day 13 revenue 1 2009 spring v5 - Disclosure(I Dr.JamesGong...

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Revenue Recognition and  Disclosure (I) Dr. James Gong
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Learning Objectives At the end of this session, you should be able to: Explain what is revenue and the revenue recognition  principles in general Apply the percentage-of-completion method for long- term contracts
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What is Revenue?
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Definition of Revenues What are revenues?   Inflows of assets or settlements of liabilities from  delivering or producing goods, rendering  services, or other activities that constitute the  entity’s ongoing or major operations.  
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Why Revenue? Largest single item in financial statements  Revenue recognition is the most frequent  reason of public companies’ financial  restatements in recent years
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Revenue Recognition Challenge: Frequent Flyers Customers fly at this time Airlines get $A Free or discounted flights Should all of $A go to income statement? Why or why not? Where are the expenses associated with the future free or discounted flights?
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Revenue Recognition Challenge: Extended Warranties Sell warranty to customers for $A Promise to extend warranty beyond manufacturer’s warranty period Service of Extended Warranty Should all of $A go to income? Why or why not? Which portion is “unearned”? Manufacturer’s Warranty Period
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Conceptual Foundations of  Revenue Recognition Much of US GAAP for revenues was developed  before the Conceptual Framework.   Concepts Statements 5: revenue recognized when Realized / Realizable Have or will receive payment - cash or receivable. Earned Earnings process is complete (done what we have to do to get  paid). Concepts Statements 6: revenue recognized when Assets increases or liability decreases Balance sheet approach
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Accounting Standards of  Revenue 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 Principle SEC SAB 104 established four simple criteria: Persuasive evidence of arrangement Delivery has occurred Fixed or determinable sales price Sales proceeds have been collected or are reasonably  assured
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Recognition of Unearned  Recognition of Unearned  Revenue Revenue
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This note was uploaded on 11/08/2011 for the course ACCY 301 taught by Professor Staff during the Spring '08 term at University of Illinois, Urbana Champaign.

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day 13 revenue 1 2009 spring v5 - Disclosure(I Dr.JamesGong...

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