1、,Recognizing Revenue,Chapter 18,Intermediate Accounting12th EditionKieso, Weygandt, and Warfield,Prepared by Coby Harmon, University of California, Santa Barbara,Current Environment,Guidelines for revenue recognitionDepartures from sale basis,Revenue Recognition at the Point of Sale,Revenue Recognit
2、ion before Delivery,Revenue Recognition after Delivery,Sales with buyback agreementsSales when right of return existsTrade loading and channel stuffing,Installment-sales methodCost-recovery methodDeposit methodSummary of basesConcluding remarks,Percentage-of-completion methodCompleted-contract metho
3、dLong-term contract lossesDisclosuresCompletion-of-production basis,Revenue Recognition,One study noted restatements of revenue:Result in larger drops in market capitalization than other types of restatement.Caused eight of the top ten market value losses in a recent year.,Revenue recognition has be
4、en the largest source of public company restatements over the past decade.,The Current Environment,The revenue recognition principle provides that companies should recognize revenue,Guidelines for Revenue Recognition,The Current Environment,LO 1 Apply the revenue recognition principle.,when it is re
5、alized or realizable and when it is earned.,Sale of product from inventory,Type of Transaction,Rendering a service,Permitting use of an asset,Sale of asset other than inventory,Date of sale (date of delivery),Services performed and billable,As time passes or assets are used,Date of sale or trade-in,
6、Gain or loss on disposition,Revenue from interest, rents, and royalties,Revenue from fees or services,Revenue from sales,Description of Revenue,Timing of Revenue Recognition,Chapter 18,Chapter 18,The Current Environment,LO 1 Apply the revenue recognition principle.,Illustration 18-1,Revenue Recognit
7、ion Classified by Type of Transaction,Earlier recognition is appropriate if there is a high degree of certainty about the amount of revenue earned.Delayed recognition is appropriate if thedegree of uncertainty concerning the amount of revenue or costs is sufficiently high or sale does not represent
8、substantial completion of the earnings process.,Departures from the Sale Basis,The Current Environment,LO 1 Apply the revenue recognition principle.,Departures from the Sale Basis,The Current Environment,LO 1 Apply the revenue recognition principle.,Illustration 18-2,FASBs Concepts Statement No. 5,
9、companies usually meet the two conditions for recognizing revenue by the time they deliver products or render services to customers.,Departures from the Sale Basis,Revenue Recognition at Point of Sale (Delivery),LO 2 Describe accounting issues for revenue recognition at point of sale.,Implementation
10、 problems,Sales with Buyback AgreementsSales When Right of Return ExistsTrade Loading and Channel Stuffing,When a repurchase agreement exists at a set price and this price covers all cost of the inventory plus related holding costs, the inventory and related liability remain on the sellers books.* I
11、n other words, no sale.,Sales with Buyback Agreements,Revenue Recognition at Point of Sale (Delivery),LO 2 Describe accounting issues for revenue recognition at point of sale.,* “Accounting for Product Financing Arrangements,” Statement of Financial Accounting Standards No. 49 (Stamford, Conn.: FASB
12、, 1981).,Recognize revenue only if six conditions have been met.,Sales When Right of Return Exists,Revenue Recognition at Point of Sale (Delivery),LO 2 Describe accounting issues for revenue recognition at point of sale.,The sellers price to the buyer is substantially fixed or determinable at the da
13、te of sale.The buyer has paid the seller, or the buyer is obligated to pay the seller, and the obligation is not contingent on resale of the product. The buyers obligation to the seller would not be changed in the event of theft or physical destruction or damage of the product.,Recognize revenue onl
14、y if six conditions have been met.,Sales When Right of Return Exists,Revenue Recognition at Point of Sale (Delivery),LO 2 Describe accounting issues for revenue recognition at point of sale.,The buyer acquiring the product for resale has economic substance apart from that provided by the seller.The
15、seller does not have significant obligations for future performance to directly bring about resale of the product by the buyer.The seller can reasonably estimate the amount of future returns.,“Trade loading is a crazy, uneconomic, insidious practice through which manufacturerstrying to show sales, p
