10 Revenue_Recognition 1 - 10 RevenueRecognitionI...

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Revenue Recognition I Revenue Recognition I Accountancy 301 Spring 2011 Flora Zhou 10
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Agenda Agenda • Revenue recognition – The general principles – Revenue recognition principles for long-term  construction contracts • Percentage-of-completion method • Completed contract method (next class) – Revenue recognition principles for multiple  deliverables (next class) – Earnings management issues (Feb 22) – Amazon case due Feb 24 
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Revenue recognition principles Revenue recognition principles     Revenues can be recognized when they are: Realized (realizable) – There is persuasive evidence of an arrangement for customer  payment – The price is fixed or determinable – Collection is reasonably assured Earned: the underlying earnings process is complete or  substantially complete – Sale of product:  at time product is shipped  or delivered – Sale of service: at time service is performed – Use of property:  with passage of time  (example: rent or interest) In substance, the revenue recognition principles  focus on the  risks and rewards -when has the entity  sufficiently reduced the risk that the transaction will  fail to result in a completed revenue.
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Revenue recognition principles Revenue recognition principles     Time of sale is used  in most industries
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Complications with revenue  Complications with revenue  recognition recognition No general standard for revenue recognition and little  guidance for service activities Over 200 pieces of  ad hoc  guidance that are hard to  retrieve and sometimes inconsistent As business models evolve, selecting the appropriate  rules becomes more difficult, since much of the existing  guidance is transaction-specific or industry-specific Non-comparability between entities and industries, with  little information to assist in identifying and adjusting  for the differences. Revenue recognition is the most frequent reason of  public companies’ financial restatements in recent years
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Revenue recognition applications Revenue recognition applications 1. Goods shipped on consignment: A software manufacturer (seller) ships 100,000  copies of a new video game to distributors, charging  $50 per copy. Under terms of the signed agreement,  distributors have the right (a) to return unsold  copies of the video game and (b) not to pay the  seller until they resell the product to final customers  through their retail outlets. The software  manufacturer wants to recognize $5,000,000 of  revenue upon delivery of the video games to the  distributors. Can the company do this?
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Revenue recognition applications  Revenue recognition applications  (cont.) (cont.) 2. Nonrefundable up-front fees:
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10 Revenue_Recognition 1 - 10 RevenueRecognitionI...

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