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Revenue Recognition
Revenue recognition GAAP
Information
Revenue journal entry occurs when recognized (not when realized)
-requires: realized/realizable & earned
Revenue Recognition Asset Usage (Asset with service contract)
Requirements Key
When asset used (amortized into revenue) FV = fair value
BV = book value
Asset Sale & Service Contract:
SP = selling price
Cash X (asset FV/SP)
COGS = cost of goods sold
Revenue X (asset BV)
GP = gross profit
Deferred Revenue X (asset FV/SP asset BV)
DGP = deferred gross profit
CIP = construction in progress
PV = present value
Service Performed/Earned: NR = note receivable
Revenue X (asset FV/SP asset BV) AR = account receivable
Deferred Revenue X (asset FV/SP asset BV) AP = account payable
Bg = beginning
Accumulated = up to now
Revenue Recognition Services
(I.E. cost incurred up to now)
Requirements
Performed
Invoice billable
Revenue Recognition Products/Disposed Asset
Information
Recognized at date of sale
Requirements
Goods delivery or goods set aside (on date of sale)
Transfer of legal title (on date of sale)

Revenue Life Insurance Proceeds

Life Insurance Proceeds from executive death:

Cash Received X (proceeds)
Cash Surrender Value (Asset) X (cash surrender value)
Other Revenue X (proceeds cash surrender value)

Unearned Revenue
Information
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Future income contracted/collected in advance

Not yet earned by time passage/other criteria
Short-term liability
Once earned it becomes revenue (i.e. advance cash receipts; royalties)
Certificates Sold (agreement of future performance)
Redeemed certificates decreases unearned revenue (revenue earned)
Lapsed (time ran out) certificates decreases unearned revenue (revenue earned)
Unearned Revenue Journal Entries/Calculation

Ending Unearned Revenue = bg unearned revenue + advance cash receipts revenue earned (current & prior year)

Unearned Revenue:
Cash X
Unearned Revenue X

Percentage Revenue Currently Earned:

Unearned Revenue X

( Total cashTotal
advance received months earned
months service is for )
Revenue X

Rent Non-refund Deposits Journal Entries

Rent Non-refund Deposits: (note: refundable deposits or deposits that can be offset to main balance are liabilities)
Cash X (Total deposit)

Deposits Revenue X ( TotalTotal deposit

years rent is for )
Unearned Deposits Revenue X
Total deposit
(Total deposit
Franchise Revenue
Total(Franchisors
years rent isBook)
for
prior deposit revenue )
Types
A. Initial Fee (earned via substantial performance)
Site selection
Supervision of construction
Bookkeeping service
Quality control
B. Continuing Fee (earned each period)
Management training
Promotion
Legal assistance
Earned Initial Fee Requirements
Franchisor no obligations to refund
Initial service performed (i.e. franchisees first operation day)
All other sale requirements are met
Other Methods: Installment & Cost Recovery Requirements
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Revenue collectible over extended period

No reasonable basis to estimate collectability

Initial Fee (Franchisor):

Cash X (down payment)
NR X
Premium (+)/Discount () X X (PV NR NR)
Unearned Revenue X (PV NR + down payment)

Initial Fee Earned (Franchisor):

Unearned Revenue X (down payment)
Revenue X (down payment)

NR Payment Received/Receipt (Franchisor):

Cash X (NR payment received discount, if any)
PV NRNR
Discount ()/ Premium (+) X X ( )
NR periods(i. e . years)
NR X (NR payment received premium, if any)

Multi-element Arrangement Revenue (process revenue)

Completed Process Method
Revenue recognized once completed
% Process Completed Method (FV allocation)
Requirements
Delivered item has value to customer (each process has a price)
Has return/refund right
Delivery/performance probable (controlled by seller)
Placing Price on each Process (price chosen rank)
1. SP of process if sold separately (vendor specific objective evidence)
2. SP of similar process from competitors (3rd party evidence)
3. SP best estimate

X Actual Process Price =

X Process Price
contract price
Totaled / all process prices ( X / Y / Z processes)

