Revenue and government grants

5 steps revenue recognition

1. Identify contract (legal: both parties committed, both parties tfr rights can be identified, payment terms identified, commercial substance eg at a profit, probable >50% entity will collect consideration)

2. Identify performance obligations (account for separately eg. Goods, services and warranty)

3. Determine transaction price (£ entity expects to be entitled incl discounts) variable consideration, significant financing component (show as operating interest income), non- cash consideration (FV), consideration payable to customer

4. Allocate transaction price to performance obligations (how much if sold separately and apply discount, % complete etc)

5. Recognise revenue when (or as) performance obligations satisfied (do the journal)

Contracts with customers (common types)

1. Principal vs agent *

2. Repurchase agreement

3. Sales with a right of return *

4. Consignment arrangements *

5. Bill and hold arrangements

6. Warranties

Government grants and disclosure

Grants relating to

1. Income

2. Assets

3. Repayment of grant

Income

1. Revenue: Transfer of control to customer (goods or services)

2. Interest & dividend income

3. Other gains / losses

   • revaluation of investments (P&L, investment category)

   • Revaluation of other NCAs (OCI)

Method to get a % progress of performance obligations

Output methods

• surveys (most accurate)

• Appraisals

• Time elapsed

• Units produced/ delivered

Input methods (use if cannot reliably measure outcome)

• proportion of work completed based on inputs (eg costs) incurred to date

• Resources consumed

• Labour hours expended

• Costs incurred

• Time elapsed

• Machine hours used

Contract costs (COS)

Costs of obtaining contract recognised as asset if the entity expects to recover the costs (eg sales team commission)

Costs that would have been incurred regardless of contract obtained recognised as an expense (eg sales team base salary)

Costs incurred in fulfilling contract are recognised as asset (Work in progress) and released when you recognise revenue

Contract with customer - SOFP presentation

• receivables (invoiced)

• Contract liability prev deferred income (prepaid/ deposit but haven’t “earned” it yet)

• Contract asset (accrued income) have performed but not yet invoiced customer

Principle vs agent

• Entity controls the goods/ service (principle). Revenue = gross revenue

• Entity arranges for goods/ services to be provided by the other party - job is to find customer (agent) revenue = commission

Repurchase agreement

1. Entity obligation to repurchase (forward contract)

2. Entity has right to repurchase (call option)

3. Entity must repurchase if customer requests (put option)

Customer does not have control of asset for 1 and 2. Entity accounts for contract as a lease (if repurchase price < selling price) or a financing arrangement if > selling price

If a PUT option entity must consider if customer likely to exercise. If repurchase price > selling price, customer incentive to exercise option

Sales with right of return

Recognise all:

• revenue (all except what entity is expects to be returned)

• Refund liability

• An asset (and corresponding adj to COS) for the right to recover products (at cost)

Eg.

Sale: bank dr 110, revenue 100, refund liability 10

And Dr right to recover stock account (at cost), CR COS

Consignment arrangements

Entity delivers a consignment to customer for sale to end users (eg wholesaler to shop to customer)

1. Establish if customer takes control of product at point of delivery or

Held under consignment until sold to end users

2. if held, revenue and cos not recognised, product stays in stock inventory of entity

Bill and hold

Goods sold but remain with seller for a specific period of time. At what point customer obtain control?

Customer control when

• reason for bill & hold substantive

• Product separately identified as belonging to customer

• Product ready for physical tfr to customer

• Entity cannot have ability to use the product or tfr it to another customer

warranties

1. Standard warranty at no cost (account for in accordance with provisions, contingent liabilities and contingent assets ch5)

2. Additional warranty available to customer at a cost (account as additional performance obligation)

3. Additional warranty at no cost provides additional service beyond assurance that product will function as intended per agreed on specifications (account as additional performance obligation)

If warranty the law (likely a standard warranty), if a longer warranty (likely additional warranty) and the nature of tasks entity promises to perform (function as intended or additional)