bg financial accounting 2 chapter 11 5595

136 CHAPTER 11: REVENUE 11.1 Overview of Revenue 11.2 Accounting requirement for Revenue 11.3 Presentation and Disclosure FINANCIAL ACCOUNTING CHAPTER 11 137 CHAPTER 11: REVENUE OBJECTIVE: After studying this chapter, you should be able to  Definition of Revenue  Types of Revenue  The Five-Step Model  Other Revenue Recognition Issues FINANCIAL ACCOUNTING CHAPTER 11 138 11.1 Overview of Revenue 11.1.1 Definition of Revenue 11.1.2 Types of Revenue FINANCIAL ACCOUNTING CHAPTER 11 11.1.1 DEFINITIONS OF REVENUE 139 The income generated from sale of goods or services, or any other use of capital or assets, associated with the main operations of an organization before any costs or expenses are deducted Revenue is shown usually as the top item in an income (profit and loss) statement from which all charges, costs, and expenses are subtracted to arrive at net income Also called sales, or (in the UK) turnover Or Revenues or revenue in business is the gross income received by an entity from its normal business activities before any expenses have been deducted Income may be received as cash or cash equivalent and is typically generated from the sale of goods or the rendering of services for a particular period of time FINANCIAL ACCOUNTING CHAPTER 11 11.1.1 DEFINITIONS OF REVENUE 140 - The amount of money that a company actually receives during a specific period, including discounts and deductions for returned merchandise It is the "top line" or "gross income" figure from which costs are subtracted to determine net income." - From the business point of view revenue can be understood as a gross increase in owners’ capital resulting from the operations of a business - The price of goods sold and services rendered during a given accounting period FINANCIAL ACCOUNTING CHAPTER 11 11.1.1 DEFINITIONS OF REVENUE 141 Other Revenue: Revenue that a company derives from any source other than its operations For example, if a company sells one of its factories or receives income from interest payments, it is considered other revenue Most (though not all) other revenue is non-repetitive and, as such, is excluded from many calculations of profit" Net revenue: Net revenue describes the gross revenue minus any product returns, allowances and any discounts for the early payment of invoices FINANCIAL ACCOUNTING CHAPTER 11 142 11.1.2 TYPES OF REVENUE FINANCIAL ACCOUNTING CHAPTER 11 143 11.1.2 TYPES OF REVENUE Sale of Goods Lending fees and investments Services provided FINANCIAL ACCOUNTING CHAPTER 11 Others (Sales of assets etc) 11.1.2 TYPES OF REVENUE (11.2.2 Other Revenue Recognition Issues) Sale return Sale Allowances Trade discount allowances Cash discount allowances Sale return A sales return is merchandise sent back by a buyer to the seller, usually for one of the following reasons:  Excess quantity shipped  Excess quantity ordered  Defective goods  Goods shipped too late  Product specifications are incorrect  Wrong items shipped  of goods sold Step 3: Determine the Transaction Price Description Implementation Transaction price is “the amount of consideration that a company expects to receive from a customer” in exchange for transferring goods and services In a contract, transaction price is often easily determined because customer agrees to pay a fixed amount In other contracts, companies must consider: (1) variable consideration, (2) time value of money, (3) noncash consideration, and (4) consideration paid or payable to customer Other issues Step • Time Value of Money - When contract (sales transaction) involves a significant financing component • • Fair value determined either by measuring the consideration received or by discounting the payment using an imputed interest rate • Company reports interest expense or interest revenue Noncash Consideration - Companies generally recognize revenue on the basis of the fair value of what is received (transactions with commercial substance) If that cannot be determined, the selling price of what was given up - Receive Donation: Contribution Revenue • Consideration Paid or Payable to Customers - May include discounts, volume rebates, coupons, or free products - In general, these elements reduce the consideration received and the revenue to be recognized Step 