Financial Reporting · Module 3: Revenue; provisions and contingencies
Five Steps, One Bundle
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Chapters
- 0:00Hook
- 0:18Steps 1–3
- 0:48Allocate
- 1:31Recognize
- 1:42Recap
In short
AASB 15 recognizes revenue in five steps: identify the contract, identify the performance obligations, determine the transaction price, allocate it on stand-alone selling prices, and recognize revenue as each obligation is satisfied. When one item's price is highly variable, the residual approach can allocate what is left to it.
- Each distinct promise is a separate performance obligation.
- Allocate the price using stand-alone selling prices.
- A highly variable or uncertain price can be estimated with the residual approach.
Transcript
0:00Hook
A customer pays $120,000 for one bundle. When is that revenue earned? Not all at once. AASB 15 walks it through five steps.
0:18Steps 1–3
Cobar sells a software license, installation, and three years of support. Step one: identify the contract. A deal with clear terms and payment. Step two: the performance obligations. Each promise that stands on its own. Here there are three: the license, the installation, and the support. Step three: the transaction price. The whole bundle, $120,000.
0:48Allocate
Step four: allocate that price, using stand-alone selling prices. Installation sells alone for $20,000. Support, $10,000 a year: $30,000. But the license sells for wildly different amounts. There's no reliable price. Pause. How much of the $120,000 goes to the license? $70,000. When a price is highly variable, take what's left: the residual. $90,000 counts only one year of support. $100,000 leaves support out.
1:31Recognize
Step five: recognize revenue as each promise is delivered. The license and installation when they are handed over. Support, over three years.
1:42Recap
Contract, obligations, price, allocate, recognize. Five steps, every time. Next: four resources, one advantage. Subscribe so you catch it.
Try a question on this lesson
From the EstatePass Financial Reporting bank. Answer it, then read the explanation.
Cobar Ltd sells a bundle for $120,000: a software license, installation, and three years of support. Installation is regularly sold separately for $20,000, and support for $10,000 a year. Cobar Ltd sells the license to different customers for a broad range of amounts, so its stand-alone selling price is highly variable, and the residual approach is appropriate. How much of the transaction price is allocated to the license?
Sources
- AASB 15 Revenue from Contracts with Customers, para 9, 22, 47, 73, 78 to 79, B58
- CPA question bank: cpa-fr-0874
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