Revenue Recognition Concepts and Criteria

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Questions and Answers

What is the GAAP definition of revenue?

Transaction profits

Increasing an asset or decreasing a liability (correct)

Only decreasing liabilities

Only increasing assets

When is revenue recognized under GAAP?

When it is realized or realizable and earned.

Match the SEC criteria to recognize revenue:

Evidence of an arrangement exists = 1 Goods delivered or services rendered = 2 Price is fixed or determinable = 3 Collectibility is reasonably assured = 4

Match the IFRS guidelines to recognize revenue:

Goods delivered or services rendered = 1 Price is fixed or determinable = 2 Collectibility is reasonably assured = 3 Signup and view all the answers

When does timing of revenue recognition occur?

Any of the above Signup and view all the answers

When is revenue recognized at product delivery?

At the time of sale. Signup and view all the answers

What are the journal entries for revenue recognition at product delivery?

Both A and B. Signup and view all the answers

When may revenue be recognized at service delivery?

At a single point in time or over several periods Signup and view all the answers

When must revenue be recognized for services performed at a single point in time?

Until final service is performed. Signup and view all the answers

What happens if payment is received before the final service?

Deferred as unearned service revenue. Signup and view all the answers

How is service revenue recognized over the service period?

Ratable over the service period. Signup and view all the answers

What is recognized by the Completed Contract Method?

Revenue and costs at the completion of the product. Signup and view all the answers

What is the disadvantage of long-term contracts regarding revenue recognition?

It may not accurately portray financial performance. Signup and view all the answers

What does Billings in Excess of Cost indicate?

Both A and B Signup and view all the answers

What is the Zero-Gross Profit Method?

A method where costs are debited and revenue credited for the same amount. Signup and view all the answers

What are the IFRS % of completion criteria?

Both A and B Signup and view all the answers

Study Notes

Revenue Recognition Concepts

Revenue is defined as an increase in assets or decrease in liabilities through delivering goods or services as part of ongoing operations.
Under GAAP, revenue is recognized when it is realized or realizable and earned.

Revenue Recognition Criteria

SEC requires evidence of an arrangement, delivery of goods/services, fixed price, and assured collectibility.
IFRS guidelines streamline criteria to delivery, fixed price, and assured collectibility.

Timing of Revenue Recognition

Revenue recognition can occur at the point of delivery, before delivery, or after delivery.

Revenue Recognition Modes

At product delivery, revenue is recognized when legal title shifts from seller to buyer. Journal entries include debiting cash or accounts receivable and crediting sales revenue, as well as accounting for cost of goods sold (COGS).
For service delivery, revenue recognition can occur at a single point in time or be spread over multiple periods, usually ratably.

Journal Entries for Revenue Recognition

In the case of service revenue, if payment is made in advance, use journal entries to reflect unearned revenue and service revenue accordingly.
When recognizing service revenue over a period, the same journal entry procedure is repeated until all unearned service revenue is recognized.

IFRS and Service Revenue Recognition

IFRS allows for revenue recognition at a single point, over a service period, or through percentage-of-completion methods.

Long-Term Contracts and Revenue Recognition

Long-term contracts can misrepresent financial performance if revenue is only recognized upon contract completion. Solutions include:
- Percentage-of-completion (most common method under both IFRS and GAAP).
- Completed contract method (used only when other options are unavailable).
- Zero product approach (specific to IFRS).

Completed Contract Method

Under this method, all revenue and costs are recognized only when the project is complete, suitable for short-term or immaterial contracts.

Cost and Billings Treatment

Costs in Excess of Billings appear as an asset on the balance sheet.
Billings in Excess of Costs are recognized as a liability, showing when billings surpass the costs incurred.

Zero-Gross Profit Method

This procedure involves recognizing actual costs and matching them with revenue; gross profit is recognized only at project completion.

Percentage of Completion Criteria

Under US GAAP, reliable measurements of completion, contract revenues, and costs are essential. All revenue recognition conditions must be met.

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Description

This quiz covers the key concepts of revenue recognition under GAAP and IFRS, emphasizing the criteria necessary for recognizing revenue. It also discusses the timing and modes of revenue recognition for both goods and services, providing an overview of journal entries related to these processes.