6-1

Revenue Recognition
Guidelines
Revenue
Revenue Recognition
Recognition Criteria
Criteria

Earning
Earningactivities
activitiesare
aresubstantially
substantiallycomplete
completeand
andno
nosignificant
significant
added
addedeffort
effortis
isnecessary
necessary

Risk
Riskof
ofownership
ownershipis
iseffectively
effectivelypassed
passedto
tothe
thebuyer
buyer

Revenue,
Revenue,and
andrelated
relatedexpense,
expense,are
aremeasured
measuredor
orestimated
estimatedwith
with
accuracy
accuracy

Revenue
Revenuerecognized
recognizednormally
normally
yields
yieldsan
anincrease
increasein
incash,
cash,
receivables
receivablesor
orsecurities
securities

Revenue
Revenuetransactions
transactionsare
areat
atarms
arms
length
lengthwith
withindependent
independentparties
parties

Transaction
Transactionis
isnot
notsubject
subjectto
torevocation
revocation

6-2

Revenue Recognition
Guidelines
Some
Somespecial
specialrevenue
revenuerecognition
recognitionsituations
situationsare
are

Revenue
RevenueWhen
WhenRight
Rightof
ofReturn
ReturnExists
Exists

Franchise
FranchiseRevenues
Revenues

Product
ProductFinancing
FinancingArrangements
Arrangements

Revenue
Revenueunder
underContracts
Contracts
Percentage-of-completion
Percentage-of-completionmethod
method
Completed-contract
Completed-contractmethod
method

Unearned
UnearnedRevenue
Revenue(amount
(amountof
ofrevenues
revenuesthat
thatare
arestill
still
unrecognized
unrecognizedappear
appearin
inthe
thebalance
balancesheet
sheetas
asaaliability)
liability)

6-3

Revenue Recognition

Analysis
Revenue
Revenueisisimportant
importantfor
for

Company
Companyvaluation
valuation

Accounting-based
Accounting-basedcontractual
contractualagreements
agreements

Management
Managementpressure
pressureto
toachieve
achieveincome
incomeexpectations
expectations

Management
Managementcompensation
compensationlinked
linkedto
toincome
income

Valuation
Valuationof
ofstock
stockoptions
options

Analysis
Analysismust
mustassess
assesswhether
whetherrevenue
revenuereflects
reflectsbusiness
businessreality
reality

Assess
Assessrisk
riskof
oftransactions
transactions

Assess
Assessrisk
riskof
ofcollectibility
collectibility

Circumstances
Circumstancesfueling
fuelingquestions
questionsabout
aboutrevenue
revenuerecognition
recognitioninclude
include

Sale
Saleof
ofassets
assetsor
oroperations
operationsnot
notproducing
producingcash
cashflows
flowsto
tofund
fundinterest
interest
or
ordividends
dividends

Lack
Lackof
ofequity
equitycapital
capital

Existence
Existenceof
ofcontingent
contingentliabilities
liabilities

6-4

Deferred Charges
Costs
Costs incurred
incurred but
but deferred
deferred because
because they
they are
are
expected
expected to
to benefit
benefit future
future periods
periods
Consider
Consider four
four categories
categories of
of deferred
deferred costs
costs
Research
Research and
and development
development
Computer
Computer software
software costs
costs
Costs
Costs in
in extractive
extractive industries
industries
Miscellaneous
Miscellaneous (Other)
(Other)

6-5

Deferred Charges
Research and Development
Accounting for R&D is problematic due to:*

High uncertainty of any potential benefits

Time period between R&D activities and determination of success
Intangible nature of most R&D activities
Difficulty in estimating future benefit periods

Hence:
U.S. accounting requires expensing R&D when incurred
Only costs of materials, equipment, and facilities with alternative
future uses are capitalized as tangible assets
Intangibles purchased from others for R&D activities with alternative
future uses are capitalized
*These accounting problems are similar to those encountered with
employee training programs, product promotions, and advertising

6-6

Deferred Charges
Computer Software Costs
[Note:
[Note:Accounting
Accountingfor
forcosts
costsof
ofcomputer
computer software
softwareto
to be
be
sold,
sold, leased,
leased,or
or otherwise
otherwisemarketed
marketedidentifies
identifiesaapoint
point
referred
referredto
toas
astechnological
technologicalfeasibility]
feasibility]
Prior
Priorto
totechnological
technological
feasibility,
feasibility,costs
costs
are
areexpensed
expensedwhen
when
incurred
incurred
After
Aftertechnological
technologicalfeasibility,
feasibility,costs
costsare
arecapitalized
capitalizedas
as
an
anintangible
intangibleasset
asset

6-7

Deferred Charges
Costs in Extractive Industries
Search
Searchand
anddevelopment
developmentcosts
costsfor
fornatural
naturalresources
resourcesis
isimportant
importantto
to
extractive
extractiveindustries
industriesincluding
includingoil,
oil,gas,
gas,metals,
metals,coal,
coal,and
andnonmetallic
nonmetallic
minerals
minerals
Two
Twobasic
basicaccounting
accountingviewpoints:
viewpoints:
Full
Fullcost
costviewall
viewallcosts,
costs,
productive
productiveand
andnonproductive,
nonproductive,
incurred
incurredin
inthe
thesearch
searchfor
forresources
resources
are
arecapitalized
capitalizedand
andamortized
amortizedto
to
income
as
resources
are
produced
income as resources are produced
and
andsold
sold

Successful
Successfulefforts
effortsviewall
viewallcosts
coststhat
thatdo
donot
notresult
resultdirectly
directlyin
in
discovery
discoveryof
ofresources
resourceshave
haveno
nofuture
futurebenefit
benefitand
andshould
shouldbe
be
expensed
expensedas
asincurred.
incurred.Prescribed
Prescribedfor
foroil
oiland
andgas
gasproducing
producing
companies
companies