AFS Revenue Recognition Slide Presentation

8/12/2019 AFS Revenue Recognition Slide Presentation

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Shoaib A. Qureshi | NUST Business School | Understanding Income Statement

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RevenueRecognition

Income is increases in economic benefits during theaccounting period in the form of inflows orenhancements of assets or decreases of liability thatresult in increase in equity IFRS Framework

The term income includes revenue and gains. Gains arisefrom peripheral or secondary activities.

Under the accrual method of accounting, revenue isrecognized when earned and expenses are recognizedwhen incurred.

Since accrual accounting does not necessarily coincidewith the receipt or payment of cash. Consequently, firmscan manipulate net income by recognizing revenueearlier or later or by delaying or accelerating therecognition of expenses.

Understanding Income Statementexplain the general principles of revenue recognition and accrual accounting,demonstrate specific revenue recognition applications and discuss the implications ofrevenue recognition principles for financial analysis


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IASB

RevenueRecognition

1. the entity has transferred to the buyer the significant

risks and rewards of ownership of the goods;

2. the entity retains neither continuing managerial

involvement to the degree usually associated withownership nor effective control over the goods sold;

3. the amount of revenue can be measured reliably;

4. it is probable that the economic benefits associated

with the transaction will flow to the entity; and

5. the costs incurred or to be incurred in respect of the

transaction can be measured reliably.



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FASB

RevenueRecognition

According to the Financial Accounting Standards Board

(FASB), revenue is recognized in the income statement

when:

(a) realized or realizable; and(b) earned.



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SEC

RevenueRecognition

There is evidence of an arrangement between the buyer

and seller.

The product has been delivered or the service has been

rendered.The price is determined or determinable.

The seller is reasonably sure of collecting money.



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SpecialCases

Long TermContracts

RevenueRecognition

The percentage-of-completion method and thecompleted-contract method are used for contractsthat extend beyond one accounting period, oftencontracts related to construction projects.

Percentage-of-completion method is appropriatewhen the projects cost and revenue can be reliablyestimated.

Accordingly, revenue, expense, and therefore

profit, are recognized as the work is performed.The percentage of completion is measured by thetotal cost incurred to date divided by the totalexpected cost of the project.



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SpecialCases

Long TermContracts

RevenueRecognition

The Completed-Contract method is used when theoutcome of a project cannot be reliably measuredor the project is short-term.

Accordingly, revenue, expense, and profit arerecognized only when the contract is complete.

Under either method, if a loss is expected, the lossmust be recognized immediately.

Under IFRS, if the firm cannot reliably measure the

outcome of the project, revenue is recognized tothe extent of contract costs, costs are expensedwhen incurred, and profit is recognized only atcompletion.



7/14Shoaib A. Qureshi | NUST Business School | Understanding Income Statement

15 Example: Revenue Recognition For Long-term Contracts



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SpecialCases

Long TermContracts

RevenueRecognition

As compared to the completed contractmethod, the percentage-of-completion methodis more aggressive since revenue is reportedsooner.

The percentage-of-completion method is moresubjective because it involves cost estimates.

However, the percentage-of-completionmethod provides smoother earnings andresults in better matching of revenues andexpenses over time.

Cash flow is the same under both methods.



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SpecialCases

InstallmentSales

RevenueRecognition

An installment sale occurs when a firm financesa sale and payments are expected to bereceived over an extended period.

If collectability is certain, revenue is recognizedat the time of sale using the normal revenuerecognition criteria.

If collectability cannot be reasonablyestimated, the installment method is used.

If collectability is highly uncertain, the costrecovery method is used.



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SpecialCases

InstallmentSales

RevenueRecognition

Under the installment method , profit isrecognized as cash is collected.

Profit is equal to the cash collected during the

period multiplied by the total expected profitas a percentage of sales.

The installment method is used in limitedcircumstances, usually involving the sale of realestate or other firm assets.

Under the cost recovery method , profit isrecognized only when cash collected exceedscosts incurred.




21 Example: Revenue Recognition For Installment Sales



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SpecialCases

InstallmentSales

RevenueRecognition

IFRS addresses when installment sale treatment isappropriate for certain real estate transactions.

Specifically, the date when title to the property istransferred and the date when the buyer acquires avested interest may differ.

Also, installment sale treatment may be requiredwhen the risks and rewards of ownership are nottransferred because the seller remains involved in

the property.Finally, significant uncertainty that the buyer cancomplete the transaction may require installmentsale treatment.


AFS Revenue Recognition Slide Presentation

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