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Chapter 4

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ACTG 2010
Douglas Kong

Revenue RecognitionThere are two approaches to revenue recognition 1 The CriticalEvent Approach identifies a point in the earnings process as the appropriate time to recognize revenue That point is called the critical event and when the critical event occurs 100 of the revenue is recognized Eg delivery of goods to customers IFRS provides 5 criteria for identifying the critical approachSignificant risks and rewards of ownership have been transferred from the seller to the buyerThe seller has no involvement or control over the goods soldThe first two are called performance criteria meaning the seller has done most or all of what its supposed to do to be entitled to payment and the buyer has accepted the goodsCollection of payment is reasonably assuredThis is a collectability criteria the seller must have reasonable expectation of getting paidThe amount of revenue can be reasonably measuredCosts of earning the revenue can be reasonably measuredThis is a measurability criteria the entity must be able to measure the amount it has earned Revenue Recognition after Delivery some examples that could delay revenue recognition until after delivery areWarranty costs a promise by a seller or producer of a product to correct specified problems with the product Returns if a company cant estimate the amount of goods customers will return it should wait until the end of the return period to recognize revenueCash Collection if a reasonable estimate of the amount that will be collected isnt possible collection becomes a critical event Consignm
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