FRF for SMEs—More Revenue Recognition Issues

U.S. GAAP includes provisions for recognizing revenues in connection with arrangements that have multi-deliverables.  ASU 2009-13 clarified those requirements by requiring a sales price to be assigned to each of the deliverables at the inception of an arrangement.

Under the FRF for SMEs, similar provisions will apply.  When a sales transaction includes the delivery or performance of multiple products, services or rights to use assets, and the delivery or performance occurs at different times, revenue recognition criteria will be applied to each of the deliverables.  A vendor of large appliances, for example, will ordinarily sell the product, charge additionally for delivery, and make warranty and/or maintenance agreements available for separate purchase.  Separate revenue recognition criteria would be applied to each of these deliverables.  For fixed fee warranty or maintenance agreements, revenue would be recognized over the term of the agreement, ordinarily on a straight line basis.

Investment income is recognized similar to U.S. GAAP.  Interest is recognized over time, royalties are recognized as they accrue under an agreement and dividends are recognized when a shareholder has the right to receive payment.

Revenue from the sale of goods is also recognized under this FRF similar to U.S.GAAP.  Revenue has to be earned by the transfer of ownership.  If a seller retains significant rights of ownership, the sale would not be recognized until those rights are transferred to the buyer.  Examples of retaining rights would include consignment sales, when a customer can unilaterally cancel a sale and when the seller is liable for a defective product or service not covered by a warranty agreement.

When performance of a sale includes more than one act, as in the case of a construction project, the percentage of completion method is used to recognize revenue.  Practically, however, a straight-line method of revenue recognition should be used unless there is some other method that better reflects performance of the project. Assuming that bonding underwriters will accept financial statements of construction companies using this FRF, the company may continue to use a percentage of completion method of revenue recognition and escape the laborious requirements of U.S. GAAP in the proposed ASU covering revenue recognition for contracts.

Recognition of revenue assumes the amount is measurable and that there is reasonable assurance of collection.  When uncertainty exists as to collectability, a separate provision should be made for the doubtful collectability.

Revenues reported in the statement of operations include only gross amounts that have economic benefit to the entity as a principal (or vendor) in a transaction.  Amounts collected for others, such as sales taxes would be excluded. This requirement presumes, then, sales taxes collected would be reported as a liability. 

Also like U.S. GAAP, an agent in a transaction will report only commissions as revenues.

Later this fall, I’ll present a four-webcast series on the FRF for SMEs.  You can obtain information and dates of presentation for these webcasts by clicking the “Live Webcasts” box on the left side of my home page, www.cpafirmsupport.com.

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by Larry Perry, CPA, CPA Firm Support Services, LLC - Larry has over 40 years experience as a CPA practitioner, author of accounting and auditing manuals, author and presenter of live staff training seminars and author of webcast and self-study CPE programs.  He is co-founder of CPA Firm Support Services, LLC (www.cpafirmsupport.com), an organization providing resources, training and consulting to smaller CPA firms.  Larry writes a weekly blog on AccountingWEB.com focusing on small audits, reviews and compilations.  He is currently developing documentation manuals and handbooks for small audits, reviews and compilations and related electronic practice aids.

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