Chapter 5 of 6Area III, 25–35% of exam

Area III: Accounting Changes, Contingencies and Revenue

This part of Area III covers accounting changes and error corrections, loss contingencies and warranties, revenue from contracts with customers and not-for-profit contributions. Questions ask for the amount and timing of recognition and the related disclosures.

Accounting changes, errors and contingencies

Changes in principle are applied retrospectively, changes in estimate prospectively, and errors are corrected by restatement. Loss contingencies are accrued only when probable and reasonably estimable; otherwise they may need disclosure. Gain contingencies are not recognized before realization.

Change in principle

Applied retrospectively to all periods presented unless impracticable, with the cumulative effect in opening retained earnings.

FASB ASC 250-10-45-5

Change in estimate

Applied in the period of change and future periods; a change in depreciation method is a change in estimate effected by a change in principle.

FASB ASC 250-10-45-17 and 45-18

Accrual threshold

Accrue a loss when it is probable that a liability was incurred and the amount is reasonably estimable.

FASB ASC 450-20-25-2

Range with no best estimate

Accrue the minimum of the range and disclose the possible additional loss.

FASB ASC 450-20-30-1

Reasonably possible losses

Not accrued, but disclosed with an estimate of the possible loss or a statement that one cannot be made.

FASB ASC 450-20-50-3 and 50-4

Revenue and not-for-profit contributions

Revenue from contracts with customers follows five steps, from identifying the contract to recognizing revenue as each performance obligation is satisfied. Incremental costs of obtaining a contract are capitalized when recoverable. Not-for-profit contributions are recognized at fair value when unconditional, while conditional promises and agency transfers are not contribution revenue.

Five steps

Identify the contract, identify performance obligations, determine the transaction price, allocate it, and recognize revenue when or as obligations are satisfied.

FASB ASC 606-10-05-4

Relative standalone selling price

The transaction price is allocated in proportion to standalone selling prices.

FASB ASC 606-10-32-31

Principal versus agent

An entity that does not control the good before transfer reports only its fee or commission.

FASB ASC 606-10-55-36 to 55-38

Donor-imposed conditions

A condition requires both a barrier and a right of return or release; the promise is recognized when the barrier is substantially met.

FASB ASC 958-605-25-5A and 25-11

Contributed services

Recognized only if they create or enhance nonfinancial assets, or require specialized skills that would otherwise be purchased.

FASB ASC 958-605-25-16

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