Sales
Sale Buy Backs (repurchase agreement)
Types
A. Forward Types unconditional obligation
Loan/lease financing transaction (repurchase SP)
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-explicitly stated/referenced
Revenue (repurchase < SP)
B. Call Option Types unconditional right
Loan financing transaction (repurchase SP)
Revenue (repurchase < SP)
Bill/Hold Sale (similar to consignee; just holder)
Revenue Recognition Requirements
Ownership risk passed
Buyer agree to buy
Fixed price/delivery date
Separated from main inventory (ready to ship)
Sales with Return Rights
Types
Full/partial refund
Store credit
Exchange for another product
Requirements
Sale price substantially fixed (date of sale)
Buyer assumes all risks/loss
Buyer paid consideration
Sale substantially complete
Potential future returns reasonably estimable
Exclude
Contingent sales (cash received depending on resale)

Sale Date:
AR/Cash X (sales)
Revenue X (sales)

Return Date:

Sale Return Allowance X (returns)

AR/Cash X (returns)

End Year Return Estimate:

Sale return Allowance X ([revenue prior returns] % return allowance)

AR/Cash X ([revenue prior returns] % return allowance)

Principle/Agent Revenue

As Principle Revenue: (i.e. Agent Company(s) assisted with service)

AR/Cash X (total revenue)

Agent(s) Revenue Due (liability) X (total revenue agent %)
Revenue (Principle) X (total revenue [1 agent %])
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As Agent Revenue:

AR/Cash X (total revenue)

Revenue X (total revenue)
Consignment Inventory Indicators (not revenue)
Controlled by another company
Transferable to 3rd party/returnable
Consignee no obligation to pay (excludes deposit payments)

Installment Sales
Information
Cash basis system
Deferred GP held for more than 12 months is contra asset
Excludes interest payments (within calculations)
Requirement
Installment sales material
Used when no reasonable basis to estimate collectability
Balance Sheet Presentation
AR is net of deferred GP
Requirements
Sufficient evidence of arrangement (signed contract)
Delivery/service occurred/rendered (risk/rewards transferred)
Price is fixed/determinable (non-contingent)
Collection reasonably assured (standard collection terms)
Earned GP
GP Total SalesCOGS(cost )
*GP % (current or prior) = =
Total Sales Total Sales
*Cash Collection (current or prior) = Current Year Down Payment + Current Cash Collected for NR

Current GP Earned = Current Cash Collection Current GP %

Prior GP Earned = Prior Cash Collection if any Prior GP %

Total Earned GP = Prior Earned GP if any + Current Earned GP

Unearned GP

*Prior/Bg Install AR = Total Prior Sales Total Pay/Collections (pertaining from year 1) Total Write offs (pertaining from year 1)
*Current/End Install AR = Total Current Sales Current Pay/Collections Current Write offs

Total Unearned GP = (Prior/Bg Install AR prior GP %) if any + (Current/End Install AR current GP %)

Total Unearned GP = Prior/Bg Unearned GP if any + Current/End Unearned GP

Journal Entries

Installment Sale:
Install AR X (Current/End Install AR)
Inventory X (Current Cash Collection GP %)
Deferred GP X (Current/End Install AR GP %)
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Recognize Revenue & Cash Collection:

Cash X (current cash collection)
Install AR X (current cash collection)

Deferred GP X (current cash collection GP %)

GP Revenue X (current cash collection GP %)

Revenue Recognition Contract

Information
Contract method changes reported retrospectively (disclosed if unusual & extraordinary)
Requirements
Sufficient evidence of arrangement (signed contract)
Delivery/service occurred/rendered (risk/rewards transferred)
Price is fixed/determinable (non-contingent)
Collection reasonably assured (standard collection terms)
Excluded
Price contingencies
Contract Methods (similar to selling inventory; different names)
Completed contract method
% completion contract method
Cost recovery method
Billings Reporting (balance sheet) (completed/% completion contract methods)
Current Asset: CIP > billings/retainer/deposits
Current Liabilities: CIP < billings/retainer/deposits

