Revenue Recognition

download Revenue Recognition

of 41

  • date post

  • Category


  • view

  • download


Embed Size (px)


Revenue & Recognition

Transcript of Revenue Recognition

Spring Garden

Powerpoint Templates

Revenue & RecognitionRidhollah Muhammad A.Monica Putri S.RenySuwondoYudi Dwiprasanto

Powerpoint TemplatesPage #Previewrevenue reflects the firm's past operations and is used to predict future performancedifferent business modelsdifferent measurementrevenue recognition as an area where improved guidance is neededPowerpoint TemplatesPage #Nature of revenuePowerpoint TemplatesPage #Definition of Revenueassociates with factors that create revenuethe gross increase in the value of assets and capitalcreated predominantly by the production and sale of the output of the entity (main operations of the business)

Powerpoint TemplatesPage #the physical and the monetary flowswhich of the four constitutes the essence of revenue?Powerpoint TemplatesPage #Based on the implications of the ideal case, revenue must be directly related to the monetary event (an increase or flow), not an object , of value increasing in the firm, which arises out of production or sale of outputthe Paton and Littleton: revenue is :the `product of the enterprise => the physical flowrepresented by the flow of funds from the customers

Powerpoint TemplatesPage #Definition of RevenueIAS 18/AASB 118 Revenue, paragraph 7:Revenue is the gross inflow of economic benefits during the period arising in the course of the ordinary activities of an entity when those inflows result in increases in equity, other than increases relating to contributions from equity participants. In the AASB Framework, paragraph 74:The definition of income encompasses both revenue and gains. Revenue arises in the course of the ordinary activities of an entity and is referred to by a variety of different names including sales, fees, interest, dividends, royalties and rentparagraph 77:Assets received or enhanced by income may include cash, receivables and goods and services received in exchange for goods and services suppliedIn the United States, the FASB defines revenues: Revenues are inflows or other enhancements of assets of an entity or settlements of its liabilities (or a combination of both) during a period from delivering or producing goods, rendering services, or other activities that constitute the entity's ongoing major or central operations.Powerpoint TemplatesPage #elements of income ongoing major or central operations (FASB)peripheral or incidental transactions (FASB)IASB: no different in nature so they are not considered a separate element in the FrameworkMartin: no reason that revenues and gains should not follow the same rules for their recognition and measurement. Fundamentally, be represent increases in net assets and they should therefore be treated identicallyPowerpoint TemplatesPage #Behavioural View of RevenueRevenue generally comes about because the entity does something to make it happen or undertakes certain activitiesRevenue is not simply a sum of money

Powerpoint TemplatesPage #Behavioural View (cont..)that revenue and profit accrue throughout the earning processthere is a continual change in value of the total assets and capital as the firm undertakes the activities specified in the processThis definition conforms with the theoretical view already mentionedContrast toThe FASB's definition of revenue:`the inflows or other enhancements of assets of an entity or settlements of its liabilities' due to `delivering or producing goods, rendering services'Powerpoint TemplatesPage #Recognition of Revenue(Historical Perspective)19th century, Income (profit)increase in net worthMay stated: realisation postulate was not accepted prior to the First world War. In 1913, leading authorities in all these fields in England and America seemed to agree on the increase in net worth concept of incomeIncrease in net worth income had to be realised because the use of specialised non-current assetsPowerpoint TemplatesPage #In Australia, Jordan CJ said:The word income is not a term of art, and what forms of receipt, and what ascertain how much of those receiptsas income, must be determined in accordance with the ordinary concepts and usages of mankind,

Ryan, the ordinary concepts of mankind :Remuneration for personal servicesIncome from propertyIncome from carrying on businessExclude receipt which were of a capital naturePowerpoint TemplatesPage #Hughes declared:It is of the essence of income that it should be realised. Income necessarily implies separation and realisation. The increase of the forests is not income until it is cut. The increase in the value of lands due to the growth and prosperity of the community is not income until it is realised. Where investments are concerned, there is no income until there has been a separate, realised gainTwo cases in Australia (foreign exchange gain):The company borrowed funds in the US as an injection of capital. On repayment, the gaincapitalPayments for goods delivered in the previous year. The gainprofitIAS, the most exchange rate gains on a long term debt (or receivables) be recognised in profit or loss of the period in which they arise

Powerpoint TemplatesPage #In the US, appraisal valuations in the 1920s contributed in part to the Great Depression of the 1930s

Accountants adopted a conservative attitude and the recognition or realisation principle was an outcome of this defensive posture

Realisation occurred in 1932, special committee supported the realisation criterion and rejected the asset appraisalPowerpoint TemplatesPage #Criteria for Revenue RecognitionAt what point during the earning process can revenue be recorded as earned because there is sufficient evidence?

