ch18, IFRS 15

Prepared by
Coby Harmon
University of California, Santa Barbara
Westmont College
18-1
CHAPTER 18
Revenue Recognition
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1. Understand the fundamental 3. Apply the five-step process to
concepts related to revenue major revenue recognition
recognition and measurement. issues.
2. Understand and apply the five- 4. Describe presentation and
step revenue recognition disclosure regarding revenue.
process.
18-2
PREVIEW OF CHAPTER 18
Intermediate Accounting
IFRS 3rd Edition
Kieso ● Weygandt ● Warfield
18-3
New Revenue Recognition Standard
ILLUSTRATION 18.1 Key Concepts of Revenue Recognition
18-4
Performance Obligation is Satisfied LO 1
Overview of the Five-Step Process
Assume that Airbus (FRA) Corporation signs a contract to sell

airplanes to Cathay Pacific Airlines (HKG) for €100 million.
ILLUSTRATION 18.2
Five Steps of Revenue Recognition
A contract is an agreement between two parties

Step 1: Identify the
that creates enforceable rights or obligations. In
contract with
this case, Airbus has signed a contract to deliver
customers.
airplanes to Cathay Pacific.
Airbus has only one performance obligation—to

Step 2: Identify the
deliver airplanes to Cathay Pacific. If Airbus also
separate performance
agreed to maintain the planes, a separate
obligations in the
performance obligation is recorded for this
contract.
promise.
18-5 LO 1
ILLUSTRATION 18.2 Five Steps of Revenue Recognition
Transaction price is the amount of consideration

Step 3: Determine that a company expects to receive from a
the transaction customer in exchange for transferring a good or
price. service. In this case, the transaction price is
straightforward—it is €100 million.
Step 4: Allocate the

transaction price to
In this case, Airbus has only one performance
the separate
obligation—to deliver airplanes to Cathay Pacific.
performance
obligations.
18-6 LO 1
ILLUSTRATION 18.2 Five Steps of Revenue Recognition
Step 5: Recognize
Airbus recognizes revenue of €100 million for the
revenue when
sale of the airplanes to Cathay Pacific when it
each performance
satisfies its performance obligation—the delivery of
obligation
the airplanes to Cathay Pacific.
is satisfied.
18-7 LO 1
Extended Example of Five-Step Process
Identifying the Contract with Customers—Step 1

Assume that Tyler Angler orders a large cup of black coffee costing $3
from BEAN. Tyler gives $3 to a BEAN barista, who pours the coffee
into a large cup and gives it to Tyler.
Question: How much revenue should BEAN recognize on this

transaction?
18-8 LO 1
Step 1: Identify the contract with customers.
1. The contract has commercial substance: Tyler gives cash for the
coffee.
2. The parties have approved the contract: Tyler agrees to
purchase the coffee and BEAN agrees to sell it.
3. Identification of the rights of the parties is established: Tyler
has the right to the coffee and BEAN has the right to receive $3.
4. Payment terms are identified: Tyler agrees to pay $3 for the
coffee.
5. It is probable that the consideration will be collected: BEAN
has received $3 before it delivered the coffee.
18-9 LO 1
It appears that BEAN and Tyler have a valid contract with one another.
Step 2: Identify the separate performance obligations.
BEAN has a performance obligation to provide a large cup of coffee

to Tyler.
BEAN has no other performance obligation for any other good or
service.
Step 3: Determine the transaction price.
The price of the coffee is $3, and no discounts or other adjustments

are available. Therefore, the transaction price is $3.
18-10 LO 1
Step 4: Allocate the transaction price to the separate

performance obligations.
Given that BEAN has only one performance obligation, no allocation

is necessary.
Step 5: Recognize revenue when each performance

obligation is satisfied.
BEAN satisfies its performance obligation when Tyler obtains control

of the coffee.
BEAN should recognize $3 in revenue from this

transaction when Tyler receives the coffee. LO 1
18-11
Identifying Separate Performance Obligations—Step

2
The following day, Tyler orders another large cup of coffee for $3 and
also purchases two bagels at a price of $5. The barista provides these
products and Tyler pays $8.
Question: How much revenue should BEAN recognize on the

purchase of these two items?
18-12 LO 1
A valid contract exists as it meets the five conditions necessary for a

contract to be enforceable as discussed in the previous example.
BEAN must determine whether the sale of the coffee and the sale of
the two bagels involve one or two performance obligations.
18-13 LO 1
Multiple performance obligations exist when the following two

conditions are satisfied:
1. BEAN must provide a distinct product or service.
2. BEAN’s products are distinct within the contract. If the performance
obligation is
► not highly dependent on,
► or interrelated with,
other promises in the contract, then each performance obligation
should be accounted for separately.
BEAN has two performance obligations.

18-14 LO 1
The transaction price is $8 ($3 + $5).

BEAN has two performance obligations.

► Each obligation is distinct and not interrelated (and priced
separately); no allocation of the transaction price is necessary.
► The coffee sale is recorded at $3 and the sale of the bagels is
priced at $5.
18-15 LO 1

BEAN has satisfied both performance obligations when the coffee

and bagels are given to Tyler (control of the product has passed to
the customer).
BEAN should recognize $8 ($3 + $5) of revenue

when Tyler receives the coffee and bagels.
18-16 LO 1
Determining the Transaction Price—Step 3

BEAN is interested in stimulating sales of its Smoke Jumper coffee
beans on Tuesdays, a slow business day for the store. Normally,
these beans sell for $10 for a 12-ounce bag, but BEAN decides to cut
the price by $1 when customers buy them on Tuesdays (the
discounted price is now $9 per bag). Tyler has come to the store on a
Tuesday, decides to purchase a bag of Smoke Jumper beans, and
pays BEAN $9.
Question: How much revenue should BEAN recognize on this

transaction?
18-17 LO 1

BEAN has a performance obligation to provide a bag of Smoke

Jumper coffee beans to Tyler.
BEAN has no other performance obligation to provide a product or
service.
18-18 LO 1
The transaction for a bag of Smoke Jumper beans sold to Tyler is

$9, not $10.

