Revenue Segment 3: Review Of Accrual Accounting

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Revenue Module 1
Segment 1
Public Companies IFRS
Private Companies GAAP for private enterprises, IFRS, nothing at all

Segment 2
Asset
Provide a future benefit; it must be probable the benefit will be enjoyed
Its Controlled (Be able to control rights and use of it)
Be the result of a transaction or event that has already occurred
Be measurable
Liability
The result of a past transaction or economic event
Require some kind of economic sacrifice to settle
Segment 3 – Review of Accrual Accounting
Cash Accounting
A system of accounting that records the cash flowing into and out of the entity. Revenue is recorded when cash is received.
Accrual Accounting
A system of accounting that measures the economic impact of transactions and economic events rather than just cash flows
Attempts to measure economic changes rather than simply cash changes
Under the accrual accounting economic events can be recorded before, after or at the same time as the associated cash flow

Difficulties with Accrual Accounting
Judgement is required for recognizing transactions and economic events
Uncertainty
Periodic reporting
While GAAP and IFRS are generally transactions based, there are usually a lot of things unknown when the financial statements are prepared
Sources of uncertainty in accrual accounting estimates
Uncollectable amounts
Returns
Warranty costs
Useful life

Module 4
Revenue
Economic benefits earned by an entity by providing goods and services to customers
Revenue recognition
The point in time when revenue is recorded (recognized) in the accounting system and reported in the income statement
Revenue Recognition
Critical event approach
Revenue Recognition according to IFRS:
Significant risk and rewards of ownership have been transferred from seller to buyer
Seller has no involvement or control over the goods sold
Collection of payment is reasonably assured
The amount of revenue can be reasonably measured
Costs of earning the revenue can be reasonably measured
The revenue recognition point should provide a reasonable and fair representation of the entity’s activities, given the needs of the people who will be using the information
Critical Events
Delivery
Completion of production
Cash Collection
Completion of warranty or right-of-return period

Segment 6
Key Points (From case in video) Total revenue is the same under bother scenarios but the timing of the revenue is different
Before critical event no revenue, At critical event All revenue is recognized
Segment 7
Gradual Approach
Revenue is recognized gradually rather than on the occurrence of a critical event
A gradual approach isn’t a substitute for the critical event method. It’s used in different circumstances
Applied to long-term contracts (construction, service contracts, interest and royalty accruals)
Implications of using a critical event for long-term contracts
A challenge is to determine how much revenue to recognize in a given period

Revenue recognition Percentage-of-Completion Method
Revenue is recognized as a job progresses
Ways to recognize revenue gradually:
According to the proportion of cost incurred
Passage of time
Achievement of specified
Formula:
Revenue for the period = (cost incurred during the period/total estimated costs for the project) * estimated project revenue

What if gradual approach criteria aren’t met?
Zero Profit Method (IFRS)
Revenue in a period is recognized up to the amount of costs incurred during the period
No profit is reported until the final year of the contract
In the final year of the contract the remaining revenue and expenses and all the profit are reported
Completed-contract method (GAAP)
No revenue is recognized until the contract is completed
Expenses are deferred until the revenue is recognized
Percentage-of-completion method
If it is expected that a long-term contract will lose money, the full amount of the loss must be recognized immediately. A
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