Kế toán, kiểm toán - Chapter 5: Income measurement and profitability analysis

INCOME MEASUREMENT AND PROFITABILITY ANALYSISChapter 5Revenue RecognitionRecord revenue when: Revenue and costs can be measured reliablyProbable that economic benefits will flow to sellerSeller has transferred the risks and rewards of ownership and doesn’t effectively manage or control the goodsThe stage of completion can be measured reliably (for services)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 IFRSRealization PrincipleRecord revenue when: ANDthere is reasonable certainty as to the collectibility of the asset to be received (usually cash).the earnings process is complete or virtually complete.Revenues are inflows or other enhancements of assets of an entity or settlements of its liabilities (or a combination of both) from delivering or producing goods, rendering services, or other activities that constitute the entity’s ongoing major or central operations.U.S. GAAPSEC Staff Accounting Bulletin No. 101 and 104Additional criteria for judging whether or not the realization principle is satisfied:Persuasive evidence of an arrangement exists.Delivery has occurred or services have been performed.The seller’s price to the buyer is fixed or determinable.Collectibility is reasonably assured. In addition to these four criteria, the SABs also pose a number of revenue recognition questions relating to each of the criteria.Revenue RecognitionRevenue recognition is often tied to delivery of the product from the seller to the buyer. Revenue Recognition at DeliveryRevenue is recognized at one specific point in time when all the revenue recognition criteria are satisfied.Recognize RevenueIs the Seller a Principal or Agent?PrincipalHas primary responsibility for delivering product or service and is vulnerable to risks associated with delivery and collection.AgentDoes not have primary responsibility for delivering product or service but acts as a facilitator that earns a commissionRecognizes as revenue the gross (total) amount received from a customer.Recognizes as revenue the net commission it receives for facilitating the sale.Revenue Recognition after DeliveryUnder U.S. GAAP, when there is exceptional uncertainty:Installment Sales MethodProfit Deferral MethodRecognizing revenue when goods and services are delivered as described in the previous section assumes we are able to make reliable estimates of amounts due from customers that might potentially be uncollectible. Under IFRS, when there is significant uncertainty regarding collectibility, revenue and expense recognition should be delayed until the recognition criteria can be satisfied.Installment SalesOn November 1, 2013, the Belmont Corporation, a real estate developer, sold a tract of land for $800,000. The sales agreement requires the customer to make four equal annual payments of $200,000 plus interest on each November 1, beginning November 1, 2013. The land cost $560,000 to develop. The company’s financial year ends on December 31. Installment Sales IFRS Method for Significant Uncertainty in Collectibility Installment Sales MethodGross Profit $240,000 ÷ $800,000 = 30%Installment Sales MethodThis entry records the realized gross profit by adjusting the deferred gross profit account.Profit Deferral MethodOn November 1, 2013, the Belmont Corporation, a real estate developer, sold a tract of land for $800,000. The sales agreement requires the customer to make four equal annual payments of $200,000 plus interest on each November 1, beginning November 1, 2013. The land cost $560,000 to develop. The company’s fiscal year ends on December 31.Profit Deferral MethodRight of ReturnIn most situations, even though the right to return merchandise exists, revenues and expenses can be appropriately recognized at point of delivery.Estimate the returnsReduce both sales and cost of goods soldConsignment SalesSometimes a company arranges for another company to sell its product under consignment. Because the consignor retains the risks and rewards of ownership of the product and title does not pass to the consignee, the consignor does not record a sale until the consignee sells the goods and title passes to the eventual customer.Revenue Recognition Prior to DeliveryPercentage-of-Completion MethodCompleted Contract Method (under U.S. GAAP)Cost Recovery Method (under IFRS)Long-term ContractsPercentage-of-Completion, Cost Recovery, and Completed Contract Methods ComparedAt the beginning of 2013, the Harding Construction Company received a contract to build an office building for $5 million. The project is estimated to take three years to complete. According to the contract, Harding will bill the buyer in installments over the construction period according to a prearranged schedule. Information related to the contract is as follows:Accounting