B2W Flipbooks

Page | 46 STEP 3: DETERMINE THE DISCOUNT RATE The entity must use a discount rate that would be refl ected in a separate fi nancing transaction between the entity and the customer at contract inception and is not reassessed. The rate would refl ect the credit risk of the party obtaining fi nancing in the contract. If the contract includes a specifi ed rate, the entity or customer must consider whether the rate refl ects a market rate. A nonmarket rate may not appropriately refl ect the fi nancing element of the contract and should be assessed to determine if a more appropriate rate should be used. STEP 4: ADJUST THE TRANSACTION PRICE When the conclusion is made that a contact contains a signifi cant fi nancing component, the entity should present the eff ects of fi nancing separately from contracts with customers in the statement of comprehensive income. Interest income or interest expense is recognized only to the extent that a contract asset (or receivable) or a contract liability is recognized in accounting for a contract with a customer. Practical Application Note: When fi nancing exists, the transaction value assigned to the contract excludes the fi nancing on the job schedule. Companies with fi nancing may decide to add a line on the job schedule to segregate the fi nancing component so the surety can see the total contract commitment on the schedule. Financing (continued) > INTERNAL CONTROL CONSIDERATIONS Develop a checklist to identify fi nancing components in each contract at inception: • Is there a long period of time (i.e., more than a year) between delivery of goods and services and receipt of payment? (indicates fi nancing component) • Is the fi nancing component signifi cant to the contract? • What is the prevailing interest rate in the market? • Discount the contract transaction price to "cash" price. • Create separate lines on work-in- progress schedule to account for fi nancing component.

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