There is only one performance obligation, no allocation is necessary.

BEAN has satisfied both performance obligations.
BEAN should recognize $9 of revenue when Tyler receives

the Smoke Jumper coffee beans.
18-19 LO 1
Allocating the Transaction Price to Separate

Performance Obligations—Step 4
Transaction price is allocated to the various performance obligations
based on their relative standalone selling prices.
BEAN offers customers a $2 discount on the purchase of a large cup

of coffee when they buy a bag of its premium Motor Moka beans
(which normally sell for $12) at the same time. As indicated earlier, a
large cup of coffee normally retails for $3 at BEAN.
Question: How much revenue should BEAN recognize on the

purchase of these two items?
18-20 LO 1

The bag of Motor Moka beans and the large cup of coffee are
distinct from one another and are not highly dependent on or highly
interrelated with the other.
18-21 LO 1
The transaction price is $13 ($12 + $1).

BEAN allocates the transaction price to the two performance

obligations based on their relative standalone selling prices as
follows.
18-22 LO 1

BEAN allocates the transaction price to the two performance

obligations based on their relative standalone selling prices as
follows.
Standalone
Product Selling Price Percentage Percentage
Beans (one bag) $12 80% ($12 ÷ $15) $ 10.40 ($13 × 80%)
Large cup of coffee 3 20% ($3 ÷ $15) 2.60 ($13 × 20%)
Total $15 100% $ 13.00
The total transaction price ($13) is allocated $10.40 to the bag of

Motor Moka beans and $2.60 to the large cup of coffee.
18-23 LO 1

BEAN has satisfied both performance obligations as control of the

bag of Motor Moka beans and the large cup of coffee has passed to
Tyler.
BEAN should recognize revenue of $13, comprised of

revenue from the sale of the Motor Moka beans at
$10.40 and the sale of the large cup of coffee at $2.60.
18-24 LO 1

BEAN satisfied its performance obligation(s) when Tyler obtained

control of the product(s).
Indicators that Tyler has obtained control are as follows:
a. BEAN has the right to payment for the coffee.
b. BEAN has transferred legal title to the coffee.
c. BEAN has transferred physical possession of the coffee.
d. Tyler has significant risks and rewards of ownership.
e. Tyler has accepted the asset.
18-25 LO 1
LEARNING OBJECTIVE 2
The Five-Step Understand and apply the five-
step revenue recognition
Process Revisited process.
Identifying the Contract with Customers—Step 1

Contract:
 Agreement between two or more parties that creates
enforceable rights or obligations.
 Can be
► written,
► oral, or
► implied from customary business practice.
18-26 LO 2
Contract with Customers—Step 1
Accounting
 Revenue cannot be recognized until a contract exists.
 Company obtains rights to receive consideration and
assumes obligations to transfer goods or services.
 Rights and performance obligations gives rise to an (net)
asset or (net) liability.
 Company does not recognize contract assets or liabilities
until one or both parties perform under the contract.
18-27 LO 2
Contract with Customers—Step 1 ILLUSTRATION 18.3
Basic Revenue
Transaction
CONTRACTS AND RECOGNITION

Facts: On March 1, 2019, Margo Company enters into a contract to transfer a
product to Soon Yoon on July 31, 2019. The contract is structured such that
Soon Yoon is required to pay the full contract price of $5,000 on August 31,
2019.The cost of the goods transferred is $3,000. Margo delivers the product to
Soon Yoon on July 31, 2019.
Question: What journal entries should Margo Company make in regards to
this contract in 2019?
The journal entry to record the sale and related cost of goods sold is as follows.
July 31, 2019
Accounts Receivable 5,000
Sales Revenue 5,000
Cost of Goods Sold 3,000
Inventory 3,000
18-28 LO 2
Contract with Customers—Step 1 ILLUSTRATION 18.3
Basic Revenue
Transaction
CONTRACTS AND RECOGNITION

Facts: On March 1, 2019, Margo Company enters into a contract to transfer a
product to Soon Yoon on July 31, 2019. The contract is structured such that
Soon Yoon is required to pay the full contract price of $5,000 on August 31,
2019.The cost of the goods transferred is $3,000. Margo delivers the product to
Soon Yoon on July 31, 2019.
Question: What journal entries should Margo Company make in regards to
this contract in 2019?
Margo makes the following entry to record the receipt of cash on August 31, 2019.
August 31, 2019
Cash 5,000
18-29 LO 2
Separate Performance Obligations—Step 2
A performance obligation is a promise to provide a distinct

product or service to a customer.
A product or service is distinct when a customer is able to

 benefit from a good or service on its own or
 together with other readily available resources.
The objective is to determine whether the nature of a

company’s promise is to transfer individual goods and services
to the customer or to transfer a combined item (or items) for
which individual goods or services are inputs.
18-30 LO 2
ILLUSTRATION
Assume that Tata Motors (IND) sells an automobile to Marquart Auto

