Financial Accounting Essay example

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Chapter 4

Revenue Recognition
Comm 353 Section 201

Copyright © 2014 Pearson Education Canada Inc./
Scott Sinclair FCA

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Lo/Fisher, Intermediate Accounting Vol.1

A. RANGE OF CONCEPTUAL ALTERNATIVES
FOR REVENUE RECOGNITION

• Wide range of alternatives exist
• Alternatives exist along the value creation process • Revenue recognized earlier reduces the quality of the information (more estimation)
• Criteria established by accounting standards eliminates some of alternatives

Copyright © 2014 Pearson Education Canada Inc. /Scott Sinclair
FCA

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Lo/Fisher, Intermediate Accounting Vol.1

A business’s value creation process

Copyright © 2014 Pearson Education Canada Inc.

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Lo/Fisher, Intermediate Accounting Vol.1

GENERAL REVENUE RECOGNITION CRITERIA

• IAS 18 provides general revenue recognition criteria • Criteria provided for the:
– Sale of goods
– Provision of services
• Criteria for sale of goods vs. provision of services viewed differently
• Recommends point 5 on value creation process
Copyright © 2014 Pearson Education Canada Inc.

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Lo/Fisher, Intermediate Accounting Vol.1

1. Sale of goods
• ALL conditions must be met in order to recognize revenue: (a) Transfer of significant risks and rewards of ownership (b) Retain no continuing managerial involvement or control to the degree usually associated with ownership (c) Amount of revenue can be measured reliably
(d) Economic benefits will flow to the entity
(e) Costs incurred or to be incurred can be measured reliably Copyright © 2014 Pearson Education Canada Inc.

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Lo/Fisher, Intermediate Accounting Vol.1

Sale of Goods from Seller to Buyer

• Requires a high degree of certainty
• Requires procurement, demand, and price risk reduced to an acceptable level
• Allows acceptance of credit and indemnity risk
• Results in some subjectivity and application of professional judgment

Copyright © 2014 Pearson Education Canada Inc.

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Lo/Fisher, Intermediate Accounting Vol.1

2. Provision of services

• Must reliably estimate the outcome
• If outcome can be estimated reliably use stage of completion to recognize revenue
• If outcome cannot be estimated reliably, revenue is recognized only to extent of recoverability of expenses recognized
– known as the cost recovery method

Copyright © 2014 Pearson Education Canada Inc.

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Lo/Fisher, Intermediate Accounting Vol.1

Determining a Reliable Estimate for the Outcome

• ALL conditions must be met:
– (a) amount of revenue can be measured reliably
– (b) probable that economic benefits associated with transaction will flow to entity
– (c) stage of completion of transaction at end of period can be measured reliably
– (d) costs incurred and costs to complete transaction can be measured reliably

Copyright © 2014 Pearson Education Canada Inc.

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Lo/Fisher, Intermediate Accounting Vol.1

Sale of Goods vs. Provision of Services
Sale of Goods
• Risk and rewards of ownership transferred • Managerial involvement and control given up
• Revenue amount measured reliably • Economic benefits transferred
• Stage of completion not applicable • Costs can be measured
Copyright © 2014 Pearson Education Canada Inc.

Provision of Services
• Ownership not applicable for services • Managerial involvement and control not applicable
• Revenue amount measured reliably • Economic benefits transferred
• Stage of completion measured reliably • Costs can be measured
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Lo/Fisher, Intermediate Accounting Vol.1

C. MULTIPLE DELIVERABLES
• Sale of good and service are not always in isolation • Multiple deliverables – Bundled sale of two or more goods and services
1. Allocation across different revenue streams
2. Timing of revenue recognition
3. Method of allocation
4. Example of multiple deliverables: franchise fees

Copyright © 2014 Pearson Education Canada Inc.

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