SBR Made Easy: How IFRS 15 Revenue Can Be Tested in SBR (part 1)

IFRS 15 and the 5 steps of Revenue recognition. Many students have no idea why they books contain step 1 Identify the Contract since...it's so obvious... Well, not so fast, this episode will show you how the first steps can be tested. 

Sign up for a free 1-week access to the SBR Group Chat or enroll to my SBR Course to learn more: https://bit.ly/SBRLK

https://www.linkedin.com/in/accatutor/

Transcript

SPEAKER_00 0:00

So, you have watched this number of videos on revenue recognition. And of course, it may feel confusing because well there was so much information that was dumped onto you. That's why we are going to look into how I4S15 is going to be tested in SBR. Well, first of all, the problem that we have in here is that revenue recognition means that we are going to recognize credit revenue and debit accounts receivable. And the problem that we are going to have is whether we should reduce the revenue that we are going to recognize. So let's say recognize not$1,000 but rather$800 as revenue and accounts receivable. Or whether we first recognize bigger amount of revenue. So let's say credit revenue$1,000 and debit accounts receivable of$1,000. And then we are going to recognize loss allowance. So we will understand that the customer is not going to pay us the full amount and we will credit accounts receivable and debit PL. That would be one of the concepts that the examiner tests. This means that we need to understand where the at the point of revenue recognition, what was the consideration that was probable, what was the consideration that was expected. Was it 1000 or just 800? And basically, the rest of the rest of the steps are going to be based around it. So for example, when we are going to talk about step one, identify the contract, we are going to look at the contract, we are going to say, okay, it's not necessarily has to be in writing, but there has to be a customer, there has to be a commercial substance, it should be approved by both parties, the consideration should be probable. So if at that very point of time you signed a contract with a customer that had a bad reputation that was in the stage of liquidation, then on that very day it was not probable that the consideration will be collected. So you were not supposed to recognize revenue, and instead, you were supposed to take the inventory that you gave them and write it off as other expenses, other costs. But if at that very day everything was okay with the customer, then you would recognize revenue, and only later, when the customer started to have problems, you would recognize the allowance. That would be one of the concepts that will be tested. Another concept that will be tested, well, in step two, when we're going to talk about performance obligations, would be whether we have supplied the single obligation or several ones. And the thing that is tested quite often is software contracts. So if we as a company give a license to software and there are also frequent updates, the question is whether there is just one obligation, the software, and the updates are not very important. And as such, we can recognize revenue straight away when we have supplied the software when we send them the software license, or whether we should consider it as a number of obligations, split revenue accordingly, and recognize it as the updates are made. So in this case, you will have to change, challenge the importance of the updates. We are going to look at the variable consideration. Well, that is actually the source of different questions, the hard questions that the examiner can come up with. So one of the examples of variable consideration would be when we have a contract that will be satisfied over time, and the final pay is going to depend on whether there were any issues, whether the time constraint was met, and so on. And because we recognize revenue over time, we basically take the expected amount of revenue and we split it over the periods or we recognize it as the progress is made. And in this case, it's very important for you to know this X that you are going to split. So it's important for you to understand whether the bonus is expected to be received or not. So the variable consideration, the bonus, would impact on the revenue recognition today, on the portion of revenue recognition, despite the fact that the bonus itself is going to be paid in future. And these are the examples how I4S15 revenue can be tested. So basically, when we're talking about this standard, we have the five steps, and five steps are mostly about these logics that revenue is recognized when there was an obligation that was satisfied and when the consideration is probable. And the rest is just the explanation of that in more detail. And when you understand the concept that we need to separate in time when we recognize revenue, when we recognize the allowance, when we have different obligations, or when we have a single one, and when we have the price that is like that or like that, then you will be able to answer the questions even if you don't remember each and every case of revenue recognition precisely. And in the next video, in the next podcast, I am going to give you some more examples of how I first 15 is tested.