Dealers at a price that includes six months of telematics services such
as navigation and remote diagnostics. These telematics services are
regularly sold on a standalone basis by Tata Motors for a monthly fee.
After the six-month period, the consumer can renew these services on a
fee basis with Tata Motors. The question is whether Tata Motors sold one
or two products.
If we look at Tata Motors’ objective, it appears that it is to sell two goods,
the automobile and the telematic services. Both are distinct (they can
be sold separately) and are not interdependent.
18-31 LO 2
ILLUSTRATION
SoftTech Inc. licenses customer-relationship software to Lopez

Company. In addition to providing the software itself, SoftTech promises
to provide consulting services by extensively customizing the software to
Lopez’s information technology environment, for a total consideration of
$600,000. In this case, SoftTech is providing a significant service by
integrating the goods and services (the license and the consulting
service) into one combined item for which Lopez has contracted. In
addition, the software is significantly customized by SoftTech in
accordance with specifications negotiated by Lopez. Do these facts
describe a single or separate performance obligation?
The license and the consulting services are distinct but interdependent,
and therefore should be accounted for as one performance obligation.
18-32 LO 2
Determining Transaction Price—Step 3
Transaction price
 Amount of consideration that company expects to receive
from a customer.
 In a contract is often easily determined because customer
agrees to pay a fixed amount.
 Other contracts, companies must consider:
► Variable consideration
► Time value of money
► Non-cash consideration
► Consideration paid or payable to customers
18-33 LO 2
Variable Consideration
 Price dependent on future events.
► May include price increases, volume discounts,
rebates, credits, performance bonuses, or royalties.
 Companies estimate amount of revenue to recognize.
► Expected value
► Most likely amount
18-34 LO 2
ILLUSTRATION 18.4 Estimating Variable Consideration
Expected Value: Probability-weighted amount in a range of possible

consideration amounts.
 May be appropriate if a company has a large number of contracts with
similar characteristics.
 Can be based on a limited number of discrete outcomes and probabilities.
Most Likely Amount: The single most likely amount in a range of possible
consideration outcomes.
 May be appropriate if the contract has only two possible outcomes.
18-35 LO 2
Variable Consideration ILLUSTRATION 18.5
Transaction Price
ESTIMATING VARIABLE CONSIDERATION

Facts: Peabody Construction Company enters into a contract with a
customer to build a warehouse for $100,000, with a performance bonus of
$50,000 that will be paid based on the timing of completion. The amount of
the performance bonus decreases by 10% per week for every week beyond
the agreed-upon completion date. The contract requirements are similar to
contracts that Peabody has performed previously, and management believes
that such experience is predictive for this contract. Management estimates
that there is a 60% probability that the contract will be completed by the
agreed-upon completion date, a 30% probability that it will be completed 1
week late, and only a 10% probability that it will be completed 2 weeks late.
Question: How should Peabody account for this revenue arrangement?
18-36 LO 2
Variable Consideration ILLUSTRATION 18.5
Transaction Price
Question: How should Peabody account for this revenue arrangement?
Management has concluded that the probability-weighted method is the

most predictive approach:
On time: 60% chance of $150,000 = $ 90,000
1 week late: 30% chance of $145,000 = 43,500
2 weeks late: 10% chance of $140,000 = 14,000
$147,500
Most likely outcome, if management believes they will meet the

deadline and receive the $50,000 bonus, the total transaction price
would be?
$150,000 (the outcome with 60% probability)
18-37 LO 2
Variable Consideration
 Companies only allocate variable consideration if it is

reasonably assured that it will be entitled to the
amount.
 Companies only recognize variable consideration if
1. they have experience with similar contracts and are
able to estimate the cumulative amount of revenue,
and
2. based on experience, they do not expect a significant

reversal of revenue previously recognized.
If these criteria are not met, revenue recognition is

constrained.
18-38 LO 2
Time Value of Money

 When contract (sales transaction) involves a significant
financing component.
► Interest accrued on consideration to be paid over
time.
► Fair value determined either by measuring the
consideration received or by discounting the payment
using an imputed interest rate.
► Company reports as interest expense or interest
revenue.
18-39 LO 2
ILLUSTRATION 18.7
Time Value of Money Transaction Price
-Extended Payment Terms
EXTENDED PAYMENT TERMS

Facts: On July 1, 2019, SEK Company sold goods to Grant Company for
R$900,000 in exchange for a 4-year, zero-interest-bearing note with a face
amount of R$1,416,163. The goods have a cost on SEK’s books of R$590,000.
Questions: (a) How much revenue should SEK Company record on July 1,
2019? (b) How much revenue should it report related to this transaction on
December 31, 2019?
Entry to record SEK’s sale to Grant Company on July 1, 2019, is as follows.

Notes Receivable 900,000
Sales Revenue 900,000
Inventory 590,000
18-40 LO 2
ILLUSTRATION 18.12
Time Value of Money Transaction Price
-Extended Payment Terms
EXTENDED PAYMENT TERMS

Facts: On July 1, 2019, SEK Company sold goods to Grant Company for
R$900,000 in exchange for a 4-year, zero-interest-bearing note with a face
amount of R$1,416,163. The goods have a cost on SEK’s books of R$590,000.
Questions: (a) How much revenue should SEK Company record on July 1,
2019? (b) How much revenue should it report related to this transaction on
December 31, 2019?
Entry to record interest revenue at the end of the year, December 31, 2019.
Notes Receivable 54,000
Interest Revenue (12% x ½ x R$900,000) 54,000
Companies are not required to reflect the time value of money if the time period
for payment is less than a year.
18-41 LO 2
Non-Cash Consideration
Goods, services, or other non-cash consideration.
 Companies sometimes receive contributions (e.g.,
donations and gifts).
 Customers sometimes contribute goods or services,
such as equipment or labor, as consideration for goods
provided or services performed.
 Companies generally recognize revenue on the basis
of the fair value of what is received.
18-42 LO 2
Consideration Paid or Payable to Customers

