CHAPTER 3

ADDITIONAL TOPICS IN INCOME

DETERMINATION
REVENUE RECOGNITION

• IS GENERALLY ACCEPTED ACCOUNTING

PRINCIPLE(GAAP) THAT DETERMINE THE SPECIFIC
CONDITION IN WHICH REVENUE IS RECOGNIZED
OR ACCOUNTED FOR

• REVENUE IS RECOGNIZE WHEN IT IS EARNED

NOT WHEN THE CASH IS RECEIVED
• DEFERRED REVENUE
CASH IS RECEIVED BEFORE REVENUE
EARNED

• ACCRUED REVENUE
CASH IS RECEIVE AFTER REVENUE EARNED
REVENUE RECOGNITION
PRIOR TO SALE

• SOLID CONSTRUCTION CORPORATION SIGNS A CONTRACT WITH THE

CITY OF SPRINGFIELD ON JANUARY 1, 2014, TO BUILD A HIGHWAY
BRIDGE OVER STONY CREEK. THE CONTRACT PRICE IS $1,000,000;
CONSTRUCTION COSTS ARE ESTIMATED TO BE $800,000, AND THE
• PROJECT IS SCHEDULED TO BE COMPLETED BY D ECEMBER
31, 2016. PERIODIC CASH PAYMENTS ARE TO BE MADE BY
THE CITY OF SPRINGFIELD AS CONSTRUCTION PROGRESSES.
HERE IS A SUMMARY OF THE STONY CREEK PROJECT’S
PROGRESS EACH YEAR:
Using the percentage-of-completion method, the
cumulative profit recognized over the three years totals
$150,000 ($60,000 1 $36,000 1 $54,000). This total equals the
difference between the contract price of $1,000,000 and
the actual costs of $850,000.
COMPLETED-CONTRACT METHOD

• THE COMPLETED CONTRACT METHOD RESPONSES RECOGNITION

OF INCOME UNTIL THE PROJECT IS COMPLETED
COMPLETED-EARNING PROCESS METHOD
THE SELLER MUST HAVE NO BIG REMAINING
OBLIGATION TO THE CUSTOMER

SALES –BASIS METHOD

REVENUE IS RECOGNIZED AT THE TIME OF SALE,
WHICH DEFINED AS THE MOMENT WHEN THE TITLE
OF THE GOODS OR SERVICES IS TRANSFERRED TO
THE BUYER
REVENUE RECOGNITION SUBSEQUENT
TO SALE
Installment Sales Method
RECOGNIZE REVENUE AND EXPENSES AT THE TIME OF
CASH COLLECTION AND NOT AT THE TIME OF SALE
Interest on Installment Contracts
IS A WAY FOR BUYER TO FINANCE THE PURCHASE OF
PROPERTY.
COST RECOVERY METHOD
NO PROFIT IS RECOGNIZED UNTIL ALL
OF THE EXPENSES INCURED TO
COMPLETE THE PROJECT HAVE BEEN
RECOUPED
REVENUE RECOGNITION FOR
SPECIALIZED SALES TRANSACTIONS

• Franchise sales.
• Sales with right of return.
• Bundled (multiple-element) sales.
FRANCHISE SALES
FRANCHISING IS A POPULAR WAY TO EXPAND
SALES OF PRODUCTS AND SERVICES IN A
VARIETY OF INDUSTRIES.
2 TYPES OF PAYEMTS:
1.An initial franchise fee, all or part of which is paid to
the franchisor when the franchise agreement is signed,
with the remainder due in installments (with interest)
over a specified period; and
2. Continuing or periodic fees generally based on a
percentage of sales generated by the franchisee.
SALES WITH RIGHT OF RETURN
When the frequency and magnitude of returns are high, a
question arises as to whether an entity should recognize
revenue at the time of sale or defer recognition until the
uncertainty regarding product returns is resolved. GAAP
specifies that for a seller to record revenue at time of sale
when right of return exists, all the following criteria must be
met:
• The seller’s price to the buyer is substantially fixed
or determinable at the date of sale.

• The buyer has paid the seller or the buyer is

obligated to pay the seller and the obligation is not
contingent on the resale of the product.
• THE SELLER DOES NOT HAVE SIGNIFICANT OBLIGATIONS
FOR FUTURE PERFORMANCE TO DIRECTLY BRING ABOUT
RESALE OF THE PRODUCT TO THE BUYER.

• • THE AMOUNT OF FUTURE RETURNS CAN BE

REASONABLY ESTIMATED.
BUNDLED (MULTIPLE-ELEMENT) SALES
Software vendors such as Microsoft and Oracle
often package their products in “bundles” of
more than one product or service (“multiple
deliverables”) that are sold for a lump-sum
contract price.
ACCOUNTING ERRORS, EARNINGS RESTATEMENTS,
AND PRIOR PERIOD ADJUSTMENTS

• ACCOUNTING ERRORS OR IRREGULARITIES

• MISAPPLICATION OF GAP
• MANAGEMENT ATTEMPTS TO EXPLOIT THE FLEXIBILITY IN
GAAP OR COMMITS OUTRIGHT FINANCIAL FRAUD TO
INFLATE EARNINGS AND OVERSTATE NET ASSETS.
PRIOR PERIOD ADJUSTMENTS THIS
ADJUSTMENT RESULTS IN AN ADDITION TO,
OR SUBTRACTION FROM.
LONG-TERM CONSTRUCTION ACCOUNTING
• IFRS RULES
• COST-PLUS CONTRACTS ARE THOSE FOR WHICH
THE CONTRACTOR IS REIMBURSED FOR
ALLOWABLE OR OTHERWISE DEFINED COSTS PLUS
A PROFIT MARK-UP. A FIXED-PRICE CONTRACT IS
ONE IN WHICH THE CONTRACTOR AGREES TO A
FIXED CONTRACT PRICE OR FIXED RATE PER UNIT
OF OUTPUT, WHICH IN SOME CASES MAY BE
SUBJECT TO COST ESCALATION CLAUSES
INSTALLMENT SALES
U.S. GAAP ALLOWS WHEN THE RISK OF
NONCOLLECTION IS HIGH OR WHEN THERE IS NO
REASONABLE BASIS FOR ESTIMATING THE
UNCOLLECTIBLES. THE INSTALLMENT SALES
METHOD ALLOWED BY U.S. GAAP IS NOT
PERMITTED BY IFRS. RATHER, THE COST RECOVERY
METHOD IS REQUIRED.
GLOBAL VANTAGE POINT
IFRS AND U.S. GAAP FOR REVENUE
RECOGNITION AND MEASUREMENT LARGELY
OVERLAP, ALTHOUGH U.S. GAAP IS MUCH
MORE VOLUMINOUS AND DETAILED
THANK YOU!!