int accounting 2 revenue recognition

Revenue Recognition core principle

when a company delivers goods or services to a customer, and it records the amount it expects to be paid for them.

step 1 of revenue recognition

id contracts with the customer

step 2 of revenue recognition

Identify distinct performance obligations in the contract

step 3 of revenue recognition

Determine the transaction price

step 4 of revenue recognition

Allocate the transaction price to the performance obligations

step 5 of revenue recognition

Recognize revenue when (or as) the entity satisfies a performance obligation

revenue recognition step 1 contract criteria

-Approval by parties/commitment to perform obligations

- rights identified

-payment terms identified

-Commercial substance

-Probable collection of consideration

what determines distinct for step 2

usable alone (or with easy resources) + separate promise

what determines not distinct for step 2

combined, customized, or dependent

combined

It is an input to a _____output

customizes

It _________ another good or service

dependent

It is highly _____________ with other goods or services

step 3 determining transaction price

Variable consideration

-Time value of money

-Consideration payable to customer

step 3 part A variable consideration

Adjust for returns, refunds, rebates, or sales discounts

step 3 part B time value money

Consider whether payment is delayed or paid early (interest effect)

step 3 part C Consideration payable to the customer

Subtract amounts the company pays back to the customer (coupons, credits, incentives)

step 4

use standalone prices. If not avalible then use Adjusted market approach

-Cost plus margin approach

-Residual value approach

adjusted market apporach

looking at the compeitieros prices

cost plus margin

device = 800

software =300

device, 800/1100 * selling price

software, 300/1100 * selling price

step 5 recognize rev when or a

at single point in time or over a perioda

indicators at a single point

1. physical possession

2. legal title

3. customer payment obligation

4. transfer of risks and benefits

   1. customer acceptance

indicators over time

customer if it can measure progress and one of these is true:

1. The customer benefits as the work is done

2. The customer controls the asset while it’s being made

3. The asset is special (can’t be sold to someone else), but the company will get paid anyway

customer benefits as work is done example

A cleaning company cleaning rooms one by one.

The customer controls the asset while it’s being made example

A custom machine being built for a customer who can inspect or direct it as it’s built.

The asset is special (can’t be sold to someone else), but the company will get paid anyway example

Example: A custom bridge or software that only this customer can use.

If progress can’t be measured reliably

The company records revenue equal to the costs it has spent