Completed Contract (GAAP only)

Information
Advantage: primarily based on final results
Disadvantage: no reflect matching principle if contract over 1 year
Requirements
Difficult to estimate costs
Many contracts in progress
Projects short-termed
Collections not assured
Loss Recognition
In year it is discovered
Billings Calculation

Current Asset (Liability) = Costs incurred up to now + Earned GP (if last year) Billings accumulated
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Steps
*SP = Estimate revenue + advance CIP
1. Bg DGP (loss) = SP Total Cost (cost incurred up to now & estimate costs)
-loss: stop here
1. (Redo for each year & each project)
-loss: stop here

Last Year/Contract Complete:

2. Current Earned GP = Bg DGP
3. Net Current Earned GP = Current Earned GP loss (from other project) if any
Journal Entries: (cost incurred (loss)/billings made/collections the same as % completion)

Cost Incurred: Loss: SP Total Cost (cost incurred up to now & estimate costs)
CIP X (cost incurred) Loss X (loss)
Cash/AP X (cost incurred) CIP X (loss)

Billings Made:
AR X (current billings)
Billings & Deposits (unearned revenue) X (current billings)

Collections:
Cash X (collections)
AR X (collections)

Revenue Recognized & Completion: (last year)

Billings & Deposits (unearned revenue) X (Total billings up to now)
Revenue Earned X (Total billings up to now)
% Completion Contract (same as IFRS)
Construction Expense X (Total cost incurred up to now)
Information

CIP Advantage: accurate via matching principle
X (Total cost incurred up to now)
Disadvantage: relies on estimates
Exception to basic realization principle
Income not measured by ordinary interim billings
Accrual method
Requirements
Profit reasonably estimable
Progress reliably measurable
Loss Recognition
Immediately recognition
Prior profit is reversed
Billings Calculation

Current Asset (Liability) = Costs incurred up to now + Earned GP accumulated Billings accumulated
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Steps (redo for each year & each project)

1. Bg DGP (loss) = SP Total Estimated Cost (cost incurred up to now & estimate costs to complete)
-loss: stop here (reverse prior earned GP, if any)
Total Loss = current loss + prior gains

Costs incurred up
2. % cost/work complete (accumulated) = now Or
Total contract costs

Costs incurred up
now
Total estimate costs

-Total contract cost = Cost incurred up to now + current estimate costs (cost to complete)

3. Earned GP accumulated (PTD) = Bg GDP % cost/work complete

4. DGP remaining = Bg GDP (1 % cost/work complete)
5. Current Earned GP = Earned GP accumulated (PTD) prior GP earned (prior PTD)
6. Current DGP = DGP remaining prior DGP
7. Net Current Earned GP = Current Earned GP loss (from other project) if any

Detail Calculation:

GP complete accumulated % = Contract price (100%) % cost complete

Journal Entries: (cost incurred (loss)/billings made/collections the same as completed contract)

Cost Incurred: Loss: SP Total Cost (cost incurred up to now & estimate costs)
CIP X (cost incurred) Loss X (loss)
Cash/AP X (cost incurred) CIP X (loss)

Billings Made:
AR X (current billings)
Billings & Deposits (unearned revenue) X (current billings)

Collections:
Cash X (collections)
AR X (collections)
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Revenue Recognized:
CIP X (Current Earned GP current cost incurred)
Construct Expense X (current cost incurred)
Revenue Earned X (Current Earned GP)

Billings & Deposits (unearned revenue) X (current billings)

CIP X (current billings)
Cost Recovery/Zero Profit Method (same as IFRS)
Information
Profit recognized when all cost has been recovered
Used when no reasonable basis to estimate collectability (justification)
Most conservative revenue recognition method
Journal Entries & Calculation

GP (Deficit) (Redo for each year) = Current Total Collections Current COGS Prior GP Deficit

Cost Recovery (CR) Sale:

CR AR X (CR Sale)
Inventory X (COGS/Total Estimated Cost)
Deferred GP X (GP)

Cost Recovery Collection:

