F7FINANCIAL REPORTING--PART B ACCOUNTING STANDARDS Chapter 4 Revenue recognition and substance of transactionsDefinition p53Revenue: Income arising in the course of an entity’s ordinary activities.Contract: An agreement between two or more parties that creates enforceable rights and obligations.Definition p53Performance obligation: A promise in a contract with a customer to transfer to the customer either:(a) a good or service (or a bundle of goods or services) that is distinct; or(b) a series of distinct goods or services that are substantially the same and that have the same pattern of transfer to the customer.Agency?Definition p53In an agency relationship, the gross inflows of economic benefits include amounts collected on behalf of the principal and which do not result in increases in equity for the entity. The amounts collected on behalf of the principal are not revenue. Instead, revenue is the amount of commission.Recognition p54: Five-stepapproachStep 1: Identify the contract(s) with a customer—a contract is an agreement between two or more parties that creates enforceable rights and obligations.Recognition p54: Five-stepapproachStep 2: Identify the performance obligations in the contract—a contract includes promises to transfer goods or services to a customer. If those goods or services are distinct, the promises are performance obligations and are accounted for separately.Recognition p54: Five-stepapproachA good or service is distinct if either of the following criteria is met:(a) the entity regularly sells the good or service separately’ or(b) the customer can benefit from the good or service either on its own or together with resources that are readily available to the customer.Recognition p54: Five-stepapproachStep 3: Determine the transaction price—the transaction price is the amount of consideration in a contract to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer.Recognition p54: Five-stepapproachThe transaction price can be a fixed amount of customer consideration, but it may sometimes include variable consideration or consideration in a form other than cash such as discounts, rebates, refunds, credits, incentives, bonuses, penalties. Under the proposal, these variable amounts would be estimated and included in the transaction price using either the ‘expected value’ or the ‘most likely amount’ approach.Recognition p54: Five-stepapproachStep 4: Allocate the transaction price to the performance obligations in the contract—an entity typically allocates the transaction price to each performance obligation on the basis of the relative stand-alone selling prices of each distinct good or service promised in the contract. If a stand-alone selling price is not observable, an entity estimates it.Recognition p54: Five-stepapproachStep 5: A company would recognise revenue when (or as) it satisfies a performance obligation by transferring a promised good or service to a customer (which is when the customer obtains control of that good or service).Recognition p54: Five-stepapproachTo determine the point in time when a customer obtains control of a promised asset and an entity satisfies a performance obligation, the entity would consider indicators of the transfer of control that include, but are not limited to, the following:(a) the entity has a present right to payment for the asset;(b) the customer has legal title to the asset;Recognition p54: Five-stepapproach(c) the entity has transferred physical possession of the asset;(d) the customer has the significant risks and rewards of ownership ofthe asset; and(e) the customer has accepted the asset.Recognition p54: Five-stepapproachA performance obligation may be satisfied at a point in time (typically for promises to transfer goods to a customer) or over time (typically for promises to transfer services to a customer). For performance obligations satisfied over time, a company would select an appropriate measure of progress to determine how much revenue should be recognised as the performance obligation is satisfied.IAS 18 REVENUEMeasurement P55•When (or as) a performance obligation is satisfied, an entity shall recognise as revenue the amount of the transaction price.Ex 1,2 P231OFF BALANCE SHEETcreativeaccounting p52Profit smoothing , where profits from good years are held back and released in bad years to make the results look consistent year on yearReducing gearing , disguise debt on the balance sheet good returnlow riskIAS 1 requires to report substance (substance over form)Form: A sells assets to BA still controls the asset A doesn't control theassetSubstance : not a real sale Substance : a real saleA/C treatment: no revenue recognised A/Ctreatment: recognise revenuereport substanceConsignment inventory P56manufacturerdealer (agent)customerdeliver inventoriessale goodsConsignment inventories Should be inventory recognised in dealer ’s book?Should be revenue recognised at delivery?Who recog the revenue?control!!!!!Consignment inventory P56 IndicatorsThe product is controlledby the manufacturer until a specified event occurs YNYThe manufacturer is able to require the return of the product or transfer the product to a third party (such as another dealer)NEx 2 P232Consignment inventory P56IndicatorsThe dealer does not havean unconditional obligationto pay for the productY NManufacturer can’t recognise revenue until customer purchases goods from dealer and dealer can’t recognise inv. Both manufacturer and dealer can recognise revenue when goods is delivered and dealer can recognise inv.Ex 2 P232Sales and repurchase P57 seller buyer salesrepurchase IndicatorsEx 3 P232Repurchasemanufacturer ’s obligation/right to repurchase the asset manufacturer ’s obligation to repurchase the asset at thecustomer ’s requestthe buyer is limited in its ability todirect the use of, and obtainsubstantially all of the remainingbenefits from, the assetwhether the buyer has a significant economic incentive to exercise that rightSales and repurchase P57 seller buyer salesrepurchase IndicatorsEx 3 P232Repurchasethe buyer does not obtain control of the assetY Nsubstance:a financing arrangementsubstance: sale of a product with a right of returnnot a real saleSales and repurchase P57 seller buyersalesrepurchase IndicatorsEx 3 P232Repurchasesubstance:a financing arrangementRepurchase price≥original selling priceYNsubstance:a lease not a real sale'Bill and hold' sales P59A bill-and-hold arrangement is a contract under which an entity bills a customer for a product but the entity retains physical possession of the product until it is transferred to the customer at a point in time in the future.An entity shall determine when it has satisfied its performance obligation to transfer a product by evaluating when a customer obtains control of that product.'Bill and hold' sales P59 IndicatorsThe reason for the bill-and-hold arrangement issubstantive (for example, the customer has requested the arrangement)NNThe product is identified separately as belonging to the customerYY'Bill and hold' sales P59 IndicatorsThe product is currently ready for physical transfer to the customer N YThe manufacturer can have the ability to use the product or to direct it to another customer.NYRecognise the revenue when customer obtains control later, usually at delivery. Recognise the revenue when the bill is received.。