Understanding Revenue Recognition and Criteria for Financial

School: Seneca College - Course: ACCOUNTING IAF620 - Subject: Accounting

Financial Reporting (pg. 330) Chap 17- Revenue ASPE *Snapshot! 17.1 Revenue defined Revenue recognition underpins the whole process of accrual accounting; it is the critical event from which almost everything else flows, including the recognition of expenses. For this reason, it is essential to develop a solid understanding of what constitutes revenue. ASPE 3400 definesrevenueas: the inflow of cash, receivables or other consideration arising in the course of the ordinary activities of an enterprise, normally from the sale of goods, the rendering of services, and the use by others of enterprise resources yielding interest, royalties and dividends. 17.2 Revenue recognition Under ASPE, revenue is recognized when the following criteria are met: • Performance is achieved.How performance is achieved depends on whether goods or services are sold. See below for additional information regarding performance. • Revenue can be reliably measured.Revenue can be reliably measured when the amount of consideration that the entity will receive in exchange for the goods or services being provided can be determined with certainty. • Collection is reasonably assured.Collection is reasonably assured when there is little risk that the customer will not remit the agreed amount of consideration in exchange for the goods or services purchased. DR Cash or accounts receivable XX CR Sales revenue XX To record sale of goods to customer. DR Cost of goods sold XX CR Inventory XX To record cost of goods sold related to customer sale assuming a perpetual inventory system. 17.2.2 Rendering of services and long-term contracts Determining when performance is achieved for the rendering of services and long-term contracts applies similar principles as for the sale of goods. However, rather than a point of delivery, revenue is recognized as the service or contract activity is performed. As a result, the point at which risks and rewards are transferred is determined using either of the following: • the percentage of completion method • the completed contract method

17.2.3 Revenue from interest, royalties, and dividends Interest,royalties, and dividends are different from other sources of revenue because there is no act that is performed by the seller. In general, revenue from these sources is recognized when the amount can be measured and is determined to be collectable. 17.2.4 Payments from a seller to a customer A seller may make payments to a customer, such as reimbursement of specific costs or a volume discount/rebate. In these situations, the payments are recognized as follows: • Any discounts and rebates are netted against the revenue from the sales to the customer. • Any reimbursement of specific costs incurred by the customer that provides an identifiable benefit to the seller is recognized as a separate cost incurred. • Any goods or services provided by the customer to the seller are treated as a separate transaction and considered an expense or asset purchase, depending on their nature.