Recognizing revenue under this FRF requires completion of performance of a transaction and reasonable assurance of collection of invoices and billings. Similar to U.S. GAAP, revenue must be earned or realizable to be recognized.
Specifically for the sale of goods, performance is achieved when the seller has transferred ownership of the goods to the buyer and the seller retains no continuing involvement in the goods transferred.
When services are provided under long-term contracts, performance should be determined under the percentage of completion method of the completed contract method. The method that best relates the revenue to the work performed should be used.
Achievement of performance occurs when:
- There is persuasive evidence of an arrangement.
- Goods have been delivered or services have been provided.
- The seller’s price is fixed or determinable.
Evidence of an arrangement: Business practices or prior transactions with a customer, side agreements, consignment sales, the right to return a product or requirements to repurchase a product may be indicators of whether an arrangement exists.
Delivery: Delivery generally occurs when a product is delivered to a customer’s facility or another specified site. As it is when recognizing revenue under other reporting frameworks, consideration of several factors may be necessary. Such factors include bill and hold agreements, required customer acceptance, layaway sales, non-refundable fees, licensing and other fees and who bears the risk of loss.
Seller’s price: Factors that should be considered to determine if a price if fixed or determinable include cancellable provisions, the right of return of a product, price protections or inventory credit arrangements and refundable fees for service agreements.
Other aspects of revenue recognition will be discussed in my next blog. Later this fall I will present four, two-hour webcasts on the FRF for SMEs. Additional information can be obtained by clicking the “Live Webcasts” box on the left side of my home page, www.cpafirmsupport.com