 May include discounts, volume rebates, coupons, free
products, or services.
 In general, these elements reduce the consideration
received and the revenue to be recognized.
18-43 LO 2
ILLUSTRATION 18.8
Consideration Paid or Payable Transaction Price –
Volume Discount
VOLUME DISCOUNT
Facts: Sansung Company offers its customers a 3% volume discount if they
purchase at least ¥2 million of its product during the calendar year. On March 31,
2019, Sansung has made sales of ¥700,000 to Artic Co. In the previous 2 years,
Sansung sold over ¥3,000,000 to Artic in the period April 1 to December 31.
Questions: How much revenue should Sansung recognize for the first 3
months of 2019?
Sansung makes the following entry on March 31, 2019.

Sansung should reduce its revenue by ¥21,000 (¥700,000 x 3%) because it is

probable that it will provide this rebate.
18-44 LO 2
ILLUSTRATION 18.8
Consideration Paid or Payable Transaction Price –
Volume Discount
Questions: How much revenue should Sansung recognize for the first 3
months of 2019?
Assuming Sansung’s customer meets the discount threshold, Sansung makes

the following entry.
Cash 679,000
If Sansung’s customer fails to meet the discount threshold, Sansung makes the
following entry upon payment.
Cash 700,000
Sales Discounts Forfeited 21,000
18-45 LO 2
Allocating Transaction Price to Separate
Performance Obligations—Step 4
 Based on their relative fair values.

 Best measure of fair value is what the company could
sell the good or service for on a standalone basis.
 If not available, companies should use their best
estimate of what the good or service might sell for as a
standalone unit.
18-46 LO 2
Allocating Transaction Price to Separate
Performance Obligations—Step 4 ILLUSTRATION 18.9
Transaction Price—
Allocation
18-47 LO 2
Allocating Transaction Price
ILLUSTRATION 18.12
Multiple Performance
Obligations—Product,
Installation, and Service
MULTIPLE PERFORMANCE OBLIGATIONS
Facts: Handler Company is an established manufacturer of equipment

used in the construction industry. Handler’s products range from small to
large individual pieces of automated machinery to complex systems
containing numerous components. Unit selling prices range from
$600,000 to $4,000,000 and are quoted inclusive of installation and
training. The installation process does not involve changes to the
features of the equipment and does not require proprietary information
about the equipment in order for the installed equipment to perform to
specifications.
18-48 (continued) LO 2
ILLUSTRATION 18.12
Handler has the following arrangement with Chai Company.

• Chai purchases equipment from Handler for a price of $2,000,000
and chooses Handler to do the installation. Handler charges the
same price for the equipment irrespective of whether it does the
installation or not. (Some companies do the installation themselves
because they either prefer their own employees to do the work or
because of relationships with other customers.) The installation
service included in the arrangement is estimated to have a
standalone selling price of $20,000.
ILLUSTRATION 18.12
Handler has the following arrangement with Chai Company.

• The standalone selling price of the training sessions is estimated at
$50,000. Other companies can also perform these training services.
• Chai is obligated to pay Handler the $2,000,000 upon the delivery
and installation of the equipment.
• Handler delivers the equipment on September 1, 2019, and
completes the installation of the equipment on November 1, 2019
(transfer of control is complete). Training related to the equipment
starts once the installation is completed and lasts for 1 year. The
equipment has a useful life of 10 years.
ILLUSTRATION 18.12
Question: (a) What are the performance obligations for

purposes of accounting for the sale of the equipment?
Handler’s primary objective is to sell equipment. The other services

(installation and training) can be performed by other parties if necessary.
As a result, the equipment, installation, and training are three separate
products or services. Each of these items has a standalone selling price
and is not interdependent.
ILLUSTRATION 18.12
Question: (b) If there is more than one performance obligation,

how should the payment of $2,000,000 be allocated to various
components?
The total revenue of $2,000,000 should be allocated to the three

components based on their relative standalone selling prices. In this
case, the standalone selling price of the equipment is $2,000,000, the
installation fee is $20,000, and the training is $50,000. The total
standalone selling price therefore is $2,070,000 ($2,000,000 + $20,000
+ $50,000). The allocation is as follows.
Equipment $1,932,367 [($2,000,000 ÷ $2,070,000) × $2,000,000]
Installation $19,324 [($20,000 ÷ $2,070,000) × $2,000,000]
Training $48,309 [($50,000 ÷ $2,070,000) × $2,000,000]
ILLUSTRATION 18.12

components?
Handler makes the following entry on November 1, 2019, to record both

sales revenue and service revenue on the installation, as well as
unearned service revenue.
November 1, 2019
Cash 2,000,000
Service Revenue (installation) 19,324
Unearned Service Revenue 48,309
Sales Revenue 1,932,367
ILLUSTRATION 18.12

components?
Assuming the cost of the equipment is $1,500,000, the entry to record

cost of goods sold is as follows.
November 1, 2019
Cost of Goods Sold 1,500,000
Inventory 1,500,000
Handler recognizes revenue from the sale of the equipment once the
installation is completed on November 1, 2019. In addition, it recognizes
revenue for the installation fee because these services have been
performed.
ILLUSTRATION 18-12

components?
Handler recognizes the training revenues on a straight-line basis starting

on November 1, 2019, or $4,026 ($48,309 ÷ 12) per month for 1 year
(unless a more appropriate method such as the percentage-of-
completion method—discussed in the next section—is warranted). The
journal entry to recognize the training revenue for 2 months in 2019 is as
follows.
December 31, 2019
Service Revenue (training) ($4,026 × 2) 8,052
ILLUSTRATION 18-12

components?
Therefore, Handler recognizes revenue at December 31, 2019, in the

amount of $1,959,743 ($1,932,367 + $19,324 + $8,052). Handler makes
the following journal entry to recognize the remaining training revenue in
2020, assuming adjusting entries are made at year-end.
December 31, 2020