Cash X (collection)
CR AR X (collection)

Recognize GP: (when cost is recovered)

Deferred GP X (Current & Prior Collections COGS = if: [current collection + prior collection] [COGS])
GPRevenue
RevenueRecognition IFRS X
Revenue Recognition Interest/Royalties/Dividends
Requirements
Revenue reliably measurable
Economic benefit probable
Revenue Recognition Services
Information
Uses percentage of completion method
Requirements
Revenue & cost reliably measurable
Economic benefit probable
Completion reliably measurable (at end of reporting period)
Revenue Recognition Products/Disposed Asset
Requirements
Revenue & cost reliably measurable
Economic benefit probable
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Transferred risk/reward
No ownership management/control over goods
Revenue Recognition Contract
Information
Uses percentage of completion method
Expected loss immediately recognized as expense
No completed contract method
Requirements
Revenue & cost reliably measurable (transaction)
Economic benefit probable
Cost & completion reliably measurable (at end of reporting period) (contract)
Revenue recognized = LE: [revenue] [cash collected cost*] (cost recovery method)
Contract Methods (similar to selling inventory; different names)
% completion contract method
Cost recovery method
Billings Reporting (balance sheet) (% completion contract methods)
Current Asset: CIP > billings/retainer/deposits
Current Liabilities: CIP < billings/retainer/deposits
% Completion Contract (same as GAAP)
Information
Advantage: accurate via matching principle
Disadvantage: relies on estimates
Exception to basic realization principle
Income not measured by ordinary interim billings
Accrual method
Requirements
Profit reasonably estimable
Progress reliably measurable
Loss Recognition
Immediately recognition
Prior profit is reversed
Billings Calculation

Current Asset (Liability) = Costs incurred up to now + Earned GP accumulated Billings accumulated

Steps (redo for each year & each project)

1. Bg DGP (loss) = SP Total Estimated Cost (cost incurred up to now & estimate costs to complete)
-loss: stop here (reverse prior earned GP, if any)
Total Loss = current loss + prior gains

Costs incurred up
2. % cost/work complete (accumulated)
= now Or
Total contract costs

Costs incurred up
now
Total estimate costs
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-Total contract cost = Cost incurred up to now + current estimate costs (cost to complete)

3. Earned GP accumulated (PTD) = Bg GDP % cost/work complete

4. DGP remaining = Bg GDP (1 % cost/work complete)
5. Current Earned GP = Earned GP accumulated (PTD) prior GP earned (prior PTD)
6. Current DGP = DGP remaining prior DGP
7. Net Current Earned GP = Current Earned GP loss (from other project) if any

Detail Calculation:

GP complete accumulated % = Contract price (100%) % cost complete

Journal Entries:

Cost Incurred: Loss: SP Total Cost (cost incurred up to now & estimate costs)
CIP X (cost incurred) Loss X (loss)
Cash/AP X (cost incurred) CIP X (loss)

Billings Made:
AR X (current billings)
Billings & Deposits (unearned revenue) X (current billings)

Collections:
Cash X (collections)
AR X (collections)

Revenue Recognized:
CIP X (Current Earned GP current cost incurred)
Construct Expense X (current cost incurred)
Revenue Earned X (Current Earned GP)

Billings & Deposits (unearned revenue) X (current billings)

CIP X (current billings)

Cost Recovery/Zero Profit Method (same as GAAP)

Information
Profit recognized when all cost has been recovered
Used when no reasonable basis to estimate collectability (justification)
Most conservative revenue recognition method
Journal Entries & Calculation
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GP (Deficit) (Redo for each year) = Current Total Collections Current COGS Prior GP Deficit

Cost Recovery (CR) Sale:

CR AR X (CR Sale)
Inventory X (COGS/Total Estimated Cost)
Deferred GP X (GP)

Cost recovery Collection:

Cash X (collection)
CR AR X (collection)

Recognize GP: (when cost is recovered)

Deferred GP X (Current & Prior Collections COGS = if: [current collection + prior collection] [COGS])
GP Revenue X