Revenue Recognition Ppp

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    1. Identify the primary criteria for revenuerecognition.

    2. Apply the revenue recognition concepts

    underlying the examples used in SAB 101.3. Record journal entries for long-term

    construction-type contracts using

    percentage-of-completion and completed-contract methods.

    Learning Objectives

    Continued

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    3

    4.Record journal entries for long-term service

    contracts using the proportional

    performance method.

    5.Explain when revenue is recognized after

    delivery of goods or services through

    installment sales, cost recovery, and cash

    methods.

    Learning Objectives

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    Both of these criteria

    generally are met at the

    point of sale.

    Revenue recognition mostoften occurs when goods

    are delivered or when

    services are rendered.

    Revenue Recognition

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    Revenue Recognition

    Criterion Associated With Revenue

    Recognition

    Criterion 1: The customer has providedpayment or a valid promise

    of payment.

    Criterion 2: The company has provideda product or service.

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    Revenue Recognition

    Before the point of Sale

    EXCEPTION:

    Revenue can be recognized

    prior to the point of sale i f:Customer provides a valid

    promise of payment ANDCriterion 1

    Criterion 2 conditions exist thatcontractually guarantee

    subsequent sale.

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    Revenue Recognition

    Point of Sale

    NORMALLY:

    Revenue is generally

    recognized at this point oftime.

    Criterion 1 is typically

    satisfied at this point.Criterion 1

    Criterion 2 Critical 2 is typically

    satisfied at this point.

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    Revenue Recognition

    After the Point of Sale

    EXCEPTION:

    The recognition of revenue

    must be deferred i f:

    Customer does not provide

    a valid promise at time of

    receipt of product or service

    OR

    Criterion 1

    Criterion 2 significant effort remains on

    the contract.

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    A product or service was provided withoutreceiving a valid promise of payment from

    customer. The company has not provided the product

    or service.

    Revenue Recognition

    Generally, revenue is not recognized prior tothe point of sale because either:

    An exception occurs when the customer provides

    a valid promise of payment and conditions exist

    that contractually guarantee the sale.

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    Revenue Recognition

    AICPA Statement of Position 97-2givescompanies more guidance through a checklist

    of four factors that amplify the two criteria:

    a. Persuasive evidence of an arrangementexists.

    b. Delivery has occurred.

    c. The vendors fee is fixed or determinable.

    d. Collectibility is probable.

    Earned

    Realised

    P i E id f

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    12Persuasive Evidence of anArrangement

    The SEC issued SAB 101

    in response to specific

    abuses involving revenuerecognition.

    P i E id f

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    SAB 101is in a question-

    and-answer format. The

    answers given areinvariably No.

    Persuasive Evidence of anArrangement

    P i E id f

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    14Persuasive Evidence of anArrangement

    Typical questions from SAB 101

    Question 1: Company A requires each sale to

    be supported by a written salesagreement signed by an

    authorized representative of

    both Company A and the

    customer.

    Addresses internal controls.

    Question 1: May Company A recognize

    revenue in the current quarter ifthe product is delivered by the

    end of the quarter but the sales

    agreement is not signed by the

    customer until a few days after

    the end of the quarter?

    ENTER

    P i E id f

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    15Persuasive Evidence of anArrangement

    Typical questions from SAB 101

    Question 2: Company Z delivers product to

    a customer on a consignmentbasis. May Company Z

    recognize revenue upon delivery

    of the product to the customer?

    Addresses the issue of circumventing

    internal controls by side agreements.

    16

    D li h d i

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    16Delivery has occurred or servicehas been rendered

    Typical questions from SAB 101

    Question 3: May Company A recognize

    revenue when it completesproduction of inventory for a

    customer if it segregates that

    inventory from other products in

    its warehouse?

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    D li h d i

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    17Delivery has occurred or servicehas been rendered

    Typical questions from SAB 101

    Question 4: Company R is a retailer that

    offers layaway sales tocustomers. A customer pays a

    portion of the sales price, and

    Company R sets the

    Focuses on issues centered on the

    bill-and-hold arrangements.

    Question 4: merchandise aside until the

    customer pays the remainder ofthe sales price, and takes

    possession of the merchandise.

    When should Company R

    recognize revenue?

    ENTER

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    18Delivery has occurred or servicehas been rendered

    bill-and-hold arrangements.

    In general, revenue should not be recognised

    in a bill-and-hold arrangement until the sellerhas transferred both legal ownership,

    evidence by the buyer taking title to the

    goods, and economic ownership, meaning

    that the buyer accepts responsibility for thesafeguarding and preservation of the goods.

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    19Delivery has occurred or servicehas been rendered

    Receipt of $100 cash as initial layaway payment:

    Cash 100

    Deposit Received from Customers 100Receipt of f inal $1,400 cash payment and delivery

    of goods to customer:

    Cash 1,400

    Deposit Received from Customers 100

    Sales 1,500

    Cost of Goods Sold 1,000

    Inventory 1,000

    Appropriate Layaway Accounting

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    20Delivery has occurred or servicehas been rendered

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    21Delivery has occurred or servicehas been rendered

    E.g. Seller Company receives $1,000 cash from

    a customer as the initial sign-up fee for a

    service. In addition to the sign-up fee, the

    customer is required to pay $50 per month for

    100 monthswhich is the economic life of this

    service agreement.

    Questions 5 & 6Deal with the seller

    receiving some up-front fee as well as

    subsequent periodic payments

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    22Delivery has occurred or servicehas been rendered

    Receipt of $1,000 cash as initial sign-up fee:Cash 1,000

    Unearned Initial Sign-Up Fees 1,000

    Receipt of f irst monthly payment of $50:

    Cash 50

    Monthly Service Revenue 50

    Partial recogni tion of the ini tial signup fee as

    revenue ($1,000/100 months):Unearned Initial Sign-Up Fees 10

    Initial Sign-Up Fee Revenue 10

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    23Delivery has occurred or servicehas been rendered

    Questions 7 & 9Deal with refundable

    fees. In summary, the non-refundable

    portion of the fees can be recognized on

    a monthly basis if the number ofrefunds can be reliably estimated.

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    Price is fixed or determinable

    Typical questions from SAB 101

    Addresses the difference between estimating

    the future impact of past events and

    estimating the future impact of future events.

    Question 8: Company A owns a building and

    leases it to a retailer. The annuallease payment is $1.2 million plus

    1% of all the retailers sales in

    excess of $25 million.

    Question 8: Should Company A estimate and

    recognize revenue associatedwith the 1% of sales over $25

    million on a straight-line basis

    throughout the year? ENTER

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    Reporting Revenue: Gross vs. Net

    Gross = Sales + commission

    Net = Commission only

    SAB 101 Gross is inapp rop r iate

    un less the seller actual ly took

    legal and econom ic ownersh ip of

    the goods being so ld.

    26Revenue Recognition Prior to

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    26Revenue Recognition PriortoProviding Goods or Services

    Completed-contract methodrecognizes all

    income when project is completed.

    Percentage-of-completion method

    recognizes revenue t