Revenue recognition may take places at a number of stages in a firms operatingPowerpoint TemplatesPage #Powerpoint TemplatesPage #Based on the need for objective evidence, there are three criteria:

Measurability of Asset ValueExistence of a transactionSubstantial Completion of The Earning ProcessPowerpoint TemplatesPage #Measurability of Asset ValueRevenue is mainly an inflow that increases the value of the total assetsFair value measurement also focuses on the enhancement of assets,without any actual or physical inflow of assets (Holding the Assets)Fair valueconsistent with the accrual accounting approach, but inconsistent with historical cost conservatism and the realisation concept.

Powerpoint TemplatesPage #Measurability of Asset ValueRecognition of changes in asset values is less of an issue where there are ready markets for asset, ex. SharesIt becomes problematic where market value are not readily available, or the asset in use is greater than its carrying valuePowerpoint TemplatesPage #Analysis of Criteria for Revenue RecognitionMeasurability of asset valueExistance of a transactionSubstantial completionCriteriaPowerpoint TemplatesPage #Measurability of asset valueRevenue >> increase value of total asset, increase in equity >> ReasonableNo inflow >> objectively? >> IAS 39, 40, 41 >> conservatismFair value accounting consistent with accrual, but inconsistent with conservatism

Powerpoint TemplatesPage #Measurability of asset valueMust asset be liquid? FASB >> Revenue is recognized when realised or realizablemust be liquid? YESwhy?Recognition vs Realisation

CollectabilityResolving uncertainty assosiated with realisationBased on experienceThe longer collectibility period, the more uncertain

Powerpoint TemplatesPage #EXISTANCE OF A TRANSACTIONnnPowerpoint TemplatesPage #EXISTANCE OF A TRANSACTIONPresently, except in spesified cases, the firms must be direct participated in the transaction >> historical cost is the most feasible.Critics from CCA and EPA, the firm doesnt need to be a party, but the market transaction is sufficient >> gain is recorded before the saleE.g. wheat and barleyWhy is it allowed? Sufficient objective evidence In some cases it is not reliable, but we cannt demand that in all cases the firm must be a direct participant.

Powerpoint TemplatesPage #SUBSTANSIAL COMPLETIONNot explicitly stated in frameworkRevenue is not generated (earned) until the firm has performed most of the activities for which the firms earns revenueSigning contract?A number of activities?Powerpoint TemplatesPage #Guidance From Standard SettersRecognition:

it is probable that any future economic benefit associated with the item will flow to or from the entity; andthe item has a cost or value that can be measured with reliability.

IASB Framework

Powerpoint TemplatesPage #Measurement:Revenue shall be measured at the fair value of the consideration received or receivable

Fair Value:is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arms length transaction.

IAS 18Powerpoint TemplatesPage #Transactions create Revenues:the sale of goods;the rendering of services; andthe use by others of entity assets yielding interest, royalties and dividends.Powerpoint TemplatesPage #The Sale of GoodsRevenue Shall be recognized when:Transferred significant risks and rewards of ownershipretains neither continuing managerial involvement nor effective controlcan be measured reliablyProbable economic benefitsthe costs incurred or to be incurred can be measured reliablyPowerpoint TemplatesPage #WHAT IS SALE?The verifiable evidence of revenue often consists of an external sales transaction, so that revenue cannot usually be recognised before the point of saleMartinPowerpoint TemplatesPage #Exceptions to sales basisDuring production Percentage of Completion MethodEnd of productionCash received after sale instalment method & cost recovery method

Powerpoint TemplatesPage #Percentage of Completion Method.. Is appropriate only when reasonably reliable estimates can be made..

Three ways to determine it:Proportion of cost incurred to es