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chapter18 - Revenue Recognition Principle Revenue...

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Slide 18-1 UCSB, Bob Anderson Revenue Recognition Chapter 18 Slide 18-2 UCSB, Bob Anderson Recognition is not the same as realization, although the two are sometimes used interchangeably in accounting literature and practice. Realization is the process of converting non-cash resources and rights into money and is most precisely used in accounting and financial reporting to refer to sales of assets for cash or claims to cash” (SFAC No. 3, par. 83). (text footnote No. 5 page 1001) IN ENGLISH: Recognize=record it Realize=Done (hopefully got the cash, but not necessarily) Revenue Recognition Principle Revenue is recognized when (1) it is realized or realizable (2) and earned If life were easy, that would be the end of it, but read the papers– revenue recognition is a major issue- that is why the SEC issued SAB 101 and why they are strictly enforcing it via the PCAOB, and why there have been so many restatements as a result of revenue recognition. Business practices make it complicated and we are going to talk about why and how to deal with it. Slide 18-3 UCSB, Bob Anderson Is there hair on it or not? Problems of implementation can arise because of 1. Sales with buyback agreements, 2. Revenue recognition when right of return exists, 3. Trade loading and channel stuffing, 4. Tied to other services or product sales, 5. Other factors Think about the transaction, ask yourself when was the revenue really earned (when did we do what it was we agreed to do and collection for this reasonably assured?). This logic will usually work. The SEC responded in SAB 101 & 104 and their response follows this logic: “The staff believes that revenue generally is realized or realizable and earned when all of the following criteria are met: Persuasive evidence of an arrangement exists,3 Delivery has occurred or services have been rendered,4 The seller's price to the buyer is fixed or determinable,5 and Collectibility is reasonably assured.6 Slide 18-4 UCSB, Bob Anderson Revenue Recognition Sale of product from inventory Type of Transaction Rendering a service Permitting use of an asset Sale of asset other than inventory Date of sale (date of delivery) Services performed and billable As time passes or assets are used Date of sale or trade-in Gain or loss on disposition Revenue from interest, rents, and royalties Revenue from fees or services Revenue from sales Description of Revenue Timing of Revenue Recognition Illustration 18-1, pg. 908 of text
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Slide 18-5 UCSB, Bob Anderson Sales with Buyback If there is a sale (even if there is a transfer of title) and the seller agrees to buy-back the product for an amount equal to the cost of the inventory and related holding cost---NO SALE But if the sellers buyback agreement is for less than the cost plus holding costs (which of course would be a “put” by the buyer), then it might need more careful consideration (i.e an allowance, which will be discussed more fully later) Slide 18-6 UCSB, Bob Anderson REMEMBER IF YOU DO NOT RECORD THE REVENUE, DO NOT RECORD THE COST!
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