Revenue Recognition

Topics: Generally Accepted Accounting Principles, Installment Sales Method, Balance sheet Pages: 3 (858 words) Published: April 19, 2008
Revenues are realized when goods and services are exchanged for cash or claims to cash (that is, receivables). Revenues are realizable when assets received in exchange are readily convertible to known amounts of cash or claims to cash. Revenues are earned when the entity has performed its duties to be entitled to compensation. There are 4 main transactions of this kind:

Revenue from selling inventory is recognized at the date of sale (usually interpreted as the date of delivery). Revenue from performing services is recognized when services have been performed and are billable. Revenue from permission to use company’s assets (e.g. interests for using money, rent for using fixed assets, and royalties for using intangible assets) is recognized as time passes or as assets are used. Revenue from selling an asset other than inventory is recognized at the point of sale. [edit]Revenue recognition criteria according to US GAAP

USSEC's SAB104 states that revenue generally is realized or realizable and earned when all of the following criteria are met: Persuasive evidence of an arrangement exists;
Delivery has occurred or services have been rendered;
The seller's price to the buyer is fixed or determinable; and Collectability is reasonably assured
[edit]Exceptions: revenues not recognized at delivery

The general rule says that revenue from selling inventory is recognized at the point of sale, but there are several exceptions. Buyback agreements: buyback agreement means that a company sells a product and agrees to buy it back after some time. If buyback price covers all costs of the inventory plus related holding costs, the inventory remains on the seller’s books. In plain: there was no sale. Returns: companies which cannot reasonably estimate the amount of future returns and/or have extremely high rates of returns should recognize revenues only when the right to return expires. Those companies which can estimate the number of future returns and have a relatively...
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