In 2013 Airbus announced a contract to deliver 50 A380 airplanes to Emirates for $20 billion to be delivered between 2016 and 2018.
Required:
Outline the five‐step revenue recognition process for this transaction.
Revenue is the gross inflow of economic benefits during the period arising in the ordinary course of activities. Revenue should be recognized when the future economic benefits that will flow to the entity can be measured reliably. The recognition criteria are usually applied separately to each transaction, but sometimes and under specific circumstances, it is necessary to apply the recognition criteria to the separate recognizable parts or of a single transaction in order to reflect the substance of the transaction. In aviation industry, the revenue transaction or events takes a significant period of time in order to complete because of the nature of product delivering against the sum of money. The five‐step revenue recognition process for this transaction are as follows:
1- Identify the contracts with customers:
A contract is an arrangement between two or more parties that creates rights and obligations to each party. The essential parts of a contract are as follows:
• All parties have approved the agreement
• All parties have identifiable rights
• All parties are committed to fulfilling their obligations
• The payment terms are identified
• The contract has commercial value
• The payment is likely to be received
2- Identify the performance
A contract is an official agreement between two parties. There are different types of contract, such as sale and purchase of a business agreement, partnership agreements, lease of business premises, lease of plant and equipment and employment agreements. The format can vary too. It can be face to face, written, or distance selling. The specifications of a contract involve offer and acceptance, the intention to create legal relations, lawful considerations, capacity and legal formalities such as terms and conditions.
A contract is a legally obligatory promise or set of promises (Bagley, C. 2013). If this promise is broken, either party involved can be legally responsible and take the other party to court. There are four basic elements in the creation of a valid contract. The first consist of an agreement between the parties involved, by an presented offer and acceptance. The second states that the parties’ promises must be supported by something of worth, known as consideration. The third advises both parties must have the ability to enter into a contract. The fourth element states the contract must have a legal purpose (Bagley, C 2013).
Revenue is the gross inflow of economic benefits during the period arising in the ordinary course of activities. Revenue should be recognized when the future economic benefits that will flow to the entity can be measured reliably. The new standard will significantly change how companies recognize revenue. It creates a whole new codification in a new era of revenue recognition by replacing hundreds of pages of guidance that are specific for each industry to a single comprehensive standard applicable to virtually all industries. The recognition criteria are usually applied separately to each transaction, but sometimes and under specific circumstances, it is necessary to apply the recognition criteria to the separate recognizable parts or of a single transaction in order to reflect the substance of the transaction. In aviation industry, the revenue transaction or events takes a significant period of time in order to complete because of the nature of product delivering against the sum of money. The five‐step revenue recognition process for this transaction are as follows:
A contract is an agreement that creates an obligation that is enforceable by the law. The law has clear guidelines that before there exists a contract that will be binding, there has to be an offer, acceptance, mutual obligation and all parties should be of sound mind and by law be of legal age. A contract can either be written or spoken. Assuming that the buyers were at the required age went to the car dealership looking to purchase a new car.
A contract is an agreement between and offeror, and an offeree, that can be enforceable by a court of law or equity (Cheeseman, 2010). A contract consists of the following elements; agreement, consideration, contractual capacity, and lawful object. Understanding each of these elements is of the utmost importance to ensure that each party involved has a good understanding of what is expected from one another.
A contract is a legal document that states and clarifies a formal agreement between two different people or groups. This implies that an agreement between parties must have a strong backing by law. The following are therefore required for a contract to be mandatory for all participants involved. These elements in a contract prove whether the contract is regarded credible or not credible: The objective is to build a legal relationship, offer and acceptance, consideration, capacity to contract and legality.
A contract in its essence according to Davitt is “a union of two or more persons, originating in their mutual promises enforceable in law, for the reordering of their relations of title, duty and claim regarding something to be done or not to be done.” Id. at 273. The tricky part concerns what a mutual promise enforceable in law entails. As stated above, there are many difference schools of thought about what fills in the gaps of promises and what is enforceable by law.
A contract is simply an agreement which has legal value so that it is binding on both the parties, and each of the party can enforce it lawfully in case of any contravention of the terms of agreement. For an agreement to take the form of a contract, it is necessary for it to contain four essential components of a legally binding contract . These include,
Contract is defined as an agreement between two or more parties creating obligations that are enforceable or otherwise recognizable at law. For purposes of this chapter, we are concerned with agreements to buy and sell some type of agricultural product. Contracts 101 You should be concerned about contract law because it determines how parties to the contract will need to keep the promises they make. Although very few contracts ever end up in court, if the parties to a contract disagree on something and are unable to resolve the disagreement, they may have to resort to the judicial process. This means that as the parties negotiate a contract, they need to consider how a judge might ultimately interpret it. For a contract to be enforceable, it must involve:
A contract is an agreement made with an intention of legal rights and obligations which the law will enforce. It contains the agreement, consideration and intention. It also have some other things to consider, like capacity of parties, genuine consent or legality of object.
The new revenue recognition standard eliminates the transaction and industry-specific revenue recognition guidance and replaces it with a principle-based approach for determining revenue recognition. The main point is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchanging for those goods or services [2]. This new standard has five steps need to be followed. The first one is to identify the contract(s) with a customer. Then entity should identify the performance obligations in the contract. After that, entity needs to make a decision about the transaction price and to allocate this price to the performance obligations in the contract. At last, entity recognizes revenue when it satisfies a performance obligation. For the first step, there are some requirements the contract has to meet, like identify the right of parties and payment terms. But the old rule only provides limited disclosure information about revenue contract [3]. In some cases, an entity will combine several contracts as one contract. Also, FASB issued the guidance that helps entity to modify
Products or services are transferred when the customer obtains control. The transfer of control to the customer represents the transfer of the rights regarding the products or services. After that, the customer has the right to use the products or services.
The revenue recognition principle is a foundation of accrual accounting and one of the main principles of GAAP. The revenue recognition principle is a set of guidelines that helps accountants to identify when a revenue event has taken place and how to appropriately record cash exchanges before, during, and after the revenue event. According to the revenue recognition principal, revenue must (1) be realized or realizable and (2) earned, in order to be recognized. According to the SEC revenue is realized when (1) Persuasive evidence of an arrangement exists, (2) Delivery has occurred or services have been rendered, (3) The seller’s price to the buyer is fixed or determinable, and (4) Collectability is reasonably assured. It is essential
It also allows the business to keep a track of money going in and out of the business. There are two main categories that all the elements fall into:
A contract is a written or spoken agreement between two or more parties that involves the exchange of two promises, which is intended to be enforceable by law. The four basic elements are the offer, consideration, acceptance, and mutuality. When elements are broken down individually, each one is just as important as the next. If one of these elements are broken or misunderstood, it could mean result in the contractual agreement becoming not valid and end in lawsuit. The overall purpose of the contract is for legal purpose and to keep a order within an agreement.