16、rofits, and market share they dont actually haveinduce their wholesale customers, known as the trade, to buy more product than they can promptly resell.”*,Trade Loading and Channel Stuffing,Revenue Recognition at Point of Sale (Delivery),LO 2 Describe accounting issues for revenue recognition at poi
17、nt of sale.,* “The $600 Million Cigarette Scam,” Fortune (December 4, 1989), p. 89.,Two Methods:Percentage-of-Completion Method.Rationale is that the buyer and seller have enforceable rights.Completed-Contract Method.,Most notable example is long-term construction contract accounting.,Revenue Recogn
18、ition Before Delivery,LO 2 Describe accounting issues for revenue recognition at point of sale.,Must use Percentage-of-Completion method when estimates of progress toward completion, revenues, and costs are reasonably dependable and all of the following conditions exist:,Revenue Recognition Before D
19、elivery,1. The contract clearly specifies the enforceable rights regarding goods or services by the parties, the consideration to be exchanged, and the manner and terms of settlement.2. The buyer can be expected to satisfy all obligations.3. The contractor can be expected to perform under the contra
20、ct.,LO 2 Describe accounting issues for revenue recognition at point of sale.,Companies should use the Completed-Contract method when one of the following conditions applies when:,Revenue Recognition Before Delivery,Company has primarily short-term contracts, or Company cannot meet the conditions fo
21、r using the percentage-of-completion method, or There are inherent hazards in the contract beyond the normal, recurring business risks.,LO 2 Describe accounting issues for revenue recognition at point of sale.,Measuring the Progress toward Completion,Most popular measure is the cost-to-cost basis.,L
22、O 3 Apply the percentage-of-completion method for long-term contracts.,Percentage-of-Completion Method,The percentage that costs incurred bear to total estimated costs, can be applied to the total revenue or the estimated total gross profit on the contract.,A) Prepare the journal entries for 2007, 2
23、008, and 2009.,Casper Construction Co.,LO 3 Apply the percentage-of-completion method for long-term contracts.,Percentage-of-Completion Method,Illustration:,LO 3 Apply the percentage-of-completion method for long-term contracts.,Percentage-of-Completion Method,Illustration:,LO 3 Apply the percentage
24、-of-completion method for long-term contracts.,Percentage-of-Completion Method,Illustration:,LO 3 Apply the percentage-of-completion method for long-term contracts.,Percentage-of-Completion Method,Illustration:,Companies recognize revenue and gross profit only at point of salethat is, when the contr
25、act is completed. Under this method, companies accumulate costs of long-term contracts in process, but they make no interim charges or credits to income statement accounts for revenues, costs, or gross profit.,Completed Contract Method,LO 4 Apply the completed-contract method for long-term contracts
26、.,LO 4 Apply the completed-contract method for long-term contracts.,Completed Contract Method,Illustration:,Illustration:,Completed Contract Method,LO 4 Apply the completed-contract method for long-term contracts.,Long-Term Contract Losses,LO 5 Identify the proper accounting for losses on long-term
27、contracts.,Two Methods:Loss in the Current Period on a Profitable ContractPercentage-of-completion method only, the estimated cost increase requires a current-period adjustment of gross profit recognized in prior periods.Loss on an Unprofitable ContractUnder both percentage-of-completion and complet
28、ed-contract methods, the company must recognize in the current period the entire expected contract loss.,Illustration: Loss on Profitable Contract,Long-Term Contract Losses,LO 5 Identify the proper accounting for losses on long-term contracts.,b) Prepare the journal entries for 2007, 2008, and 2009
29、assuming the estimated cost to complete at the end of 2008 was $215,436 instead of $170,100.,Casper Construction Co.,Long-Term Contract Losses,LO 5 Identify the proper accounting for losses on long-term contracts.,Illustration: Loss on Profitable Contract,Long-Term Contract Losses,LO 5 Identify the