for the Cost of Construction and Accounts ReceivableUnder the percentage-of-completion, cost recovery, and completed contract methods, all costs of construction are recorded in an asset account called construction in progress. Gross Profit Recognition—General ApproachGross Profit Recognition—General ApproachThe same journal entry is recorded to close out the billings on construction contract and construction in progress accounts under the percentage-of-completion, cost recovery, and completed contract methods.Timing of Gross Profit Recognition Under the Percentage-of-Completion MethodUnder the percentage-of-completion method, profit is recognized over the life of the project as the project is completed. We determine the amount of gross profit recognized in each period using the following logic:Percentage-of-Completion Method Allocation of Gross ProfitPercentage-of-Completion Method Allocation of Gross ProfitNotice that the gross profit recognized in each period is added to the construction in progress account.Percentage-of-Completion Method Allocation of Gross ProfitThe income statement for each year will report the appropriate revenue and cost of construction amounts. Timing of Gross Profit Recognition Under the Completed Contract MethodUnder the completed contract method, all revenues and expenses related to the project are recognized when the contract is completed. Income RecognitionThe same total amount of profit or loss is recognized under the percentage-of-completion, cost recovery, and completed contract methods, but the timing of recognition differs.Statement of Financial Position RecognitionThe balance in the construction in progress account differs among the methods because of the earlier gross profit recognition that occurs under the percentage-of-completion method. Statement of Financial Position RecognitionBillings on construction contract are subtracted from construction in progress to determine balance sheet presentation.CIP > BillingsAssetBillings > CIPLiabilityLong-term Contract LossesPeriodic Loss for Profitable ProjectsDetermine periodic loss and record loss as a credit to the construction in progress account.Software and Other Multiple Deliverable ArrangementsUnder IFRS, if a sale includes multiple elements (software, future upgrades, post contract customer support, etc.), the revenue should be allocated to the various elements based on the fair values of the individual elements. Under U.S. GAAP, multiple-deliverable software arrangements had to have “vendor-specific objective evidence” (“VSOE”) of fair values of the individual elements in order to recognize revenue. Revenue is deferred until VSOE is available or until all elements of the arrangement are delivered.Software and Other Multiple Deliverable ArrangementsSellers offering other multiple-deliverable contracts now are allowed to estimate selling prices when they lack VSOE from stand-alone sales prices. Using estimated selling prices allows earlier revenue recognition than would be allowed if sellers had to have VSOE in order to recognize revenue. The FASB’s Emerging Issues Task Force (EITF) issued guidance to broaden the application of this basic perspective to other arrangements that involve “multiple deliverables,” such as sales of appliances with maintenance contracts, cellular phone contracts that come with a “free phone,” and even painting services that include sales of paint as well as labor. Franchise SalesInitial Franchise FeesGenerally recognized at a point in time when the franchisor has substantially performed all of the initial services required by the franchise agreement.U. S. GAAP vs. IFRSHas over 100 revenue-related standards that sometimes contradict each other. The IASB and FASB are working together on a comprehensive revenue-recognition standard.Has two primary standards that also sometimes contradict each other and that don’t offer guidance in some important areas (like multiple deliverables).The Boards appear committed to improving accounting in this area.Activity RatiosWhenever a ratio divides an income statement balance by a statement of financial position balance, the average for the year is used in the denominator.Profitability RatiosReturn on Equity Key ComponentsProfitabilityActivityFinancial LeverageThis is called the DuPont framework because the DuPont Company was a pioneer in emphasizing this relationship.DuPont FrameworkReturn on equity=Profit marginXAsset turnoverXEquity multiplierNet incomeAvg. total equity=Net incomeNet salesXNet salesAvg. total assetsXAvg. total assetsAvg. total equityThe DuPont framework helps identify how profitability, activity, and financial leverage trade off to determine return to shareholders:Return on equity=Return on assetsXEquity multiplierNet incomeAvg. total equity=Net incomeAvg. total assetsXAvg. total