CPA PEP accounting students: Study tips for revenue recognition under ASPE

VANCOUVER – Revenue recognition is the most commonly tested Financial Reporting topic in the CPA Professional Education Program (CPA PEP) exams. You can expect assessment opportunities (AOs) involving revenue recognition in Core 1, the electives, and the Common Final Exam (CFE). In fact, in the last eleven CFE Day 2s, revenue recognition has been tested nine times. 

In this article, I will walk you through different types of revenue recognition scenarios under Accounting Standards for Private Enterprises (ASPE) tested in CPA PEP and CFE exams, with tips and tricks on how to catch and answer them. 

1. Revenue from goods vs. services

When reviewing CPA Canada case solutions, you have likely seen the revenue criteria “risks and rewards of ownership have been transferred.” You may have also seen another variation called “performance achieved” for the same paragraph. Students often ask me why the solutions sometime show the former and other times the latter. The answer is goods versus services. In a transaction involving the sale of goods, performance is achieved when the seller has transferred to the buyer the risks and rewards of ownership. 

On the other hand, revenue from service transactions is recognized as the service is performed (i.e., performance achieved). In CPA PEP cases, when you’re presented with sale of goods, you should write: “Performance achieved (seller has transferred to the buyer the risks and rewards of ownership)” and, for service transactions, you should write simply: “Performance achieved.” This is a simplified example. ASPE paragraphs 3400.04 through 3400.18 provide additional guidance as to the timing of revenue recognition in different circumstances. 

2. Revenue collected on behalf of third parties (gross vs. net)

This is another commonly tested revenue topic. Consider a situation where revenue is collected on behalf of third parties. For example, an online booking website, such as AirBnB, lists properties for rental. The property owners collect most of the revenue, while the booking site collects a commission for its services. The property owners are the principal owners, while the booking site is the agent, facilitating the sale. 

ASPE revenue recognition rules say that, in an agency relationship, the amounts collected by the agent on behalf of the principal are not revenue. This means that the online booking website cannot recognize the entire amount of sale as revenue. Instead, revenue is the net amount (i.e., the commission). Likewise, the property owners, who are the principles, record the gross amount, which is the amount without the commission. The logic here is that amounts collected on behalf of third parties are not economic benefits to the enterprise so they cannot be recognized. If you’re presented with this topic in CPA PEP cases, analyze whether an enterprise is acting as a principal or an agent using the guidelines in ASPE paragraph 3400.24. 

3. Revenue involving multiple arrangements

This is a complex variation of a revenue recognition topic that can be tested in different ways. Think of this as a bundle. Let’s say a company sells kitchen appliances and installation services. Customers can purchase the appliances separately, request just installation services separately, or a bundle containing both. In a situation with a bundle, the company must determine how to allocate the total transaction sale to each component. 

The ASPE rules say that revenue from multiple arrangements should be allocated on a relative stand-alone selling price basis. The stand-alone selling price is the price at which the company would sell goods or services separately to a customer (i.e., off-the-shelf prices). Stand-alone selling price can be determined through actual transactions (if the company sells each component separately), or it can be estimated using observable inputs and estimation techniques as described in ASPE paragraph 3400.A11. 

In CPA PEP cases, start by analyzing whether separate components (multiple arrangements) exist using the case facts and ASPE paragraphs 3400 A3-A5. If they don’t exist, apply revenue recognition criteria to the arrangement as a whole. If they do, you will likely be given the stand-alone selling prices, which you can use to proportionally allocate the total transaction price to each component. 

4. Other revenue topics

The above are the most commonly tested revenue recognition topics from my observation. There are several other scenarios, such as:

• Upfront non-refundable deposits
• Sales with right of return
• Long-term contracts
• Percentage of completion vs. complete contract method
• Warranties
• Loyalty points
• Consignment arrangements
• Bill-and-hold arrangements
• Customers’ unexercised rights
• Licencing 

I suggest reviewing past CFE exam cases available in CPA Canada’s CRC, and obtaining supplemental cases, to practise and understand the different circumstances revenue recognition is tested. And check out my other articles on Canadian Accountant, as they may help you on your way to becoming a chartered professional accountant. 

Gevorg Grigoryan, CPA, is an instructor, mentor and coach to students in the CPA program. Visit Gevorg CPA to learn more and subscribe to Gevorg’s YouTube channel to access CPA program videos.