FAR- Module 2

Five-Step Approach to Revenue Recognition Step 1

Identify the contract with a customer

Five-Step Approach to Revenue Recognition Step 2

Identify the separate performance obligations in the contract

Five-Step Approach to Revenue Recognition Step 3

Determine the transaction price

Five-Step Approach to Revenue Recognition Step 4

Allocate the transaction price to the separate performance obligations

Five-Step Approach to Revenue Recognition Step 5

Recognize revenue when or as the entity satisfies each performance obligation

Contract Criteria for Revenue Recognition

Approved by all parties, identifiable rights, identified payment terms, has commercial substance, and probable collection of consideration

Performance Obligation

A promise to transfer either a good or service to a customer

Criteria for a Distinct Performance Obligation

Separately identifiable from other goods or services in the contract and customer can benefit from it independently or with available resources

Transaction Price

The amount of consideration an entity expects to receive in exchange for transferring goods or services to a customer

Factors in Determining Transaction Price

Variable consideration, significant financing, noncash considerations, and consideration payable to the customer

Transaction Price Allocation

Allocated based on the expected stand-alone selling price of each unique performance obligation

Revenue Recognition Over Time

Measured using output or input methods toward completion

Revenue Recognition at a Point in Time

Recognized when the customer obtains control of the asset

Long-Term Construction Contract Revenue Methods

Recognized over time using progress measures or at a point in time upon contract completion

Losses on Long-Term Construction Contracts

Recognized immediately when discovered, regardless of the revenue recognition method used

Formula for Construction Gross Profit Over Time

$$\left(\frac{\text{Total Cost to Date}}{\text{Total Estimated Cost}} \times \text{Total Estimated Gross Profit}\right) - \text{Gross Profit Recognized to Date}$$

Costs to Obtain a Contract

Treated as assets if expected to be recovered, or treated as expenses if incurred regardless of contract obtainment

Principal vs Agent Distinction

Principal has control and recognizes gross consideration, while agent lacks control and recognizes only a fee or commission

Forward or Call Option (Repurchase Price less than Original Price)

Accounted for as a lease

Forward or Call Option (Repurchase Price greater than or equal to Original Price)

Accounted for as a financing arrangement

Put Option (Repurchase Price less than Original Selling Price)

Accounted for as a lease if customer has significant economic incentive, or sale with right of return if no incentive

Put Option (Repurchase Price greater than or equal to Original Selling Price)

Accounted for as a financing arrangement if greater than market value, or sale with right of return if less than or equal to market value

Bill-and-Hold Arrangement Criteria

Substantive reason exists, separately identified as belonging to customer, ready for transfer, and entity cannot use or redirect it

Consignment Arrangement Definition and Indicators

Dealer sells products on behalf of entity while entity retains control; dealer has no unconditional obligation to pay, and entity can require return

Separate Warranty Obligation

Treated as a separate obligation if purchased separately or provides service beyond basic compliance assurance

Refund Liability

Represents consideration an entity expects to return to customers who have a right of return

Change in Accounting Estimate

Applied prospectively to current and future periods without adjustment to prior financial statements

Change in Depreciation Method

Accounted for as a change in accounting estimate prospectively

Change in Accounting Principle

Applied retrospectively with cumulative effect reported as an adjustment to beginning retained earnings of earliest year presented

Exception to Change in Accounting Principle

Applied prospectively if impracticable to estimate cumulative effect, such as a change to LIFO

Three Types of Accounting Changes

Change in accounting principle, change in accounting estimate, and change in accounting entity

Change in Accounting Entity

Applied retrospectively by restating all current and prior period financial statements presented

Error Correction

Reported as prior period adjustments to retained earnings net of tax and prior financials are restated

Four Adjusting Entry Situations

Deferred revenues, prepaid expenses, accrued/receivable revenues, and accrued expenses

Deferred Revenues (Adjusting Entry)

Cash is received before the performance obligation is met

Prepaid Expenses (Adjusting Entry)

Cash is paid before the expense is incurred

Receivables or Accrued Revenues (Adjusting Entry)

Cash is received after the performance obligation has been met

Accrued Expenses (Adjusting Entry)

Cash is paid after the expense has been incurred

Journal Entry to Earn Deferred Revenue

Debit Deferred revenue, Credit Revenue

Adjusting Journal Entry Rules

Recorded by year-end, never involve cash account, and hit one income statement and one balance sheet account

Summary of Significant Accounting Policies

First note to financial statements; identifies measurement bases and specific accounting principles and methods used

Remaining Notes to Financial Statements

Disclose facts not in body or summary of policies such as inventory, PP and E, contingency losses, and fair value estimates

Disclosure of Risks and Uncertainties

Requires disclosure of nature of operations, use of estimates, significant estimates, and vulnerability to concentrations

Subsequent Event Definition and Categories

Occurs after balance sheet date but before financial statements are issued or available to be issued; categorized as recognized or nonrecognized

Recognized Subsequent Events

Provide additional information about conditions existing at balance sheet date and must be recognized in financials

Nonrecognized Subsequent Events

Provide information about conditions occurring after balance sheet date and are not included in financials

Subsequent Evaluation Period

Evaluated through issue date for SEC filers, or through available date for non-SEC entities

Fair Value

Price received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at measurement date

Most Advantageous Market

The market with the best price for the asset or liability after considering transaction costs

Market Approach for Fair Value

Uses prices and relevant information from market transactions involving identical or comparable assets or liabilities

Income Approach for Fair Value

Converts future amounts such as cash flows or earnings to a single discounted amount

Cost Approach for Fair Value

Uses current replacement cost to measure the fair value of assets

Level 1 Inputs for Fair Value

Quoted prices in active markets for identical assets or liabilities with the highest priority

Level 2 Inputs for Fair Value

Inputs other than quoted market prices that are directly or indirectly observable

Level 3 Inputs for Fair Value

Unobservable inputs reflecting entity assumptions based on best available information with lowest priority

Special Purpose Frameworks Guidelines

OCBOA presentations use cash, modified cash, or tax basis; require clear non-GAAP titles and disclosures similar to GAAP

Gross Margin Formula

$$\frac{\text{Net Sales} - \text{Cost of Goods Sold}}{\text{Net Sales}}$$

Return on Equity or ROE Formula

$$\frac{\text{Net Income}}{\text{Average Total Equity}}$$

Current Ratio Formula

$$\frac{\text{Current Assets}}{\text{Current Liabilities}}$$

Quick Ratio Formula

$$\frac{\text{Cash} + \text{Short-Term Marketable Securities} + \text{Net Receivables}}{\text{Current Liabilities}}$$