Professional Documents
Culture Documents
UAA ACCT 650 Seminar in Executive Uses of Accounting Dr. Fred Barbee
The fundamental revenue recognition concept is that revenues should not be recognized by a company until realized or realizable and earned by the company.
Lynn E. Turner, Chief Accountant, SEC Speech by SEC Staff: Revenue Recognition May 31, 2001
Revenue Recognition
In an effort to provide better and more comprehensive guidance as to when companies should record revenues, the FASB has added a project on revenue recognition to its agenda.
www.fasb.org May 22, 2002
Revenue usually is the largest item in financial statements, and revenue recognition issues top the list of reasons for financial reporting restatements.
L. Todd Johnson FASB Senior Project Manager www.fasb.org/news/nr052002.shtml
A bottom up approach that provides an inventory of existing revenue recognition guidance and accepted practices.
. . . Issues involving revenue recognition are among the most important and the most difficult that standard setters and accountants face.
www.fasb.org/project/revenue_recognition.shtml
Conceptual Guidance
Authoritative Literature
Significant Gap
Conceptual Guidance
Authoritative Literature
Revenue
Revenues are inflows of assets and/or settlement of liabilities from delivering or producing goods, rendering services, or other activities that constitute the entitys ongoing major or central operations.
Statement of Financial Accounting Concepts No. 6 Elements of Financial Statements Paragraph 78
Revenue
Essential Characteristics
Recognition
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.
Statement of Financial Accounting Concepts No. 5 Recognition & Measurement in Financial Statements of Business Enterprises - Paragraph 6
Recognition
Essential Characteristics
Depiction in both words and numbers Included in financial statements and statement totals Disclosure by other means is not recognition
Statement of Financial Accounting Concepts No. 5 Recognition & Measurement in Financial Statements of Business Enterprises - Paragraph 6
To be recognized . . .
Realized
When cash or claims to cash are received.
Realizable
When assets received are readily convertible to known amounts of cash or claims to cash.
Realization Criterion
The revenue the amount the customers will pay can be objectively measured. The eventual collection of cash (or cashequivalents) can be reasonably assured.
Any remaining fulfillment costs can be estimated with reasonable reliability and accuracy.
The company has completed a substantial portion of the production and sales effort. The risks of ownership have been shifted to the customer.
Revenue
Sales Timing of Recognition Date of Sale (Date of Delivery)
Revenue
Fees or Services Timing of Recognition Services Performed and Billable
Revenue
Interest, Rent, and Royalties Timing of Recognition As time passes or assets are used
Revenue
Gain or loss on disposition Timing of Recognition Date of Sale or Trade in
Figure 2.2 The Revenue Recognition Process: Industries Recognizing Revenue at Indicated Phases
Revenues may also be recognized at other times besides the point of sale.
Revenue Recognition
Lets look at . . .
Should a company that acts as a distributor or reseller of products or services record revenue as gross or net?
Example Priceline.com . . .
Priceline.com brokered airline tickets online and included the full price of the ticket as Priceline.com revenues. This greatly inflated revenues relative to traditional ticket brokers and travel agents who only included commissions as revenue.
Example eBay.com . . .
eBay.com included the entire price of auctioned items into its revenue even though it had no ownership or credit risk for items auctioned online.
The Company . . .
Is the primary obligor.
Has general inventory risk. Has latitude in establishing prices Changes the product or performs part of the service.
The Company . . .
Determines product/service specifications.
Bears risk for physical loss of inventory. Bears credit risk. Cash and price discounts must be deducted from revenue rather than be reported as expenses.
Deferral of Revenue
Implementation . . .
Restate prior years?
One-time cumulative adjustment? Phase in?
Concluding Thoughts
FASB sought to improve financial disclosure by limiting diversity in accounting practice. Good matching of revenues and expenses is not always easy.
Concluding Thoughts
The job of determining, supporting and sustaining financial reporting policies within a company in a changing environment can be a difficult one.