Service Revenue (training) ($48,309 − $8,052) 40,257
18-56 LO 2
Recognizing Revenue When (or as) Each
Performance Obligation Is Satisfied—Step
5
Company satisfies its performance obligation when the
customer obtains control of the good or service.
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.
18-57 LO 2
5
Recognizing revenue from a performance obligation over
time
 Measure progress toward completion
► Method for measuring progress should depict transfer
of control from company to customer.
► Most common are cost-to-cost and units-of-delivery
methods.
► Objective of methods is to measure extent of progress
in terms of costs, units, or value added.
18-58 LO 2
5Step in Process Description Implementation
1. Identify the A contract is an A company applies the revenue

contract with agreement that creates guidance to contracts.
customers. enforceable rights or
obligations.
ILLUSTRATION 18.15
Summary of the
Five-Step Revenue
Recognition Process
18-59 LO 2
2. Identify the A performance obligation A contract may be comprised of

separate is a promise in a contract multiple performance
performance to provide a product or obligations.
obligations service to a customer. Accounting is based on
in the A performance obligation evaluation of whether the
contract exists if the customer can product or service is distinct
benefit from the good or within the contract.
service on its own or If each of the goods or services
together with other readily is distinct, but is interdependent
available resources. and interrelated, these goods
and services are combined and
ILLUSTRATION 18.15
Summary of the reported as one performance
Five-Step Revenue obligation.
Recognition Process
18-60 LO 2
3. Determine Transaction price is the In determining the transaction

the amount of consideration price, companies must consider
transaction that a company expects to the following factors:
price. receive from a customer 1. variable consideration,
in exchange for
2. time value of money,
transferring goods and
services. 3. non-cash consideration, and
4. consideration paid or
payable to customer.
ILLUSTRATION 18.15
Summary of the
Five-Step Revenue
Recognition Process
18-61 LO 2
4. Allocate the If more than one The best measure of fair value
transaction performance obligation is what the good service could
price to the exists, allocate the be sold for on a standalone
separate transaction price based basis (standalone selling price).
performance on relative fair values. Estimates of standalone selling
obligation. price can be based on
1. adjusted market
assessment,
2. expected cost-plus a margin
approach, or
ILLUSTRATION 18.15 3. a residual approach.
Summary of the
Five-Step Revenue
Recognition Process
18-62 LO 2
5. Recognize A company satisfies its Companies satisfy performance

revenue performance obligation obligations either at a point in
when each when the customer time or over a period of time.
performance obtains control of the Companies recognize revenue
obligation is good or service. over a period of time if one of
satisfied. the following criteria is met:
1. customer receives and
consumes the benefits as
the seller performs,
2. customer controls the asset
as it is created, or
ILLUSTRATION 18.15
Summary of the 3. company does not have an
Five-Step Revenue
Recognition Process alternative use for the asset.
18-63 LO 2
Accounting for Revenue Apply the five-step process to
major revenue recognition
Recognition Issues issues.
 Sales returns and allowances

 Repurchase agreements
 Bill and hold
 Principal-agent relationships
 Consignments
 Warranties
 Non-refundable upfront fees
18-64 LO 3
Sales Returns and Allowances
 Right of return is granted for product for various

reasons (e.g., dissatisfaction with product).
 Company returning the product receives any
combination of the following.
1. Full or partial refund of any consideration paid.
2. Credit that can be applied against amounts owed,

or that will be owed, to the seller.
3. Another product in exchange.
18-65 LO 3
Credit Sales with Returns and Allowances
Illustration: Assume that on January 12, 2019, Venden NV sells 100

cameras for €100 each on account to Amaya SA. Venden allows
Amaya to return any unused cameras within 45 days of purchase. The
cost of each product is €60. Venden estimates that:
1. Three products will be returned.

2. The costs of recovering the products will be immaterial.
3. The returned products are expected to be resold at a profit.
To record the sale of the cameras January 12, 2019.

Sales Revenue (100 × €100) 10,000
Inventory (100 × €60) 6,000
18-66 LO 3
On January 24, Amaya returns two of the cameras. On January 31,

Venden prepares financial statements and determines that it is likely
that only one more camera will be returned. Venden makes the
following entries related to these transactions.
To record the return of the cameras January 24, 2019.

Sales Returns and Allowances 200
Accounts Receivable (2 × €100) 200
Returned Inventory 120
Cost of Goods Sold (2 × €60) 120
18-67 LO 3
Venden originally estimated that the most likely outcome was that
three cameras would be returned. Venden believes the original
estimate is correct and makes the following adjusting entries to
account for expected returns at January 31, 2019.
To record expected sales returns on January 31, 2019.

Allowance for Sales Returns and Allowances 100
To record the expected return of the one camera

Estimated Inventory Returns 60
18-68 LO 3
Venden’s income statement for the month of January.