30、proper accounting for losses on long-term contracts.,Illustration: Loss on Profitable Contract,Illustration: Loss on Unprofitable Contract,Long-Term Contract Losses,LO 5 Identify the proper accounting for losses on long-term contracts.,c) Prepare the journal entries for 2007, 2008, and 2009 assuming
31、 the estimated cost to complete at the end of 2008 was $246,038 instead of $170,100.,Casper Construction Co.,Long-Term Contract Losses,LO 5 Identify the proper accounting for losses on long-term contracts.,$683,438 678,500 = 8,438 cumulative loss,Illustration: Loss on Unprofitable Contract,Plug,Long
32、-Term Contract Losses,LO 5 Identify the proper accounting for losses on long-term contracts.,Illustration: Loss on Unprofitable Contract,Long-Term Contract Losses,LO 5 Identify the proper accounting for losses on long-term contracts.,Illustration: Loss on Unprofitable Contract,For the Completed-Cont
33、ract method, companies would recognize the following loss :,Construction contractors should disclosure:the method of recognizing revenue, the basis used to classify assets and liabilities as current (length of the operating cycle),the basis for recording inventory, the effects of any revision of est
34、imates, the amount of backlog on uncompleted contracts, and the details about receivables.,Disclosures in Financial Statements,Revenue Recognition Before Delivery,LO 5 Identify the proper accounting for losses on long-term contracts.,In certain cases companies recognize revenue at the completion of
35、production even though no sale has been made.,Completion-of-Production Basis,Revenue Recognition Before Delivery,LO 5 Identify the proper accounting for losses on long-term contracts.,Examples are: precious metals oragricultural products.,When the collection of the sales price is not reasonably assu
36、red and revenue recognition is deferred.,Revenue Recognition After Delivery,LO 6 Describe the installment-sales method of accounting.,Methods of deferring revenue: Installment-sales methodCost-recovery methodDeposit method,Generally Employed,Recognizes income in the periods of collection rather than
37、 in the period of sale.Recognize both revenues and costs of sales in the period of sale, but defer gross profit to periods in which cash is collected.Selling and administrative expenses are not deferred.,Installment-Sales Method,Revenue Recognition after Delivery,LO 6 Describe the installment-sales
38、method of accounting.,The profession concluded that except in special circumstances, “the installment method of recognizing revenue is not acceptable.”* The rationale: because the installment method does not recognize any income until cash is collected, it is not in accordance with the accrual conce
39、pt.,Acceptability of the Installment-Sales Method,*“Omnibus Opinion,” Opinions of the Accounting Principles Board No. 10 (New York: AICPA, 1966), par. 12.,Revenue Recognition after Delivery,LO 6 Describe the installment-sales method of accounting.,Recognizes no profit until cash payments by the buye
40、r exceed the cost of the merchandise sold.APB Opinion No. 10 allows a seller to use the cost-recovery method to account for sales in which “there is no reasonable basis for estimating collectibility.” In addition, FASB Statements No. 45 (franchises) and No. 66 (real estate) require use of this metho
41、d where a high degree of uncertainty exists related to the collection of receivables.,Cost-Recovery Method,Revenue Recognition after Delivery,LO 7 Explain the cost-recovery method of accounting.,Seller reports the cash received from the buyer as a deposit on the contract and classifies it on the bal
42、ance sheet as a liability.The seller does not recognize revenue or income until the sale is complete.,Deposit Method,Revenue Recognition after Delivery,LO 7 Explain the cost-recovery method of accounting.,Copyright 2007 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this
43、 work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copi
44、es for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.,Copyright,Measuring the Progress toward Completion,Cost-to-cost basis,LO
45、 3 Apply the percentage-of-completion method for long-term contracts.,Percentage-of-Completion Method,Illustrations 18-3,4,& 5,Costs incurred to date,Most recent estimate of total costs,=,Percent complete,Percent complete x Estimated total revenue =,Revenue to be recognized to date,Revenue to be recognized to date,Current-period Revenue,-,Revenue recognized in prior periods,=,
