Revenue

Revenue Recognition
Recognition

Revenue Revenue Revenue

Current Recognition at Recognition Recognition
Environment the Point of Sale before Delivery after Delivery

Guidelines for Sales with discounts Percentage-of- Installment-

revenue Sales with right of completion sales method
recognition return method Cost-recovery
Departures Sales with buybacks Completed- method
from sale Bill and sales contract Deposit
basis method method
Principal-agent
relationships Long-term Summary of
contract losses bases
Trade loading and
channel stuffing Disclosures
Completion-of-
Multiple-Deliverable
production
Arrangements
basis
 The
The Current
Current Environment
Environment
A recent survey of financial executives noted that the
revenue recognition process is increasingly :

 more complex to manage

 prone to error
 material to financial statements compared to any
other area in financial reporting.
 a top fraud risk
 The risk or errors and inaccuracies is significant
Guidelines for Revenue Recognition

The revenue recognition principle provides

that companies should recognize revenue

(1) when it is realized or realizable and

(2) when it is earned.

Proper revenue recognition revolves around three
terms:
Revenue are realized when-
 A company exchanged goods and services for cash or
receivables
 Assets a company receives in exchange are readily
convertible to know amounts of cash or claims to cash.

 The earning process is completed or virtually complete

Four revenue transactions:
• Selling products at the date of sales.
• Services provided, when service have been
performed and are billable.
• Permitting others to use enterprise assets, such as
interest, rent, and royalties
• Disposing of assets
 REVENUE RECOGNITION FOR FRANCHISES

1. Assistant is site selection:

(a) Analyzing location and (b) negotiating lease.

2. Evaluation of potential income.

3. Supervision of construction activity

(a) obtaining financing (b) designing building and ©

supervising contractor while building.

4. Assistance in the acquisition of signs, fixtures , and

equipment.
5. Bookkeeping and advisory services:

(a) setting up franchisee’s records;

(b) advising on income , real estate and other taxes; and

© advising on local regulations of the franchisee’s business.

6. Employee and management training.

7. Quality control

8. Advertising and promotion.

Assume that PISA-PIE’s Pizza Inc. charges an initial franchise
fee of PhP.50,000 for the right to operate as franchisee of
PISA-PIE’s Pizza. Of this amount, PhP10,000 is payable when
the franchisee signs the agreement, and the balance is
payable in five annual payments of PhP.8,000 each. In return
for the initial franchise fee, PISA-PIE’s will help locate the site,
negotiate the lease or purchase of the site, supervise the
construction activity, and provide the bookkeeping services.
The credit rating of the franchisee indicates that money can be
borrowed at 8%. The present value of an ordinary annuity of
five annual receipts of PhP. 8,000 each discounted at 8% is
1. If there is reasonable expectation that PISA-PIE’s Pizza Inc.
may refund the down payment and if substantial future
services remain to be performed by PISA-PIE’s Pizza Inc.

Cash 10,000
Notes Receivable 40,000
Discount on Notes Receivable 8,058.32
Unearned Franchise Fee 41,941.68
2. If the probability of refunding the initial franchise fee is
extremely low, the amount of future services to be provided
to the franchisee is minimal, collectivity of the note is
reasonably assured, and substantial performance has
occurred

Cash 10,000
Notes Receivable 40,000
Discount on Notes Receivable 8,058.32
Revenue from Franchise Fees 41,941.68
3. If the initial down payments is not refundable,
represents a fair measure of the services already provided,
with a significant amount of services still to be performed
by PISA-PIE’s Pizza in future periods, and collectivity of the
notes is reasonable assured:

Cash 10,000
Notes Receivable 40,000
Discount on Notes Receivable 8,058.32
Revenue from Franchise Fees 10,000.00
Unearned Franchise Fee 31,941.68
4. If the initial down payments is not refundable and no
future services are required by the franchisor, but collection
of the note is so uncertain that recognition of the note as
an asset is unwarranted

Cash 10,000.00
Revenue from Franchise Fees 10,000.00
5. Under the same conditions as those listed in case 4 above,
except that the down payments is refundable or substantial
services are yet to be performed

Cash 10,000.00
Unearned Franchise Fees 10,000.00
 Continuing Franchise Fees

 Bargain Purchase

 Options To Purchase

 Franchisor’s Cost

 Disclosures of Franchisors