ILLUSTRATION 18.16
Venden’s statement of financial position as of January 31, 2019.
ILLUSTRATION 18.17
18-69 LO 3
Cash Sales with Returns and Allowances
Illustration: Assume now that on January 12, 2019, Venden NV sells

100 cameras for €100 each for cash to Amaya SA. Venden allows
Amaya to return any unused cameras within 45 days of purchase. The
cost of each product is €60. Venden estimates that:
1. Three products will be returned.

2. The costs of recovering the products will be immaterial.
3. The returned products are expected to be resold at a profit.
To record the sale of the cameras January 12, 2019.

Cash 10,000
Sales Revenue (100 × €100) 10,000
Inventory (100 × €60) 6,000
18-70 LO 3
Assuming that Venden did not pay cash at the time of the return of the
two cameras to Amaya on January 24, 2019, the entries to record the
return of the two cameras and related cost of goods sold are as
follows.
To record the return of the cameras January 24, 2019.

Accounts Payable (2 × €100) 200
Returned Inventory 120
18-71 LO 3
On January 31, 2019, Venden prepares financial statements. As

indicated earlier, Venden estimates that the most likely outcome is that
one more camera will be returned. Venden therefore makes the
following adjusting entries.
To record expected sales returns on January 31, 2019.

Accounts Payable (1 × €100) 100
To record the expected return of the one camera

Estimated Inventory Returns 60
18-72 LO 3
Venden’s income statement for the month of January.

ILLUSTRATION 18.18
Venden’s statement of financial position as of January 31, 2019.
ILLUSTRATION 18.19
18-73 LO 3
Repurchase Agreements
 Allows company 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.
 If the obligation or right to repurchase is for an amount
greater than or equal to selling price, then
transaction is a financing transaction.
18-74 LO 3
ILLUSTRATION 18.20
Repurchase Agreements Recognition—Repurchase
Agreement
REPURCHASE AGREEMENT
Facts: Morgan Ltd., an equipment dealer, sells equipment on January 1,
2019, to Lane Company for £100,000. It agrees to repurchase this
equipment (an unconditional obligation) on December 31, 2020, for a price
of £121,000.
Question: How should Morgan Inc. record this transaction?
Assuming an interest rate of 10% is imputed from the agreement, Morgan

makes the following entry to record the financing on January 1, 2019.
Cash 100,000
Liability to Lane Company 100,000
18-75 LO 3
ILLUSTRATION 18.22
Repurchase Agreements Recognition—Repurchase
Agreement
Question: How should Morgan record this transaction?
Morgan records interest on December 31, 2019, as follows.
Interest Expense 10,000

Liability to Lane Construction (£100,000 x 10%) 10,000
Morgan records interest and retirement of its liability to Lane on December

31, 2020, as follows.
Interest Expense 11,000

Liability to Lane Construction (£110,000 x 10%) 11,000
Liability to Lane Construction 121,000

Cash (£100,000 + £10,000 + £11,000) 121,000
18-76 LO 3
Bill-and-Hold Arrangements
 Contract under which an entity bills a customer for a

product but the entity retains physical possession of
the product until a point in time in the future.
 Result when buyer is not yet ready to take delivery but
does take title and accepts billing.
18-77 LO 3
Bill-and-Hold Arrangements ILLUSTRATION 18.21
Recognition—Bill and Hold
BILL AND HOLD

Facts: Butler A.Ş. sells ₺450,000 (cost ₺280,000) of fireplaces on March 1,
2019, to a local coffee shop, Baristo, which is planning to expand its
locations around the city. Under the agreement, Baristo asks Butler to retain
these fireplaces in its warehouses until the new coffee shops that will house
the fireplaces are ready. Title passes to Baristo at the time the agreement is
signed.
Question: When should Butler recognize the revenue from this

bill-and-hold arrangement?
Butler determines when it has satisfied its performance obligation to transfer

a product by evaluating when Baristo obtains control of that product.
18-78 LO 3

For Baristo to have obtained control of a product in a bill-and-hold

arrangement, all of the following criteria should be met:
(a) The reason for the bill-and-hold arrangement must be substantive.
(b) The product must be identified separately as belonging to Baristo.
(c) The product currently must be ready for physical transfer to Baristo.
(d) Butler cannot have the ability to use the product or to direct it to another
customer.
In this case, it appears that the above criteria were met, and therefore
revenue recognition should be permitted at the time the contract is signed.
18-79 LO 3

March 1, 2019
Butler makes the following entries to record the bill-and-hold sale and
related cost of goods sold.
Accounts receivable 450,000
Inventory 280,000
18-80 LO 3
Principal-Agent Relationships
 Principal’s performance obligation is to provide goods or
perform services for a customer.
 Agent’s performance obligation is to arrange for principal to
provide goods or services to a customer.
 Examples:
► Preferred Travel Company (agent) facilitates the booking
of cruise excursions by finding customers for Regency
Cruise Company (principal).
► Priceline (USA) (agent) facilitates the sale of various
services such as car rentals at Hertz (USA) (principal).
 Revenue for agent is amount of commission received.
18-81 LO 3
Consignments
 Manufacturers (or wholesalers) deliver goods but retain

title to the goods until they are sold.
 Consignor (manufacturer or wholesaler) ships
merchandise to the consignee (dealer), who is to act as
an agent for the consignor in selling the merchandise.
 Consignor makes a profit on the sale.
► Carries merchandise as inventory.
 Consignee makes a commission on the sale.
18-82 LO 3
ILLUSTRATION 18.23
Consignments Recognition—Sales on
Consignment
18-83 LO 3
ILLUSTRATION 18.23
18-84 LO 3
ILLUSTRATION 18.23
18-85 LO 3
ILLUSTRATION 18.23
18-86 LO 3
ILLUSTRATION 18.25
Consignments Recognition—Sales on
Consignment
18-87 LO 3
Warranties
Two types of warranties to customers:

1. Product meets agreed-upon specifications in contract at
time product is sold.
a. Warranty is included in sales price (assurance-type
warranty).
2. Not included in sales price of product (service-type

warranty).
a. Recorded as a separate performance obligation.
18-88 LO 3
ILLUSTRATION 18.26
Warranties Performance Obligations
and Warranties
WARRANTIES
Facts: Maverick Company sold 1,000 Rollomatics on October 1, 2019, at
total price of $6,000,000, with a warranty guarantee that the product was
free of defects. The cost of the Rollomatics is $4,000,000. The term of this
assurance warranty is 2 years, with an estimated cost of $80,000. In
addition, Maverick sold extended warranties related to 400 Rollomatics for 3
years beyond the 2-year period for $18,000. On November 22, 2019,
Maverick incurred labor costs of $3,000 and part costs of $25,000 related to
the assurance warranties. Maverick prepares financial statements on
December 31, 2019. It estimates that its future assurance warranty costs will
total $44,000 at December 31, 2019.
Question: What are the journal entries that Maverick Company

should make should make in 2019 related to the sale of the
Rollomatics and the assurance and extended warranties?
18-89 LO 3
ILLUSTRATION 18.24
Warranties Recognition—Performance
Obligations and Warranties

October 1, 2019
To record the sale of the Rollomatics and the related extended warranties:
Cash ($6,000,000 + $18,000) 6,018,000
Sales Revenue 6,000,000
Unearned Warranty Revenue 18,000
To record the cost of goods sold and reduce the inventory of

Rollomatics:
Cost of Goods Sold 4,000,000
Inventory 4,000,000
18-90 LO 3
ILLUSTRATION 18.24
Warranties Recognition—Performance
Obligations and Warranties

November 22, 2019

To record the warranty costs incurred:
Warranty Expense 28,000
Salaries and Wages Payable 3,000
Inventory (parts) 25,000
December 31, 2019

To record the adjusting entry related to its assurance warranty at year
end:
Warranty Expense 44,000
18-91 Warranty Liability 44,000 LO 3
Non-Refundable Upfront Fees
 Payments from customers before

► Delivery of a product.
► Performance of a service.
 Generally relate to initiation, activation, or setup of a
good or service to be provided or performed in the
future.
 Most cases, upfront payments are nonrefundable.
► Examples include:
 Membership fee in a health club.
 Activation fees for phone, Internet, or cable.
18-92 LO 3
Presentation and Disclosure Describe presentation and
disclosure regarding
revenue.
Presentation
Contract Assets and Liabilities
 Contract assets are of two types:
1. Unconditional rights to receive consideration
because company has satisfied its performance
obligation.
2. Conditional rights to receive consideration
because company has satisfied one performance
obligation but must satisfy another performance
obligation before it can bill the customer.
18-93 LO 4
ILLUSTRATION 18.27
Presentation Contract Asset Recognition
and Presentation
CONTRACT ASSET
Facts: On January 1, 2019, Finn ASA enters into a contract to transfer
Product A and Product B to Obermine Overstock for €100,000. The contract
specifies that payment of Product A will not occur until Product B is also
delivered. In other words, payment will not occur until both Product A and
Product B are transferred to Obermine. Finn determines that standalone
selling prices are €30,000 for Product A and €70,000 for Product B. Finn
delivers Product A to Obermine on February 1, 2019. On March 1, 2019,
Finn delivers Product B to Obermine.
Question: What journal entries should Finn Company make in

regards to this contract in 2019?
18-94 LO 4
ILLUSTRATION 18.27
Presentation Contract Asset Recognition
and Presentation
Question: What journal entries should Finn Company make in

regards to this contract in 2019?
On February 1, 2019, Finn records the following entry:

Contract Asset 30,000
On February 1, Finn does not record an accounts receivable because it does

not have an unconditional right to receive the €100,000 unless it also
transfers Product B to Obermine. When Finn transfers Product B on March
1, 2019, it makes the following entry.

Contract Asset 30,000
18-95 LO 4
ILLUSTRATION 18.28
Presentation Contract Liability Recognition
and Presentation
CONTRACT LIABILITY
Facts: On March 1, 2019, Henly Company enters into a contract to transfer
a product to Propel Inc. on July 31, 2019. It is agreed that Propel will pay the
full price of $10,000 in advance on April 1, 2019. The contract is non-
cancelable. Propel, however, does not pay until April 15, 2019, and Henly
delivers the product on July 31, 2019. The cost of the product is $7,500.
Question: What journal entries are required in 2019?
No entry is required on March 1, 2019:

► Neither party has performed on the contract.
► Neither party has an unconditional right as of March 1, 2019.
18-96 LO 4
ILLUSTRATION 18.28
Presentation Contract Liability Recognition
and Presentation
Question: What journal entries are required in 2019?
On receiving the cash on April 15, 2019, Henly records the following entry.
Cash 10,000
Unearned Sales Revenue 10,000
On satisfying the performance obligation on July 31, 2019, Henly records the
following entry to record the sale.
Unearned Sales Revenue 10,000
In addition, Henly records cost of goods sold as follows.

