WK 6

What is the difference between income and revenue

• income is broader and is any economic benefit in the accounting period that occurs via inflows, improvement of assets, decrease in liabilities that increase equity excluding contribution from equity participants

• income = rev + gains

• revenue is just income that comes from the entity’s ordinary activities (sale of gs)

• gains are income that is not from the entity’s normal activities

what are the 5 steps for recognising revenue

1. identify if there’s a contract with customers

2. determine how many performance obligations there are

3. determine transaction price

4. allocate transaction price to each performance obligation based on a standalone selling price basis.

5. recognise revenue as PO gets satisied.

Step 1:identify contract with customer. How to determine if contract exists.

all 5 must be met

• is approved and committed to by all parties

  • read over and agreed upon

• clarity regarding what will be received and what will be provided: rights identifiable

• know how much and when to pay

• commercial substance: know if contract will affect future cfs.

• collection probable.

Step 2: identify performance obligations (POs)

PO is a promise to transfer a distinct gs to a customer

what counts as distinct

• Customer can benefit from it on its own

• its separately identifiable

  • shouldn’t have been significantly integrated, modified or interdependent

if both are met then its a separate performance obligation if not u combine it with other gs

Step 3: Determine transaction price

what is transaction price: amount of consideration entity expects to be entitled to receive for transferring gs to customer.

factors affecting transaction price:

• variable consideration: if theres factors/future events that affects the final amount received eg. discounts, penalties rebates

• if a significant portion is financing costs: time value of money. need to adjust for this.

how to estimate transaction costs

• prob weighted expected value

• most likely outcome

can we always recognise full estimate:

• Variable consideration is included in the transaction price only to the extent that it is highly probable that a significant revenue reversal will NOT occur. 

  • Estimate first → then ask: Is it sufficiently certain?

step 4: transaction price allocation to performance obligation

• allocate based on a relative standalone selling price basis

• standalone selling price- what entity would get if they sold gs separately

• allocated based on proprtion of standalone selling prices

Step 5: recognise revenue as po is satisifed

you recognise revenue when entity satisifies perfromance obligation by transferring control of promise of gs to customer

control: ability to direct the use of and derive substantially all economic benefits remaining from the asset

how performance obligations get satisfied

• at a point in time

• overtime

  • overtime if any 1 is met

    • customer simultaneoulsy receives and consumes benefit eg. cleaning service

    • customer gets control of asset as it is created eg. building on customer land

    • no alternative use and entity is entitled to payment for work completed. eg. some customised assets

if considered overtime how do we allocate revenue

• either based on input or output method

Principal vs agent consideration

principal is when the nature of promise is a po to provide the specified gs itself

indicators of principal:

• They are primarily responsible for transferring gs

• Bear inventory risk before or after the goods are ordered by customer

• Has discretion in establishing prices

agent when nature of promise is to arrange for gs to be provided by another party.

Principal vs agent revenue recognition

• principal: recognise all revenue and pay commission fee to agent (expense)

• agent: Revenue is just commission earned