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Int. Acct. I
Ch. 17: Revenue Recognition
| Term | Definition |
|---|---|
| performance obligation | a promise to provide a product or service to a customer; met when the customer contains control of the good or service |
| control | determined whether the performance obligation is satisfied; when the product or service is available for direct use and receive benefits from the asset or service |
| control | the customers’ ability to prevent other companies from directing the use of, or receiving the benefits, from the asset or service |
| revenue recognition standard | companies recognize and measure revenue based on changes in assets (rights to receive consideration) or liabilities (performance obligations to transfer goods or services) arising from contracts with customers. |
| contract | the lifeblood of business, and determines the terms of the transaction, measurement of the consideration, and the promises to be met by both parties |
| key objective (revenue recognition) | recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration that the company receives (or expects to receive) in exchange for these goods or services. |
| asset liability approach | the basis for revenue recognition; recognizes and measures revenue based on changes in assets and liabilities |
| Five-Step Process for Revenue Recognition | Identity the contract with customers. Identify the separate performance obligations in the contract. Determine the transaction price. |
| Five-Step Process for Revenue Recognition | Allocate the transaction price to the separate performance obligations. Recognize revenue when each performance obligation is satisfied. |
| Revenue Recognition (Step 1) | identity the contract with customers |
| contract specifications | the contract has commercial substance the parties to the contract have approved the contract the company can identify each party’s rights regarding the goods or services to be provided |
| contract specifications | the company can identify the payment terms for the goods and services to be transferred it is probable that the company will collect the payment to which it is entitled |
| commercial substance | a change in future cash flow as a result of a transaction |
| contract | an agreement between two or more parties that creates enforceable rights or obligations |
| transaction price | the amount of consideration that a company expects to receive from a customer in exchange for transferring goods and services |
| variable consideration | if the price of a good or service depends on future events, companies must estimate the amount it will receive so the amount of revenue to recognize can be determined |
| expected value | a probability-weighted amount in a range of probable consideration outcomes |
| most likely amount | the single most likely amount in a range of possible consideration outcomes |
| time value of money | considered if there is a significant timing difference between transfer of goods or services and payment; The revenue recognized at transfer of goods or services equals the fair value of the consideration to be received. |
| discount on notes receivable | contra asset account |
| noncash consideration | if consideration received is in the form of goods, services, or other non-cash items, companies recognize revenue based on the fair value of what was received |
| consideration paid or payable to the customer | reduce the consideration received and the amount of revenue recognized. Examples include discounts, volume rebates, coupons, free products, etc. |
| sales discounts forfeited | contra expense account |
| relative fair value | used to allocate transaction price to more than one performance obligation. |
| standalone selling price | the best measure of fair value is what the company could sell the good or service for on a standalone basis |
| adjusted market assessment | the seller considers what it could sell the product or services for in the market in which it normally conducts business |
| expected cost plus a margin | the seller estimates its costs of satisfying a performance obligation and then adds an appropriate profit margin |
| returned inventory account | separate account from inventory, asset account |
| refund liability account | the amount that is expected to be returned; liability account |
| estimated inventory returns | added to returned inventory account; asset account |
| repurchase agreement | allow companies to transfer an asset to a customer but have an unconditional (forward) obligation or unconditional right (call option) to repurchase the asset at a later date |
| put option | an option to put the asset back for purchase to the party who sold it |
| bill-and-hold arrangements | a contract under which a company bills a customer for a product, but the company retains physical possession of the product until it is transferred to the customer at a point in time in the future |
| principal | provides goods or services for a customer |
| agent | arranges for the principal to provide goods or services to a customer; amounts collected on behalf of the principal are not revenue of the agent; revenue for the agent is the amount of the commission it receives. |
| cosignment | an agreement using a specialized marketing method for certain types of product |
| consignor | ships merchandise to the consignee (manufacturer or wholesaler) |
| consignee | acts as a selling agent for consignor in selling the merchandise (dealer) |
| assurance-type warranty | the product meets agreed-upon specifications at the time the product is sold. The value of the warranty is included in the sales price |
| nonrefundable upfront fees | generally relate to initiation, activation, or setup of a good or service to be provided. upfront fees should be allocated over the period benefitted. |
| contract asset | unconditional rights to receive consideration because the company has satisfied its performance obligation with a customer |
| contract asset | conditional rights to receive consideration because the company has satisfied one performance obligation but must satisfy another performance obligation in the contract before it can bill the customer. |
| contract liability | a company’s obligation to transfer goods or services to a customer for which the company has received consideration from the customer |
| contract modification | a change the contract terms while it is ongoing |
| disaggregation | to separate in component parts |
Created by:
ryanriggs18
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