assetsAvg. total equityAppendix 5A: Interim ReportingIssued for periods of less than a year, typically as quarterly financial statements.Serves to enhance the timeliness of financial information.Fundamental debate centers on the choice between the discrete and integral part approaches.Interim ReportingReporting Revenues and ExpensesIAS No. 14 requires companies to apply the same accounting policies in its interim financial statements as its annual financial statementsReporting Unusual ItemsMajor events such as discontinued operations are reported entirely within the interim period in which they occur. Earnings Per ShareQuarterly EPS calculations follow the same procedures as annual calculations. Reporting Accounting ChangesAccounting changes made in an interim period are reported by retrospectively applying the changes to prior financial statements. Appendix 5A: Interim ReportingDisclosuresRecognition and reversal of impairment loss and write-downs. Purchase and disposal of property, plant, and equipment. Litigation settlements.Changes in accounting policies, accounting estimates, and correction of errors.Related party transactions. Changes in the classification of financial assets. Changes in contingent liabilities or contingent assets.Seasonal revenues, costs, and expenses.Issuance of debt and equity securities.Dividends paid.Changes in corporate structure such as business combinations, gain or loss of control of investments, restructurings, and discontinued operations.Unusual or infrequent items.Revenue Recognition: A Chapter SupplementCore Revenue Recognition PrincipleA company must recognize revenue when goods or services are transferred to customers in an amount that reflects the consideration the company expects to receive in exchange for those goods or services. Key Steps in Applying the PrincipleIdentify a contract with a customer.Identify the performance obligation(s) in the contract.Determine the transaction price.Allocate the transaction price to the performance obligations.Recognize revenue when each performance obligation is satisfied. Step 1: Identify the ContractUnder the proposed standard, we recognize revenue associated with contracts that are legally enforceable. Step 2: Identify the Performance Obligation(s)Performance obligations are promises to transfer goods or services to the buyer and are accounted for separately if they are distinct.A performance obligation is accounted for separately from other performance obligations if it is distinct, which is the case if either:The seller regularly sells the good or service separately, orA buyer could use the good or service on its own or in combination with goods or services the buyer could obtain elsewhereStep 2: Identify the Performance Obligation(s)If a seller integrates goods and services into one asset, they are viewed as providing an integration service that qualifies as a single performance obligation.A bundle of goods or services is viewed as a single performance obligation if both of the following are true:The goods or services in the bundle are highly interrelated and the seller provides a significant service of integrating them into a combined item.The bundle is significantly modified or customized for the customer. Step 3: Determine the Transaction PriceDetermining the transaction price is simple if the buyer pays a fixed amount immediately or in the near future. Variable ConsiderationTime Value of MoneyCollectibility of the Transaction PriceComplications in Determining Transaction PriceAccounting for Variable Consideration When it Can be Reasonably EstimatedAccounting for Variable Consideration When it Can be Reasonably EstimatedThe Time Value of MoneyIf the time value of money is significant, a sales transaction is viewed as including two parts: a delivery component and a financing component. The Time Value of MoneyStep 4: Allocate the Transaction Price to the Performance ObligationsIf an arrangement has more than one distinct performance obligation, the seller allocates the transaction price to the separate performance obligations in proportion to the standalone selling price of the goods or services underlying those performance obligations.Step 4: Allocate the Transaction Price to the Performance ObligationsStep 5: Recognize Revenue When Each Performance Obligation Is SatisfiedIn general, a seller recognizes revenue allocated to each performance obligation when it satisfies the performance obligation. Step 5: Recognize Revenue When Each Performance Obligation Is SatisfiedIf a performance obligation is not satisfied over time, it is satisfied at a single point in time, when the seller transfers control of goods to the buyer. Often transfer of control is obvious and coincides with delivery. In other circumstances, though, transfer of control is not as clear. End of Chapter 5