Revenue recognition

Why did the IASB and FASB feel the need to issue a discussion paper on revenue recognition?

IAS 18 Revenue was too complex

US GAAP was too simplistic

Both IFRSs and US GAAP had led to a diversity in practical application

The Boards were reacting to recent scandals

What is the objective of the Boards in producing the discussion paper on revenue recognition?

To develop a single revenue model that can be applied consistently regardless of industry

To recognise revenue sooner

To change the way in which long term contracts are accounted for

To assist entities in enhancing profitability

Under the proposed standard when would a company would recognise revenue?

When the company satisfies a performance obligation by transferring goods and services to a customer as contractually agreed

When the goods and services are received

When the goods and services are paid for

When the goods are dispatched

In principle, the model set out in the discussion paper could apply to all contracts. Which of the following type of contract is it felt that the model would not be appropriate for?

Insurance contracts

Commodity contracts

Sale of goods with warranties

Service contracts

Under the proposed model, what is the principle behind the recognition of revenue?

Revenue is recognised when either the net contract liability is reduced or the net contract asset has increased

Revenue is recognised when either the net contract liability is increased or the net contract asset has reduced

Revenue is recognised at any time before control is achieved

Revenue is recognised when the contract is signed

Entity A agrees to sell Entity B a product for £50,000, which is the transaction price. Entity A has an obligation to provide a product worth £50,000 and a right to receive payment of £50,000. The company must account for this transaction as follows:

Recognise an asset of £50,000

Do not record anything in the financial statements

Recognise revenue of £50,000

Recognise a liability of £50,000

Entity A agrees to sell Entity B a product for £50,000, which is the transaction price. Entity A has an obligation to provide a product worth £50,000 and a right to receive payment of £50,000. Entity A completes a sale and has no further obligation to deliver goods. The company must account for this transaction as follows under the discussion paper:

The net position in the contract is now an asset of £50,000, and so the business would recognise £50,000 revenue

The net position in the contract is now zero, and so the business would not recognise £50,000 revenue

The net position in the contract is now a liability of £50,000, and so the business would recognise £50,000 revenue

The net position in the contract is now zero, and so the business would recognise £50,000 revenue

An entity sells an item with a warranty for £9,000. If it sold the item and the warranty separately it would cost £8,000 for the goods and £2,000 for the warranty. The company must account for this transaction as follows under the discussion paper:

Revenue would be £7,200 and the amount allocated to the warranty element would be £1,800 recognised over the warranty`s life

Recognise revenue of £9,000

Revenue would be £8,000 and the amount allocated to the warranty element would be £2,000 spread over the warranty`s life

Recognise revenue of £10,000

The transfer of assets in the revenue recognition model proposed by the discussion paper is based upon what principle?

Collectability

Passing of title in law

Passing of the risks and rewards of ownership

Passing of control of the asset

The discussion paper may have a significant effect particularly on accounting for:

Financial instruments

Sale of services

Leases

Long-term construction contracts

Why did the IASB and FASB feel the need to issue a discussion paper on revenue recognition?

What is the objective of the Boards in producing the discussion paper on revenue recognition?

Under the proposed standard when would a company would recognise revenue?

In principle, the model set out in the discussion paper could apply to all contracts. Which of the following type of contract is it felt that the model would not be appropriate for?

Under the proposed model, what is the principle behind the recognition of revenue?

Entity A agrees to sell Entity B a product for £50,000, which is the transaction price. Entity A has an obligation to provide a product worth £50,000 and a right to receive payment of £50,000. The company must account for this transaction as follows:

An entity sells an item with a warranty for £9,000. If it sold the item and the warranty separately it would cost £8,000 for the goods and £2,000 for the warranty. The company must account for this transaction as follows under the discussion paper:

The transfer of assets in the revenue recognition model proposed by the discussion paper is based upon what principle?

The discussion paper may have a significant effect particularly on accounting for:

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