Special Cases of Revenue Recognition

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Special Cases of Revenue Recognition
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Criteria for revenue recognition

• Condition 1 Critical Event
• The critical event in the process of earning the
  revenue has taken place
• Condition 2 Measurability
• The amount that will be collected is reasonably
  assured and is measurable with a reasonable
  degree of reliability

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Percentage-of-completion Method

• Mainly used for long-term construction projects,
  such as roads and bridges, etc.
• Revenue is recognized BEFORE sales
• Reasons
• Condition 1 is satisfied as the project is built
• Condition 2 is satisfied with a known buyer and a
  set price.

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Example

• Signed on January, 1, 1999
• Contract price 1,000,000
• Estimated construction costs 800,000
• Estimated completion date Dec, 31, 2001

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Completed-transaction Method

• Mainly used in cases in which its not possible
  to determine expected costs with a high degree of
  reliability under long-term construction
  contracts.
• It defers recognition of income until the project
  is completed.

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Installment Sales Method

• Used in situations where sales are made under
  very extended cash collection terms and the risk
  of non-collection is unusually high.
• Critical event takes place only as the amounts
  due are received
• Amounts ultimately collected are not measurable
  with accuracy at the time of sale.

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Commodities

• Critical event happens prior to sale.
• Commodities are traded. So their price is widely
  available.

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Commodities

• Example
• Farmer harvests 110,000 bushels.
• Cost is 2 per bushel.
• Price at harvest is 3.5.
• Farmer sells 100,000 bushels at harvest.
• Price at the beginning of next year is 3.
• Farmer sells 10,000 bushels at the beginning of
  next year.

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Sales method

• Recognize revenue at the point of sale.
• Revenue is selling price times quantity.
• COGS per bushel is the same in both years.

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Production method

• Recognize revenue at the point of harvest.
• At the point of harvest, the unsold inventory is
  measured at the market price and market gain on
  unsold inventory is recognized.
• Adjust the value of your inventory when the price
  changes subsequently and recognize the associated
  holding gain or loss on speculation.
• COGS per bushel is the actual production cost if
  the commodities are sold at harvest and it is the
  market price if sold after harvest.