Revenue Recognition

Timing of Revenue Recognition

1. At Delivery 2. Before Delivery 3. After Delivery

SEC Bill-and-hold criteria

1. Buyer all assumes risk of ownership 2. buyer commits to purchase 3. buyer requests bill-and-hold 4. scheduled delivery 5. seller has no performance obligations 6. good segregated from the rest of inventory 7. goods complete and ready for shipment

Completed Contract Accounting Procedure

1. Debit CIP; credit cash/other appropriate accounts 2. As bills are sent to costumer, debit A/R and credit billings (account billings) 3. When cash is received from costumer, debit cash and credit A/R 4. At the end of the project, recognize revenue by debiting CIP for revenue and debit project cost (COGS) credit Revenue (all revenue from the contract) 5. Close out CIP and billings accounts by debit to billings and credit to CIP

Zero-Gross Profit Method Accounting Procedure

1. Debit CIP; credit cash/other appropriate accounts 2. As bills are sent to costumer, debit A/R and credit billings (account billings) 3. When cash is received from costumer, debit cash and credit A/R 4. Based upon actual costs incurred debit costs and credit revenue for the same amount. 5. At completion, recognize gross profit 6. Close out CIP(cr) and billings accounts (db)

% of Completion Accounting Procedure

1. Debit CIP; credit cash/other appropriate accounts 2. As bills are sent to costumer, debit A/R and credit billings (account billings) 3. When cash is received from costumer, debit cash and credit A/R 4. Credit Revenue, debit contraction costs debit CIP with difference between revenue and costs of the contract. 5. Close CIP and Billings Accounts

Steps for Rev Rec of Multiple Arrangements

1. Determine whether arrangement can be divided into separate units of accounting. Item must have standalone value 2. Allocate Amt received using % of of total revenue multiplied by selling price of package. 3. Apply general rev rec accounting rules

SEC Criteria to Recognize Revenue

1. Evidence of an arrangement exists 2. Goods Delivered or Services Rendered 3. Price is fixed or determinable 4. Collectibility is reasonable assured

IFRS Guidelines to Recognize Revenue

1. Goods Delivered or Services Rendered 2. Price is fixed or determinable 3. Collectibility is reasonable assured

2 ways to implement % of completion under US GAAP

1. Revenue-Cost approach 2. Gross-Profit approach (IFRS only)

6 Conditions for Right-to-Return

1. Sales price fixed 2. buyer has paid or is obligated to pay 3. The buyer's obligation to the seller would not be changed in the event of theft or damage of the product. 4. buyer and seller are not related parties 5. The seller does not have significant future performance obligations to directly bring about the resale of the product by the buyer 6. Seller can reasonably measure amt of future returns

IFRS approaches to Recognizing Service Revenue

1. Single point in time 2. Over the service period 3. Percentage-of-completion

Implementation of Gross-Profit approach

1. costs for the period is the actual cost incurred 2. Cumulative Gross Profit= (est. gross profit)(% complete) 3. Gross Profit for current period= cum. gross profit- gross profit recognized in prior periods 4. Revenue for period= (3)computed above+actual costs for the period

IFRS % of completion Criteria

1. total contract revenue is reliably measured 2. $ flow to entity 3. reliably measure contract costs and stage of contract completion at end of reporting period 4. can compare actual costs incurred with prior estimates.

Multiple Elements Arrangements

Also called multiple deliverable arrangements. Involves multiple products, services, or right to use assets

Channel Stuffing

Also called trade loading. Companies get wholesale distributers to buy more inventory than they can sell in the current period

Accounting for Sales Returns

Book the sale as normal (db A/R or cash and credit sales rev. Recognize the ant of sales returns by debit to sales returns and allowances (contra-rev. acct) credit allowance for sales returns (contra-rev. acct.)

Bill-and-hold Arrangements

Buyer accepts title and billings but delays receipt of goods

Percentage of Completion US GAAP criteria

Company must be able to make reliable measurements of the degree of completion, contract revenues, and costs. All condition of rev rec are met

Accounting for Consignment (On the delivery date)

Consignor credits inventory and debits inventory on consignment. Consignee makes no entry

Accounting for Consignment (Upon sale of the inventory)

Consignor debits COGS and credits Inventory then debits cash and commission expense and credits Revenue Consignee debits cash received from sale and credits commission and amt due to consignee then debits amt due to consignee and credits cash

Revenue Recognition at Product Delivery Journal Entries

Determine COGS and revenue (Sale price less COGS) 1. Debit Cash or A/R for revenue; Credit Sales Revenue 2. Debit COGS; Credit Inventory

Single Point in Time Journal Entries

If payment is received before final service... 1. Debit Cash; credit unearned service revenue 2. Debit unearned service revenue; credit service revenue

Service Period Revenue Recognition Journal Entries

If payment is received in full before service is rendered... 1. Debit Cash, credit unearned revenue 2. As service is rendered, debit unearned service revenue and credit service revenue. 3. Repeat journal entry #2 until unearned service revenue is $0

Revenue (GAAP Definition)

Increasing an asset or decreasing a liability (or combination of both) by producing or delivering goods, or rendering services that are the entity's ongoing major or central operations

Revenue Recognition at Service Delivery

May recognize revenue at a single point in time or over several periods as service is performed.

Cost in Excess of Billings

Net the CIP account with billings. Reported as an asset on balance sheet.

Billings in Excess of Cost

Occurs when billings account is greater than CIP. The net of the CIP and billings account is recorded as a liability on the balance sheet.

Revenue Recognition at Delivery- Service Revenue over the service period. Recognize revenue...

Ratably over the service period

IFRS Sales with Right of Return

Recognize revenue when sale is made as long as it can reliably estimate future returns. If the company cannot reliably measure returns, it delays rev rec until the item sold cannot be returned

Accounting of Unprofitable Contracts

Recognize total loss in the year loss is identified

Completed Contract Method

Recognizes all revenue and costs at the completion of product. Nothing shown in financial statements until completion. Only use this method when % of comp. is not an option or with short term immaterial contracts.

Disadvantage of Long Term Contracts w.r.t rev. rec. and the solution

Recognizing revenue at the end of a contract does not accurately portray the financial performance and position of the company. Companies can recognize revenue over the life of the contract using 1. % of Completion (IFRS & GAAP; most common and preferable method) 2. Completed Contract (GAAP) 3. Zero Product Approach (IFRS)

Revenue Recognition (GAAP)

Revenue is recognized when it realized or realizable and earned.

Revenue Recognition at Product Delivery

Revenue recognized at the time of sale. At the time of sale legal title passes from seller to buyer.

Revenue Recognition at Service Delivery- Single Point in Time; Must Wait...

Until final service is performed to recognize revenue

Consignment Sale

arrangement where a seller (consignor) delivers goods to a third party (consignee), who sells the goods to a customer.

Accounting Procedures for Unprofitable Contract Under complete contract method

debit loss on LTcontract and credit CIP

Accounting Procedures for Unprofitable Contract Under % completion method

loss= est. contract loss+any gross profit recognized to date credit loss to CIP

Principal-agent arrangement

one party (agent) acts on behalf of another party (principal)