Professional Documents
Culture Documents
REVENUE FROM
CONTRACTS WITH
CUSTOMERS
1
This material is the property of Department of Accounting
and Finance, CoBE, AAU. Permission must be obtained from
Learning Objectives
At the completion of studying this
chapter, you will be able to:
Standards
IFRS 15
IFRS 13
ISA 1
REVENUE MEASUREMENT
REVENUE MEASUREMENT
REVENUE RECOGNITION
Identify the
contract
with a
customer
(Step 1)
Identify the
performance
obligations
in the
contract
(Step 2)
Determine
the
transaction
price (Step 3)
Allocate the
transaction
price to
performance
obligations
(Step 4)
Recognize
revenue when
(or as) the entity
satisfies a
performance
obligation (Step
5)
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Contract:
Agreement
business practice.
Company
11
obligations) results or
whether it is a modification of the existing
contract.
Prospective Modification
Company should
- account for effect of change in period of
change as well as future periods if change
affects both.
- not change previously reported results.
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exists.
Company
assetnot
= Rights
received
> Performance
does
recognize
contract
assets or
liabilities until one orobligation
both parties to the contract
Contract liability = Rights received < Performance
perform.
obligation
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Identify Performance
ObligationsStep 2
Sale
Saleofofproduct
product
from
inventory
from inventory
Revenue
Revenuefrom
from
sales
sales
Date
Dateofofsale
sale(date
(date
ofofdelivery)
delivery)
Performing
Performing
aaservice
service
Permitting
Permitting
use
useof
ofan
an
asset
asset
Sale
Saleof
ofasset
asset
other
than
other than
inventory
inventory
Revenue
Revenue
from
fromfees
feesor
or
services
services
Revenue
Revenue
from
from
interest,
interest,
rents,
rents,and
and
royalties
royalties
Gain
Gainor
orloss
loss
on
on
disposition
disposition
Services
Services
performed
performed
and
andbillable
billable
As
Astime
time
passes
passesor
or
assets
assetsare
are
used
used
Date
Date of
of
sale
sale or
or
trade-in
trade-in
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Identify Performance
ObligationsStep 2
Determining Transaction
PriceStep 3
Transaction price
Amount
Determining Transaction
PriceStep 3
Variable Consideration
Price dependent on future events.
- May include discounts, rebates, credits,
performance bonuses, or royalties.
Companies estimate amount of revenue to recognize.
- Expected value
- Most likely amount
Companies only recognize variable consideration if
1. they have experience with similar contracts and are
able to estimate the cumulative amount of revenue, and
2. based on experience, they do not expect a significant
reversal of revenue previously recognized.
If
Variable Consideration
ESTIMATING VARIABLE CONSIDERATION
Facts: Peabody Construction Company enters into a contract with a
customer to build a warehouse for Birr 100,000, with a performance bonus of
Birr 50,000 that will be paid based on the timing of completion. The amount
of the performance bonus decreases by 10% per week for every week
beyond the agreed-upon completion date. The contract requirements are
similar to contracts that Peabody has performed previously, and
management believes that such experience is predictive for this contract.
Management estimates that there is a 60% probability that the contract will
be completed by the agreed-upon completion date, a 30% probability that it
will be completed 1 week late, and only a 10% probability that it will be
completed 2 weeks late.
Question: How should Peabody account for this revenue arrangement?
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Variable Consideration
Question: How should Peabody account for this revenue arrangement?
Management has concluded that the probability-weighted method is the
most predictive approach:
60% chance of Birr 150,000 =
30% chance of Birr 145,000 =
10% chance of Birr 140,000 =
Birr 90,000
43,500
14,000
Birr 147,500
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Determining Transaction
PriceStep 3
Non-Cash Consideration
Goods, services, or other non-cash consideration.
-
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27
Services c
Service b and c
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Right of return
Repurchase agreements
Warranties
Consignments
Etc
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RIGHT OF RETURN
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RIGHT OF RETURN
Question: How should Venden record this sale?
Venden records the sale as follows with the expectation that three products
will be returned:
Cash
10,000
9,700
300
Venden records the cost of goods sold with the following entry.
Cost of Goods Sold
Estimated Inventory Returns (Birr 60 x 3)
Inventory
5,820
180
6,000
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RIGHT OF RETURN
Question: How should Venden record this sale?
When a return occurs, Venden records the following entries.
Refund Liability (2 x Birr100)
200
Accounts Payable
Returned Inventory (2 x Birr 60)
Estimated Inventory Returns
200
120
120
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Repurchase Agreements
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Repurchase Agreements
REPURCHASE AGREEMENT
Example: Morgan Inc., an equipment dealer, sells equipment on January 1,
2015, to Lane Company for Birr 100,000. It agrees to repurchase this
equipment on December 31, 2016, for a price of Birr 121,000.
100,000
100,000
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Repurchase Agreements
Question: How should Morgan Inc. record this transaction?
Morgan Inc. records interest on December 31, 2016, as follows.
Interest Expense
10,000
10,000
Morgan Inc. records interest and retirement of its liability to Lane Company
on December 31, 2016, as follows.
Interest Expense
11,000
11,000
121,000
121,000
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Consignments
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Consignments
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Warranties
WARRANTIES
Facts: Maverick Company sold 1,000 Refrigerators during 2015 at a total
price of Birr 6,000,000, with a warranty guarantee that the product was free
of any defects. The cost of Refrigerators sold is Birr 4,000,000. The term of
the assurance warranty is two years, with an estimated cost of Birr 30,000.
In addition, Maverick sold extended warranties related to 400 Refrigerators
for 3 years beyond the 2-year period for Birr 2,000.
Question: What are the journal entries that Maverick Company should
make in 2015 related to the sale and the related warranties?
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Warranties
Question: What are the journal entries that Maverick Company should
make in 2015 related to the sale and the related warranties?
To record the revenue and liabilities related to the warranties:
Cash (Birr 6,000,000 + Birr12,000)
Warranty Expense
6,012,000
30,000
Warranty Liability
30,000
12,000
Sales Revenue
6,000,000
4,000,000
4,000,000
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PERCENTAGE-OF-COMPLETION METHOD
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PERCENTAGE-OF-COMPLETION METHOD
ILLUSTRATION 18A-4
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PERCENTAGE-OF-COMPLETION METHOD
ILLUSTRATION 18A-5
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PERCENTAGE-OF-COMPLETION METHOD
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PERCENTAGE-OFCOMPLETION
METHOD
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PERCENTAGE-OF-COMPLETION METHOD
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PERCENTAGE-OF-COMPLETION METHOD
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PERCENTAGE-OF-COMPLETION METHOD
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PERCENTAGE-OF-COMPLETION METHOD
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Journal Entries
Cost-Recovery Method
Comparison of Gross
Profit Recognized under
Different Methods
Under both percentage-of-completion and costrecovery methods, the company must recognize in the
current period the entire expected contract loss.
Prepare the journal entries to record revenue and expense for 2014, 2015, and
2016 assuming the estimated cost to complete at the end of 2015 was
$215,436.
Prepare the journal entries for 2014, 2015, and 2016 assuming the estimated
cost to complete at the end of 2015 was $246,038 instead of $170,100.
PRESENTATION AND
DISCLOSURE
Presentation
a contract liability,
PRESENTATION AND
DISCLOSURE
Disclosures
72
US GAAP