Chapter 4 - Income measurement.docx

Chapter 4 - Income measurement.docx - Chapter 4 Income...

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Chapter 4 – Income statement and the objectives of financial reporting Week 7 – November 2, 2015 Income Measurement Revenue Recognition An economic gain earned by an entity from providing goods and services to customers The issue is when does this economic gain actually “happen” – or get “recognized” in the financial statements (pg. 106) This decision impacts the amounts reported in the financial statements, financial ratios and possibly people’s perceptions of how the entity is performing. Guidelines for Revenue Recognition under IFRS and ASPE 5 criteria that should be met under ASPE and IFRS to recognize revenue 1. Performance has occurred and the significant rights and risks of ownership have been transferred to the buyer 2. The seller has no involvement or control over the goods sold 3. Collection of payment can be reasonably assured 4. The amount of revenue can be reasonably measured 5. Costs of earning the revenues can be reasonably measured 1 & 2 are performance criteria – usually met once customer purchases goods and takes delivery unless o Buyer has to resell the merchandise before the seller gets paid (i.e. Consignment goods, paintings, where goods are held but not bought) o The seller has to install the goods and the installation is a significant part of the purchase 3 is collectability – must have a reasonable expectation of getting paid or a reasonable estimate of how much can be collected must be able to be made 4 & 5 deals with measurability – the entity must be able to estimate the amount it has earned and the costs incurred to earn it (matching criteria). o I.e. warranty costs or returns – if can’t properly estimate, can’t recognize the revenues o Overall, there is a general bias to be more conservative and delay recognition of revenues under IFRS to reduce uncertainty and make the f/s more “reliable”, however also not practical to wait until all uncertainty is resolved. Choices need to be made. 2 different approaches to recognizing revenue 1. Critical-Event Approach 2. Gradual Approach
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Each approach applies to different types of transactions depending on the facts and circumstances The Critical Event Approach Identifies a particular point in the earnings process as the appropriate time to recognize revenues. This point is called the critical event (could be at the completion of
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