4: Allocate Transaction Price to Separate Performance Obligations Description If more than one performance obligation exists, allocate the transaction price based on relative fair values Implementation The best measure of fair value is what the good service could be sold for on a standalone basis (standalone selling price) Estimates of standalone selling price can be based on 1) adjusted market assessment, 2) expected cost plus a margin approach, or 3) a residual approach • The customer SIMULTANEOUSLY RECEIVES and consumes the benefits provided by the entity’s performance RECOGNISE • The entity’s performance CREATES OR ENHANCES an asset that the customer OVER TIME controls as the asset is created or enhanced • -the entity has A PRESENT RIGHT TO PAYMENT for the asset • -the customer has LEGAL TITLE to the SATISFIES AT asset A POINT IN • -the entity has TRANSFERRED PHYSICAL POSSESSION of the asset TIME • -the customer has the SIGNIFICANT RISKS AND REWARDS related to the ownership of the asset; • -the customer HAS ACCEPTED the asset STEP 5: RECOGNISE REVENUE WHEN OR AS THE ENTITY SATISFIES A PERFORMANCE OBLIGATION Step 5: Recognize Revenue When Each Performance Obligation Is Satisfied Description A company satisfies its performance obligation when the customer obtains control of the good or service Implementation • Companies satisfy performance obligations either at a point in time or over a period of time • Companies recognize revenue over a period of time if (1) or (2) (i) and (ii) either (a) or (b)  Next slide Change in Control Indicators 1.Company has a right to payment for asset 2.Company has transferred legal title to asset 3.Company has transferred physical possession of asset 4.Customer has significant risks and rewards of ownership 5.Customer has accepted the asset Recognizing Revenue When Each Performance Obligation is Satisfied • Recognize revenue over a period of time (in a more rigorous manner) if: (1) The customer controls the asset as it is created or enhanced or (2) (i) the company does not have an alternative use for the asset created or enhanced and (ii) either (a) the customer receives benefits as the company performs and therefore the task would not need to be re-performed, or (b) the company has a right to payment and this right is enforceable • Recognizes revenue over time by measuring the progress toward completion • Method for measuring progress should depict transfer of control from company to customer • The most common method is the cost-to-cost method • percentage-of-completion method APPLYING THE IFRS FIVE-STEP MODEL CONCLUSION CORE PRINCIPLE: REVENUE FROM CONTRACTS WITH CUSTOMER recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services 168 11.2.2 Accounting for Revenue 11.2.2.1 Increase in Revenue 11.2.2.2 Decrease in Revenue FINANCIAL ACCOUNTING CHAPTER DOUBLE ENTRY FOR REVENUE 169 • PRINCIPLE: • An increase of revenue is a credit entry in the revenue account • An decrease of inventory is a debit entry in the revenue account FINANCIAL ACCOUNTING CHAPTER DOUBLE ENTRY FOR REVENUE 170 Sales: Dr: Receivable Cr: Revenue/Sales Dr: Cost of Goods Sold Cr: Inventory FINANCIAL ACCOUNTING CHAPTER DOUBLE ENTRY FOR REVENUE 171 Sales Returns: Dr: Sales Returns Cr: Accounts Receivable Dr: Inventory Cr: Cost of Goods Sold FINANCIAL ACCOUNTING CHAPTER DOUBLE ENTRY FOR REVENUE 172 Sales Allowances: 1.Dr: Sales Allowances Cr: Accounts Receivable FINANCIAL ACCOUNTING CHAPTER DOUBLE ENTRY FOR REVENUE 173 Cash Discount Allowances: Dr: Cash Dr: Cash Discount Allowances Cr: Accounts Receivable FINANCIAL ACCOUNTING CHAPTER 11.3 PRESENTATION AND DISCLOSURE 174 FINANCIAL ACCOUNTING CHAPTER 11 ... remitting cash to consignor 153 11 .2 Accounting requirement for Revenue 11 .2. 1 The Five-Step Model 11 .2. 2 Accounting for Revenue FINANCIAL ACCOUNTING CHAPTER 11 11 .2. 1 The Five-Step Model REVENUE... invoices FINANCIAL ACCOUNTING CHAPTER 11 1 42 11. 1 .2 TYPES OF REVENUE FINANCIAL ACCOUNTING CHAPTER 11 143 11. 1 .2 TYPES OF REVENUE Sale of Goods Lending fees and investments Services provided FINANCIAL. .. exchange for those goods or services 168 11 .2. 2 Accounting for Revenue 11 .2. 2.1 Increase in Revenue 11 .2. 2 .2 Decrease in Revenue FINANCIAL ACCOUNTING CHAPTER DOUBLE ENTRY FOR REVENUE 169 • PRINCIPLE: