Revenue Recognition Recognize Revenue when (1) Realized or Realizable & (2) Earned At the Point of Sale: Transaction approach Before Delivery: Percentage-of-Completion Completed-Contracts Method Net Realizable Value After Delivery: Cash Collection Basis: Installment Sales Method Cost Recovery Methods Deposit Method

Revenues are realized when goods and services are exchanged for cash or claims to cash (receivables)Revenues are realized when goods and services are exchanged for cash or claims to cash (receivables) Revenues are realizable when assets received in exchange are readily convertible to known amounts of cash or claims to cashRevenues are realizable when assets received in exchange are readily convertible to known amounts of cash or claims to cash Revenues are earned when the earnings process is complete or virtually complete -- that is, when the entity has substantially accomplished what it must do to be entited to the benefits represented by the revenuesRevenues are earned when the earnings process is complete or virtually complete -- that is, when the entity has substantially accomplished what it must do to be entited to the benefits represented by the revenues

Income Determination: recognition basis At the Point of Sale --At the Point of Sale -- Transaction approach –an exchange has taken place & –the earnings process is (virtually) complete

Income Determination: recognition basis During the production process --During the production process --Percentage-of-Completion –Long-term construction, property or service contracts –Have a dependable estimate of the progress and cost to complete –Have reasonable assurance of collectibility of contract price Provides a better measure of periodic incomeProvides a better measure of periodic income Avoids the fluctuations in revenues, expenses & incomeAvoids the fluctuations in revenues, expenses & income

Income Determination: recognition basis Completion-of-Production Basis --Completion-of-Production Basis -- Completed-Contract Method –Revenue & gross profit from long-term construction are recognized only when the contract is completed. Construction costs are accumulated in an inventory account and progress billings are accumulated in a contra inventory account Net Realizable Value –Immediate marketability –Unit interchangeability –Difficulty determining cost Known or determinable revenuesKnown or determinable revenues Inability to determine costs and therefore defer expense recognition until saleInability to determine costs and therefore defer expense recognition until sale

Income Determination: recognition basis Cash Collection Basis --Cash Collection Basis -- Installment & Cost Recovery Methods –Absence of a reasonable basis for estimating degree of collectibility Level of uncertainty with respect to collection of the receivable precludes recognition of gross profit before cash is receivedLevel of uncertainty with respect to collection of the receivable precludes recognition of gross profit before cash is received

Recognizing “a sale in the ordinary course of business”: Sales Basis Criteria Sale with a right of returnSale with a right of return Product financing arrangementProduct financing arrangement Real estate saleReal estate sale Sales-type leaseSales-type lease Sale of receivables with recourseSale of receivables with recourse Nonmonetary exchangeNonmonetary exchange Sale-leaseback transactionSale-leaseback transaction Factors to Consider to recognize revenue Conditions that delay recognition

Sale with a right of return Factors to Consider to recognize revenue –Is the economic substance is a sale or financing arrangement? –Is the sales price determined? –Is the collection of the sales price probable? –What are the seller’s future obligations? –Are returns predictable? Conditions that delay recognition Sales price is not fixed or deteminableSales price is not fixed or deteminable Payment is excused until product is soldPayment is excused until product is sold Payment is excused if product is stolen or damagedPayment is excused if product is stolen or damaged Buyer does not have a separate economic substanceBuyer does not have a separate economic substance Seller is obligated to bring about a resale of the propertySeller is obligated to bring about a resale of the property Future returns are not predictableFuture returns are not predictable

Product Financing Arrangement Factors to Consider to recognize revenue –Are risks & rewards of ownership transferred? Conditions that delay recognition –Agreement requires repurchase at specified prices or provides compensation for losses

Real Estate Sale Factors to Consider to recognize revenue –Probability of collection –Seller continued involvement –Whether economic substance of the transaction is a sale of real estate or another type of transaction such as a service contract Conditions that delay recognition –Inadequate buyer investment in the property –Seller’s continuing obligations, such as participation in future losses, responsibility to obtain financing, construct buildings, or initiate or support operations

Sales-type lease Factors to Consider to recognize revenue –Transfer of benefits and risks of ownership –Probability of collection –Predictability of future unreimbursable costs Conditions that delay recognition –Inability to meet the conditions for real estate sales –Inability to meet specified conditions (4 criteria) indicating transfer of benefits and risks of ownership –Collection not predictable –Uncertainty about future unreimbursable costs

Sale of receivables with recourse Factors to Consider to recognize revenue –Isolation of transferred assets –Right to pledge or exchange transferred assets –Control of receivables Conditions that delay recognition –Transferred assets can be reached by transferor or its creditors –Transferee –S inability to pledge or exchange transferred assets –Control of receivables not surrendered due to repurchase or redemption agreement

Nonmonetary exchange Factors to Consider to recognize revenue Completion of the earnings processCompletion of the earnings process Conditions that delay recognition Exchanges of similar inventory or productive assetsExchanges of similar inventory or productive assets

Sale-leaseback Transactions Factors to Consider to recognize revenue Substance of the transactionSubstance of the transaction Portion of property leased backPortion of property leased back Length of leaseback periodLength of leaseback period Conditions that delay recognition All sale-leaseback transactions are financing transactions and not sales transactions unless leaseback covers only a small part of the property or is for a short period of timeAll sale-leaseback transactions are financing transactions and not sales transactions unless leaseback covers only a small part of the property or is for a short period of time