Revenue Recognition
The issue of revenue recognition practices is an area that has received a lot of attention from regulators. Whenever there is a report of financial restatements or negative earnings, regulators pay extra attention to review the financial statements in order to verify that that there are not any indications of financial fraud or that the organization overstepped their boundaries in the area of managed earnings. The reason that regulators have taken a special interest in financial accounting and potential fraud is due to the collapses of companies such as Enron, WorldCom and Tyco. Regulators and those in the accounting profession are focusing their efforts on the causes of fraud as well as the steps that can be taken to effectively detect and prevent a possible reoccurrence of fraudulent behavior especially in the area of revenue recognition and the overstatement of assets.
Revenue recognition refers to the time when transactions are recorded on the books, Per Generally Accepted Accounting Principles (GAAP), revenues, and gains, are generally recognized when: 1. Revenues are realized or are realizable 2. They have been earned the substantial completion of the activities involved in the earnings process.
Both of these items are typically met at the point of sale, which generally occurs when goods are delivered or when services are rendered to the customer. Usually revenues and assets are recognized simultaneously. However, assets can be received before the conditions of revenue recognition are met. One example would be if a customer pays in advance for goods or services which will be received at a later date. Even though the cash is received and is recorded as an asset in the company’s books, the revenue has not been earned. Typically the revenue is not recognized prior to a sale because either the customer has not paid for the goods yet or because the goods have not been delivered to the customer. The main exception to not recognizing revenue prior to a
Revenue recognition refers to the time when transactions are recorded on the books, Per Generally Accepted Accounting Principles (GAAP), revenues, and gains, are generally recognized when: 1. Revenues are realized or are realizable 2. They have been earned the substantial completion of the activities involved in the earnings process.
Both of these items are typically met at the point of sale, which generally occurs when goods are delivered or when services are rendered to the customer. Usually revenues and assets are recognized simultaneously. However, assets can be received before the conditions of revenue recognition are met. One example would be if a customer pays in advance for goods or services which will be received at a later date. Even though the cash is received and is recorded as an asset in the company’s books, the revenue has not been earned. Typically the revenue is not recognized prior to a sale because either the customer has not paid for the goods yet or because the goods have not been delivered to the customer. The main exception to not recognizing revenue prior to a
References: American Institute of Certified Public Accountants Accounting Standards Executive Committee Statement of Position 97-2, (1997) Software revenue recognition, p.08. FASB. (2012, October 13). Revenue recognition—joint project of the fasb and iasb. Retrieved from http://www.fasb.org/project/revenue_recognition.shtml Levitt, A. (1998, September 28). The numbers game. Retrieved from http://www.sec.gov/news/speech/speecharchive/1998/spch220.txt Parizek, G., & Findley, M. (2008). Charting a course: revenue reconition practices for toda 'ys business environment. Journal of Accountancy, 20(3), 15-22. SEC. (1999, December 3). Sec staff accounting bulletin: No. 101 – revenue recognition in financial statements. Retrieved from http://sec.gov/interps/account/sab101.htm U.S., SEC. (2002, October 13). Letter: 2000 audit risk alert to the american institute of certified public accountants. Retrieved from http://www.sec.gov/info/accountantts/staffletters/audrsk2k.htm