Topic 7: Revenue
Self Study Questions Solutions 1. H&P Q15.7 page 592
ACCT2011: Financial Accounting A
BUSINESS SCHOOL
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Revenue that is allocated to a performance obligation is recognised when (or as) the performance obligation is satisfied (para. 46). Paragraph 31 states that an entity satisfies a performance obligation by transferring a promised good or service to the customer. The good or service is transferred when (or as) the customer obtains control of that good or service. To discover when control has passed to the customer the entity must determine at the start of the contract whether the entity satisfies a performance obligation over time or at a point in time (para. 32). A performance obligation must first be assessed to see if it is satisfied over time and, if not, it is necessary to determine the point in time at which it is satisfied.
Paragraph 35 states that an entity transfers control of a good or service over time, and thus satisfies the performance obligation over time, if any one of the following tests are met:
a) the customer simultaneously receives and consumes the benefits provided as the entity performs;
b) there are two other tests that are not required in ACCT6001
Paragraphs B3 and B4 provide guidance on paragraph 35(a). Paragraph B3 notes that routine and repeating services would satisfy this test – for example, a contract in which daily office cleaning services are provided by the entity to a customer. Where it is less obvious that the customer receives and consumes the benefits as the entity performs, paragraph B4 provides that a performance obligation would be satisfied over time if the entity is of the view that ‘another entity would not need to substantially re-perform the work that the entity has completed to date if that other entity were to fulfil the remaining performance obligation to the customer’.
In circumstances where it is decided that a performance obligation is not satisfied over time, the entity is deemed to satisfy the performance obligation at a point in time (para. 38). Revenue is recognised at that point in time at which a customer obtains control of a promised good or service and the entity satisfies a performance obligation (para. 38). In addition to the definition and criteria for control provided in paragraphs 31 to 34, other indicators of the transfer of control of a good or service to a customer include (para. 38):
a) the entity has a present right to payment for the asset;
b) the customer has legal title to the asset (control is still deemed to pass to the customer in those cases
where the entity retains legal title only as a protective right in case of non-payment by the customer);
c) Not expected in ACCT6001
d) the customer has the significant risks and rewards of ownership of the asset (an entity must exclude
any risks that give rise to separate performance obligations. For example, one risk of asset ownership is the need to maintain the asset. If the entity has contracted to provide maintenance services after the delivery of the asset to the customer, it still has a performance obligation to satisfy); and
e) the customer has accepted the asset (e.g. a contract might state that a customer must first certify that the goods delivered to it by the entity are the ones it contracted for). Such certification would be a form of customer acceptance. Where the entity can objectively determine that it is delivering what was contracted for (e.g. by counting the number of goods delivered or observing other key characteristics),
then lack of formal customer acceptance would not stop the entity deciding that control had passed to the customer (para. B84). However, where goods are delivered to a customer on a trial-and-evaluation basis and the customer does not have to pay until the trial period ends, control of the goods is not transferred until the customer accepts the goods or the trial period finishes. (para. B86).
2. H&P Q15.8 page 592
Paragraph 60 of AASB 15 requires an entity to assess whether a contract with a customer contains a significant financing component and, if so, the transaction price must be adjusted. This involves separating the consideration into the portion that represents the transaction price for the promised transfer of goods or services and the portion that represents the interest revenue or interest expense from the financing component. The objective of this adjustment is the need:
‘for an entity to recognise revenue at an amount that reflects the price that a customer would have paid for the promised goods or services if the customer had paid cash for those goods or services when (or as) they transfer to the customer (i.e., the cash selling price).’ (para. 61)
An entity is required to consider all relevant facts in determining whether a significant financing component exists within a contract including both:
a) the difference, if any, between the amount of promised consideration and the cash selling price of the promised goods or services; and
b) the combined effect of both of the following:
i) the expected length of time between when the entity transfers the promised goods or services to the
customer and when the customer pays for those goods or services; and
ii) the prevailing interest rates in the relevant market. (para. 61)
The characteristics in paragraph 61 reflect the typical characteristics in a contract with a financing component. However, these characteristics are not essential in determining the presence of a financing component. Paragraph 62 notes that a contract would not have a significant financing component if any of the following circumstances were present:
a) the customer paid for the goods or services in advance and the timing of the transfer of those goods or services is at the discretion of the customer;
b) a substantial amount of the consideration promised by the customer is variable and the amount or timing of that consideration varies on the basis of the occurrence or non-occurrence of a future event that is not substantially within the control of the customer or the entity (for example, if the consideration is a sales-based royalty); or
c) the difference between the promised consideration and the cash selling price of the good or service (as described in para. 61) arises for reasons other than the provision of finance to either the customer or the entity, and the difference between those amounts is proportional to the reason for the difference. For example, the payment terms might provide the entity or the customer with protection from the other party failing to adequately complete some or all of its obligations under the contract.
Notwithstanding paragraphs 61 and 62, the Standard does not require that the consideration needs to be adjusted for a financing component if the period between the transfer of a promised good or service and the receipt of the consideration is for a period of 12 months or less (para. 63). When calculating the interest component, the entity is required to use a discount rate that would be used if a separate financing transaction had been entered into with the customer at the start of the contract. This rate must reflect the
credit risk of whichever party is being financed (i.e. the entity or the customer) as well as any collateral (para. 64).
IT Support Co. Conditions
Payment terms can be identified Contract has commercial substance
Consideration will probably be collected when due
9(c) 9(d) 9(e)
Application to this contract
Yes, payment on agreement
Yes, payment for specific services Yes, paid before services provided
The contract is approved and the parties are committed to their obligations
Oral contract with agreement signified by payment
Each party’s rights for goods or services to be transferred can be identified
Customer – to receive online support via receipt of access codes: virus scan; performance optimisation; connectivity problem correction.
IT Support Co – right to immediate flat fee
Refer Topic 7 on Canvas for online questions solutions
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