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Revenue recognition guidance exists throughout accounting literature, accounting and audit guides and audit risk alerts for specific industries and the SEC’s SAB 104. Yet there is no one comprehensive source. In this course you will have a complete handbook. You’ll review the current literature, look at the implications of premature recognition, unique revenue recognition issues of specialized industries and examine current FASB projects and the impact they will have on financial statements.
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The process of formally recording or incorporating an item into the financial statements of an entity as an asset, liability, revenue, expense, or the like. Recognition includes depiction of an item in both words and numbers, with the amount included in the totals of the financial statements.Concepts Statement No. 5 sets forth criteria to provide direction for resolving issues that involve accounting recognition. It states that an item and information about it should meet four fundamental recognition criteria: definitions, measurability, relevance, and reliability.
• Assets are probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events. Assets have the following characteristics:Measurability– Embodiment of a probable future benefit that involves a capacity, individually or in combination with other assets, to contribute directly or indirectly to future net cash inflows.• Liabilities are probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events. It also has three characteristics:
– A particular entity can obtain the benefit and control others’ access to it.
– The transaction or other event giving rise to the entity’s right to or control of the benefit has already occurred.– It embodies a present duty or responsibility to one or more other entities that entails settlement by a probable future transfer or use of assets at a specified or determinable date, on occurrence of a specified event or on demand.• Revenues are inflows or other enhancements of assets of an entity or settlements of its liabilities (or a combination of both) from delivering or producing goods, rendering services, or other activities that constitute the entity’s ongoing major or central operations. They represent actual or expected cash inflows or will eventually as a result of the entity’s ongoing major or central operations. Assets increased by revenues may be of various kinds: cash, claims against customers or clients, other goods or services received, or increased value of a product resulting from production.
– The duty or responsibility obligates a particular entity, leaving it little or no discretion to avoid the future sacrifice.
– The transaction or other event obligating the entity has already happened.
• Expenses are outflows or other uses of assets or incurrences of liabilities (or a combination of both) from delivering or producing goods, rendering services, or carrying out other activities that constitute the entity’s ongoing major or central operations. They represent actual or expected cash outflows (or the equivalent) that have occurred or will eventually occur as a result of the entity’s ongoing major or central operations.
• Gains are increases in equity (net assets) from peripheral or incidental transactions of an entity and from all other transactions and other events and circumstances affecting the entity, except those that result from revenues or investments by owner.
• Losses are decreases in equity (net assets) from peripheral or incidental transactions of an entity and from all other transactions and other events and circumstances affecting the entity, except those that result from expenses or distributions to owners.
• Historical cost (historical proceeds) – Assets such as property, plant, and equipment, and most inventories are reported at historical cost. Liabilities that involve obligations to provide goods or services to customers are reported at historical proceeds.Relevance and Reliability
• Current cost – Inventories, for instance, may be reported at their current or replacement cost.
• Current market value – Some investments in marketable securities are reported at their current market value. Current market value is also generally used for assets expected to be sold at prices lower than previous carrying amounts.
• Net realizable (settlement) value – Short-term receivables and some inventories are reported at net realizable value, the non-discounted amount of cash or its equivalent into which an asset is expected to be converted in due course of business less direct costs.
• Present (or discounted) value of future cash flows – Long-term receivables are reported at their present value (discounted at the implicit or historical rate) which is the present or discounted value of future cash inflows into which an asset is expected to be converted in due course of business less present values of cash outflows necessary to obtain those inflows.
• Usually the two conditions are met by the time product or merchandise is delivered or services are rendered to customers. Revenues from manufacturing and selling activities and gains and losses from sales of other assets are usually recognized at time of sale.
• In cases where sale or cash receipt or both occurs before production and delivery (e.g., magazine subscriptions), revenue is recognized as earned by production and delivery.
• If a product is contracted for before production, then revenue may be recognized by a percentage-of-completion method as earned, or as production takes place provided the entity has reasonable estimates of results at completion and reliable measure of progress as available.
• When services are rendered or rights to use assets extend continuously over time, interest for example, then reliable measures based on contractual prices agreed to in advance are available, and revenues are recognized as earned as time passes. • When products or other assets are readily realizable because they are salable at reliably determinable prices without significant effort (precious metals, for example), then revenues and some gains or losses may be recognized at completion of production or when prices of the assets change.
• When product, services, or other assets are exchanged for non-monetary assets that are not readily convertible into cash, revenues or gains or losses are recognized on the basis that they have been earned and the transaction is completed.
• If collectibility of assets received for product, services, or other assets is doubtful, then revenues and gains may be recognized on the basis of cash received. Such recognition depends on the provision that the fair values involved can be determined within reasonable limits.
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