Customer's Contract With An Entity

Contracts are an important part of everyday life. They are an essential part of business. As a student of a business law class, I will discuss in this paper several aspects of contracts. This paper will give a definition of a contract and the essential elements necessary to form a valid contract. It will briefly discuss breach of contract and the difference between a material breach and a nonmaterial breach of contract. Examples of legal and equitable remedies available for breach of contracts will be highlighted. Also, legal excuses for nonperformance or other grounds for discharge of contracts will be addressed. Finally, three types of common contracts personally and professionally encountered will be mentioned.

In 2018 it will be mandatory that AASB111 and AASB108 are replaced by AASB15. This new standards main principle necessitates entities to recognise revenue to portray the transfer of goods or services to customers in amounts that mirror the payment, of which the company expects to be entitled. AASB15 also provides regulation for transactions that were not previously addressed thoroughly, such as service revenue and contract modifications. Essentially it presents a 5 step system of Identifying the contracts with the customer, identifying the separate performance obligations in the contract, determining the transaction price, allocating the transaction price to certain performance obligations and recognizing revenue when or as the entity fulfils performance obligations – This is demonstrated towards the end of the report with a

The boards proposed a standard by which revenue would be recognized entirely based on the firm’s contract with the customer. Any remaining rights or obligations in the contract would give rise to net contract assets or net contract liabilities. Under the proposal, revenue would be recognized based on the changes in rights and obligations under a contract entered into with a customer. Rights (assets) arise from a customer’s promise of cash or other compensation while obligations (liabilities) arise from the firm’s promise to transfer assets to the customer. Revenue is recognized whenever there is an increase in contractual assets or a decrease in contractual liabilities or a combination of both. Remaining rights under the contract are measured, the balance of which will create a net contract asset or a net contract liability.

a. Contracts executed by the parties normally include provisions that clearly specify the enforceable rights regarding goods or services to be provided and received by the parties, the consideration to be exchanged, and the manner and terms of settlement.

New accounting rules will affect the company’s revenue recognition in the upcoming year. Many companies such as Rolls-Royce Holdings will be affected by this change. Rolls-Royce Holdings books its revenues even before its services performed. For instance, they sell large engines and maintenance service, and Rolls-Royce Holdings booked the revenue even 1.5 years in advance. They will no longer able to book this unperformed revenues for the upcoming year. The investors will have a better picture on the firm’s revenues based on the new revenue recognition. Some sectors, such as telecommunications, media and pharmaceuticals, are expected to be affected more than others, because the firms recognize revenues before they perform the services. Moreover,

2. On the basis of the response to Question 1, discuss the revenue recognition accounting literature

The key difference of revenues and expenses recognition is obvious. According to IFRS, the income statement records the increasing of future economic benefit as revenues, such as sales, interests, dividends, and rents, and the recognition of revenues and expenses are combined directly in the same transaction (Matching principle). But ASPE standards state that the income statement only records the existing or realizing performance as revenues. Same situation in the expenses, in IFRS’s income statement, they are recognized by a decrease in the asset or an increase in the liability for future position. In addition, under ASPE, we do not recognize an expense as a provision unless the benefit does qualifies as an asset (CICA, 2011, Section 1000).

The Client hereby engages the Provider to provide services described herein under “Scope and Manner of Services.” The Provider hereby agrees to provide the Client with such services in exchange for consideration described herein under “Payment for Services Rendered.”

The most relevant and authoritative is FASB Codification: 605-45-45-1, and it pertains to revenue recognition and most importantly to principal and agent consideration. The standard basically states that if you are considered the principal, then you recognize revenues at gross amounts. On the other hand, if you are considered an agent, then you recognize revenues at net amounts. The standard is broken up in the following two sections.

The Codification’s goal is to clarify the company of thousands of U.S. authoritative accounting announcements published by diverse standard-setters. Therefore, to accomplish this objective, the FASB sponsored a project to incorporate and typically adapt all related accounting publication announced by the standard-setters of the U.S. in conjunction with those of the FASB, the Emerging Issues Task Force (EITF) and the American Institute of Certified Public Accountants

Contract terms are statements which determine the rights and obligations of the parties who have signed the contract. Sometimes contract terms can be deemed to be unfair as they may be greatly one sided towards one party in the contract. Unfair contract term laws apply to standard form consumer contracts. According to the Australian Consumer Law, a consumer contract is defined as a contract used for the supply of goods or services, or the sale of land which will be used for personal, domestic or household use.

3. In mixed goods-services situations, courts determine whether the contract is for the sale of goods by determining whether the good or the service is the dominant part of the transaction.

Step 5: Recognize revenue when (or as) the performance obligations are satisfied (i.e. when (or as) control of good or service is transferred to customer.” (Streaser, Jialin Sun, Perez Zaldivar, & Ran, 2014).

* Level of completion of the transaction at the balance sheet date can be assessed;

Contracts are used in many different forms and for just as many different situations within our everyday lives. Some contracts are more involved than others and for some; contracts are an essential of their success. As we continue, we will take a look at different types of contracts with the main focus on enforceable contracts. With so many elements that are incorporated into any contract, the six essential elements of enforceable contracts will be the main focus of this writing. Having a clearer understanding of the essentials of life will help prepare us for life’s curves that may come our way.