R adopts the position that its revenues are earned

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- r adopts the position that its revenues are earned when its products are shipped and the risks rewards of the merchandise passes to its customers. At that point, Pfizer has done everything • . d and, thus, recognizes the sale in the income statement. Most companies recognize revenues - g these same criteria. Pfizer does not recognize revenues for the gross selling price. Instead, - er deducts that portion of gross sales that is likely to be refunded to customers through sales
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5-7 Module 5 I Revenue Recognition and Operating Income rebates, discounts and incentives (including volume purchasesr.Pfizer estimates the likely cost of those price reductions and deducts that amount from gross sales. Similarly, Pfizer does not recognize revenues for those products that it estimates will be returned, possibly because the drugs hit their expiration date before they are sold by Pfizer's customers. In sum, Pfizer recognizes revenues for products delivered to customers, and for only the sales price net of anticipated discounts and returns. This is why we often see "Revenues, net" on companies' income statements. IFRS INSIGHT Revenue Recognition and IFRS Revenue is generally recognized under both U.S. GAAP and JFRS when the earning process is r complete (when the seller has performed all obligations under the sales arrangement and no performance obligations remain) and benefits are realized or realizable. Further, there is extensive guidance under U.S. GAAP for specific industry transactions. That guidance is not present in IFRS. Moreover, public companies in the U.S. must follow additional guidance set by the SEC. Many believe that companies recognize revenue slightly earlier under IFRS than under GAAP. Revenue Recognition and Risk Exposure More than 70% of SEe accounting and auditing enforcement actions involve misstated revenues. The SEe's concern about aggressive (premature) revenue recognition prompted the issuance of a special Staff Accounting Bulletin (SAB) 101 on the matter. The SEe provides the following examples of problem areas to assist companies in properly recognizing revenue: Case J: Channel stuffing. Some sellers use their market power over customers to induce (or even require) them to purchase more goods than they actually need. This practice, called channel stuffing, increases period-end sales and net income. If no side agreements exist for product returns, the practice does not violate GAAP revenue recognition guidelines, but the SEe contends that revenues are misrepresented and that the practice is a violation of securi- ties laws. Case 2: Barter transactions. Some barter transactions are concocted to create the illusion of revenue. Examples include the advertising swaps that dot-corn companies have sometime engaged in, and the excess capacity swaps of fiber optic communications businesses. The advertising swap relates to the simultaneous sale and purchase of advertising. The exces capacity swap relates to a company selling excess capacity to a competitor and, simultane- ously, purchasing excess capacity from that competitor. Both types of swaps are exchange:
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