most Likely Amount Method

Estimating transaction price using the single highest probability outcome when there are two possible outcomes

Constraint on Variable Consideration

Requirement to restrict variable revenue inclusion unless it is probable that a significant reversal will not occur later

Right of Return

Allowance for customers to return merchandise which is recorded as a contra revenue account rather than a separate performance obligation

Net Sales Revenue

Gross sales revenue minus actual and estimated returns

Principal

Party whose performance obligation is to provide goods or services directly and records gross sales revenue and cost of goods sold

Agent

Party whose performance obligation is to facilitate transactions between a principal and a customer and records only commission revenue

Adjusted Market Assessment Approach

Estimating stand-alone selling price based on prices customers would pay in the relevant market

Expected Cost Plus Margin Approach

Estimating stand-alone selling price by forecasting costs to satisfy an obligation and adding a reasonable profit margin

Residual Approach

Method to estimate a stand-alone selling price by subtracting known stand-alone prices from total transaction price

Residual Approach (formula)

Total Transaction Price - Sum of Known Stand-Alone Prices

License

Agreement granting a customer access to intellectual property

Franchise

Agreement granting a franchisee the right to sell products and use intellectual property owned by a franchisor

Consignment Arrangement

Agreement where a consignor retains legal title and ownership risk of physical goods sent to a consignee until sold to a third party

Gift Card

Card sold to customers that is initially recorded as deferred revenue liability and recognized as revenue when redeemed or when redemption likelihood becomes remote