Int Acct Ch. 6: Revenue Recognition

What is Revenue?

(“Top Line” on the I/S) The amount we earn from providing goods/services

When do we recognize revenue (JE) (recognition principle)?

When we do whatever it is we’re supposed to do - NOT when we get the cash.

Step 1 for applying the revenue recognition principle

Identify the contract with a customer (written, oral, or can be implied) (C)

Step 2 for applying the revenue recognition principle

Identify the performance obligation(s) in the contract (PO)

Step 3 for applying the revenue recognition principle

Determine the transaction price (TP)

Step 4 for applying the revenue recognition principle

Allocate the transaction price to each performance obligation (TP → PO)

Step 5 for applying the revenue recognition principle

Recognize revenue when (or as) each performance obligation is satisfied (when/as the customer gets control of the asset).

Recognizing Revenue at a single point in time

When control of the good has passed upon delivery, the revenue is recognized at a single point in time.

5 tests for determining if control of a good has passed

Buyer obligation to pay seller, buyer has legal title to the asset, buyer has physical possession of the asset, buyer assumes risks and rewards of ownership, buyer has accepted the asset.

Recognizing revenue over a period of time

One of 3 criteria must be met: 1. the customer controls the benefit of sellers work as it is performed (EX: Season tickets). 2. The customer controls the asset as it is created (EX: Bathroom remodel). 3. The seller creates an asset that has no alternative use and they have the legal right to collect the payment. (EX: Custom cruise ship)

Determining progress toward completion

Output (amount completed out of total) or Input (How much spent relative to the collected total) based

Determining if there are Multiple (distinct) performance obligations

To be distinct, they must be both capable of being used by itself or in conjunction with something else, and seperately identifiable from other assets

How to identify if there is a contract

1. Commercial Substance, 2. Parties have to have approved it, 3. Rights have to have been established, 4. Payment terms are identified, 5. Probable that payment will be recieved

Prepayments

NOT Performance Obligations

Quality assurance warranties

Not a seperate PO (it’s just stating a product works)

Extended Warranties

Customer pays additional money ($) to extend the warranty. This is a seperate performance obligation

Options

Coupon for a future purchase is a seperate PO only if it gives a substantial discount

When given Standalone Prices…

Add them up to get total, divide Sa prices by total, multiply the percentage by the total Transaction Price

Variable Consideration

We don’t know the exact amount at the time of the sale; Bonus, rebate, discounts may impact final price.

Right of Return

Return JE: DR. Sales Return + Allowances, Inventory. CR. A/R, COGS

Principal or agent

Principal: who bears responsibility for asset record gross amount.

Agent: Only records the commission

Time Value of Money

Delay between the delivery of a good and the payment; the 1 party is financing the other, there will be both sales revenue and interest revenue

Discount on Notes Recievable

The holding account for interest we haven’t earned yet; Contra-Asset

Revenue estimation methods when sa prices aren’t available

Adjusted market assessment approach, Expected cost plus margin approach, residual approach

Adjusted market assessment approach

Look at competitors’ pricing

Expected cost plus margin approach

Cost of 200 + 300% margin

Residual (leftover as extra) approach

Total TP - sa prices had = sa price for remaining PO

Functional Licenses

Recognize revenue at a point in time (EX: Audiobooks, songs)

Symbolic Licenses

Recognize revenue over time (Keep promoting the brand for it to have value) (EX: NFL→NBC)

Franchises

Right-to-use for a period of time (EX: 5 years); recognize revenue over time.

PP+E: Recognize revenue when PPE is delivered

Training: Recognize revenue when training is performed (At a single point in time, but can depend)

Bill-and-hold arrangements

Seller sells goods, but doesn’t yet deliver them. They can still recognize revenue as long as:

1. Customer “controls” when it will be delivered

2. Valid reason for hold

Consignment Arrangements

Selling arrangement whereby the consignor transfers goods to another company (“consignee”) to sell, while retaining legal title to those goods.

Gift Cards

Transferable prepayments for a specified dollar value of goods or services to be delivered at a future date. Are deferred revenue liabilities until redeemed or viewed as unreedemable (broken).

Balance Sheet Disclosures

Seller Reports contract liabilities (paid before satisfying a PO) or contract assets (seller has a conditional right to recieve payment after satisfying a PO) on seperate lines of the B/S

Income Statement Disclosures

Seller is required to include any bad debt expense and any interest revenue or interest expense associated with significant financing components of long-term contracts in either the I/S or disclosure notes