After completing chapter 3, students will be able to: When is it appropriate to recognize revenue before or after the point of sale? Revenue recognition details for long-term construction contracts, agricultural commodities, and installment sales; revenue principles for franchise sales, right of return, and “bundled” software sales; how the flexibility in GAAP for income determination invites managers to manipulate or manage earnings;. | Additional Topics in Income Determination Revsine/Collins/Johnson/Mittelstaedt/Soffer: Chapter 3 Learning objectives When is it appropriate to recognize revenue before or after the point of sale? Revenue recognition details for long-term construction contracts, agricultural commodities, and installment sales. Revenue principles for franchise sales, right of return, and “bundled” software sales. How the flexibility in GAAP for income determination invites managers to manipulate or manage earnings. The various techniques used to manage earnings. SEC guidance on revenue recognition designed to curb earnings management How error corrections and prior period restatements are reported. Key differences between IFRS and . GAAP rules for revenue recognition. Proposed changes that IASB and FASB are considering for contract-based revenue recognition. 3- Recall the criteria for revenue recognition Condition 1: The critical event in the process of earning the revenue has taken place. Condition 2: The amount of revenue that will be collected is reasonably assured and is measurable with a reasonable degree of reliability. Time of sale is used in most industries 3- Figure Revenue recognition prior to sale: Long-term construction projects Before construction begins, a formal contract has been signed. The buyer is assured and the contract price is specified. Consequently, both revenue recognition conditions are satisfied prior to the time of sale. Condition 1: The critical event is actual construction, thus revenue is earned over time as the project progresses toward completion. Condition 2: Measurability is satisfied because there’s a firm contract with a known buyer at a set price. In addition, construction costs can be estimated with reasonable accuracy so that expenses can be matched with revenues. Percentage-of-completion method: revenue is recognized in proportion to the “work done” each period. 3- Example: Solid Construction Corp. Contract price is . | Additional Topics in Income Determination Revsine/Collins/Johnson/Mittelstaedt/Soffer: Chapter 3 Learning objectives When is it appropriate to recognize revenue before or after the point of sale? Revenue recognition details for long-term construction contracts, agricultural commodities, and installment sales. Revenue principles for franchise sales, right of return, and “bundled” software sales. How the flexibility in GAAP for income determination invites managers to manipulate or manage earnings. The various techniques used to manage earnings. SEC guidance on revenue recognition designed to curb earnings management How error corrections and prior period restatements are reported. Key differences between IFRS and . GAAP rules for revenue recognition. Proposed changes that IASB and FASB are considering for contract-based revenue recognition. 3- Recall the criteria for revenue recognition Condition 1: The critical event in the process of earning the revenue has taken place. .