Cost of Good Sold 7,500
Inventory 7,500
18-97 LO 4
Presentation
Contract Modifications
 Change in contract terms while it is ongoing.
 Companies determine
► whether a new contract (and performance
obligations) results or
► whether it is a modification of the existing contract.
18-98 LO 4
Separate Performance Obligation

 Account for as a new contract if both of the following
conditions are satisfied:
► Promised goods or services are distinct (i.e.,
company sells them separately and they are not
interdependent with other goods and services), and
► The company has the right to receive an amount of
consideration that reflects the standalone selling
price of the promised goods or services.
18-99 LO 4
Separate Performance Obligation
For example, Crandall Co. has a contract to sell 100 products to a

customer for $10,000 ($100 per product) at various points in time
over a six-month period. After 60 products have been delivered,
Crandall modifies the contract by promising to deliver 20 more
products for an additional $1,900, or $95 per product (which is the
standalone selling price of the products at the time of the contract
modification). Crandall regularly sells the products separately.
Given a new contract, Crandall recognizes an additional:
Original contract [(100 units - 60 units) x $100] = $4,000

New product (20 units x $95) =1,900
Total revenue $5,900
18-100 LO 4
Prospective Modification
 Company should
► account for effect of change in period of change as
well as future periods if change affects both.
► not change previously reported results.
18-101 LO 4
For Crandall, the amount recognized as revenue for each of the

remaining products would be a blended price of $98.33, computed
as follows.
Products not delivered under original contract
($100 x $40) = $4,000

Products to be delivered under contract
modification ($95 x 20) = 1,900
Total remaining revenue $5,900
Revenue per remaining unit ($5,900 ÷ 60) = $98.33
18-102 LO 4
Under the prospective approach, a blended price ($98.33) is used

for sales in the periods after the modification.
ILLUSTRATION 18.30
Comparison of Contract Modification Approaches
18-103 LO 4
Presentation
Costs to Fulfill a Contract

 Companies divide fulfillment costs (contract acquisition
costs) into two categories:
1. Those that give rise to an asset.
2. Those that are expensed as incurred.
18-104 LO 4
Presentation
Collectibility
 Credit risk that a customer will be unable to pay in
accordance with the contract.
► Whether a company will get paid is not a consideration
in determining revenue recognition.
► Amount recognized as revenue is not adjusted for
customer credit risk.
18-105 LO 4
Disclosure
Companies disclose qualitative and quantitative

information about the following:
 Contracts with customers.
 Significant judgments.
 Assets recognized from costs incurred to fulfill a contract.
18-106 LO 4
Disclosure
Companies provide a range of disclosures:

 Disaggregation of revenue.
 Reconciliation of contract balances.
 Remaining performance obligations.
 Cost to obtain or fulfill contracts.
 Other qualitative disclosures.
► Significant judgments and changes in them.
► Minimum revenue not subject to variable consideration
constraint.
18-107 LO 4

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Prepared by

Assume that Airbus (FRA) Corporation signs a contract to sell

A contract is an agreement between two parties

Airbus has only one performance obligation—to

Transaction price is the amount of consideration

Step 4: Allocate the

Identifying the Contract with Customers—Step 1

Question: How much revenue should BEAN recognize on this

Step 1: Identify the contract with customers.

Step 2: Identify the separate performance obligations.

BEAN has a performance obligation to provide a large cup of coffee

Step 3: Determine the transaction price.

The price of the coffee is $3, and no discounts or other adjustments

Step 4: Allocate the transaction price to the separate

Given that BEAN has only one performance obligation, no allocation

Step 5: Recognize revenue when each performance

BEAN satisfies its performance obligation when Tyler obtains control

BEAN should recognize $3 in revenue from this

Identifying Separate Performance Obligations—Step

Question: How much revenue should BEAN recognize on the

Step 1: Identify the contract with customers.

A valid contract exists as it meets the five conditions necessary for a

Step 2: Identify the separate performance obligations.

Step 2: Identify the separate performance obligations.

Multiple performance obligations exist when the following two

BEAN has two performance obligations.

Step 3: Determine the transaction price.

The transaction price is $8 ($3 + $5).

Step 4: Allocate the transaction price to the separate

BEAN has two performance obligations.

Step 5: Recognize revenue when each performance

BEAN has satisfied both performance obligations when the coffee

BEAN should recognize $8 ($3 + $5) of revenue

Determining the Transaction Price—Step 3

Question: How much revenue should BEAN recognize on this

Step 1: Identify the contract with customers.

A valid contract exists as it meets the five conditions necessary for a

Step 2: Identify the separate performance obligations.

BEAN has a performance obligation to provide a bag of Smoke

The transaction for a bag of Smoke Jumper beans sold to Tyler is

Step 4: Allocate the transaction price to the separate

There is only one performance obligation, no allocation is necessary.

Step 5: Recognize revenue when each performance

BEAN has satisfied both performance obligations.

BEAN should recognize $9 of revenue when Tyler receives

Allocating the Transaction Price to Separate

BEAN offers customers a $2 discount on the purchase of a large cup

Question: How much revenue should BEAN recognize on the

Step 1: Identify the contract with customers.

A valid contract exists as it meets the five conditions necessary for a

Step 2: Identify the separate performance obligations.

Step 3: Determine the transaction price.

The transaction price is $13 ($12 + $1).

Step 4: Allocate the transaction price to the separate

BEAN allocates the transaction price to the two performance

Step 4: Allocate the transaction price to the separate

BEAN allocates the transaction price to the two performance

The total transaction price ($13) is allocated $10.40 to the bag of

Step 5: Recognize revenue when each performance