Kế toán, kiểm toán - Chapter 7: Revenue recognition

CHAPTER 7REVENUE RECOGNITIONINTERMEDIATE ACCOUNTINGPrinciples and Analysis 2nd EditionWarfield Weygandt Kieso Apply the revenue recognition principle.Describe accounting issues involved with revenue recognition at point of sale.Apply the percentage-of-completion method for long-term contracts.Apply the completed-contract method for long-term contracts.Describe the installment-sales and cost-recovery methods of accounting.Learning ObjectivesCurrent EnvironmentGuidelines for revenue recognitionDepartures from sale basisRevenue Recognition at Point of SaleRevenue Recognition before DeliveryRevenue Recognition after DeliverySales with buyback agreementsSales when right of return existsTrade loading and channel stuffingInstallment-sales methodCost-recovery methodDeposit methodSummary of basesPercentage-of-completion methodCompleted-contract methodCompletion-of-production basisRevenue RecognitionOne study noted restatements of revenue:Result in larger drops in market capitalization than other types of restatement.Caused eight of the top ten market value losses in a recent year.Of the ten companies, the leading three lost $20 billion in market value in just three days following disclosure.Revenue recognition has been the largest source of public company restatements over the past decade.The Current EnvironmentThe revenue recognition principle provides that companies should recognize revenueGuidelines for Revenue RecognitionThe Current EnvironmentLO 1 Apply the revenue recognition principle.when it is realized or realizable and when it is earned.Sale of product from inventoryType of transactionRendering a servicePermitting use of an assetSale of asset other than inventoryDate of sale (date of delivery)Services performed and billableAs time passes or assets are usedDate of sale or trade-inGain or loss on dispositionRevenue from interest, rents, and royaltiesRevenue from fees or servicesRevenue from salesDescription of revenueTiming of revenue recognitionThe Current EnvironmentLO 1 Apply the revenue recognition principle.Illustration 7-1Revenue Recognition Classified by Type of TransactionEarlier recognition is appropriate if there is a high degree of certainty about the amount of revenue earned.Delayed recognition is appropriate if thedegree of uncertainty concerning the amount of revenue or costs is sufficiently high or sale does not represent substantial completion of the earnings process.Departures from the Sale BasisThe Current EnvironmentLO 1 Apply the revenue recognition principle.Revenue Recognition AlternativesThe Current EnvironmentLO 1 Apply the revenue recognition principle.Illustration 7-2FASB’s Concepts Statement No. 5, companies usually meet the two conditions for recognizing revenue by the time they deliver products or render services to customers.Departures from the Sale BasisRevenue Recognition at Point of Sale (Delivery)LO 2 Describe accounting issues for revenue recognition at point of sale.Implementation problems,Sales with buyback agreementsSales when right of return existsTrade loading and channel stuffingWhen a repurchase agreement exists at a set price and this price covers all cost of the inventory plus related holding costs, the inventory and related liability remain on the seller’s books.* In other words, no sale.Sales with Buyback AgreementsRevenue Recognition at Point of Sale (Delivery)LO 2 Describe accounting issues for revenue recognition at point of sale.* “Accounting for Product Financing Arrangements,” Statement of Financial Accounting Standards No. 49 (Stamford, Conn.: FASB, 1981).Recognize revenue only if all six of the following conditions have been met.Sales When Right of Return ExistsRevenue Recognition at Point of Sale (Delivery)LO 2 Describe accounting issues for revenue recognition at point of sale.The seller’s price to the buyer is substantially fixed or determinable at the date of sale.The buyer has paid the seller, or the buyer is obligated to pay the seller, and the obligation is not contingent on resale of the product. The buyer’s obligation to the seller would not be changed in the event of theft or physical destruction or damage of the product.Sales When Right of Return ExistsRevenue Recognition at Point of Sale (Delivery)LO 2 Describe accounting issues for revenue recognition at point of sale.The buyer acquiring the product for resale has economic substance apart from that provided by the seller.The seller does not have significant obligations for future performance to directly bring about resale of the product by the buyer.The seller can reasonably estimate the amount of future returns.Recognize revenue only if all six of the following conditions have been met.“Trade loading is a crazy, uneconomic, insidious practice through which manufacturers—trying to show sales, profits, and market share they don’t actually have—induce their wholesale customers, known as the trade, to buy more product than they can promptly resell.”*Trade Loading and Channel StuffingRevenue Recognition at Point of Sale (Delivery)LO 2 Describe accounting issues for revenue recognition at point of sale.* “The $600 Million Cigarette Scam,” Fortune (December 4, 1989), p. 89.Two Methods:Percentage-of-Completion Method.Rationale is that the buyer and seller have enforceable rights.Completed-Contract Method.Most notable example is long-term construction contract accounting.Revenue Recognition Before DeliveryLO 2 Describe accounting issues for revenue recognition at point of sale.Must use Percentage-of-Completion method when estimates of progress toward completion, revenues, and costs are reasonably dependable and all of the following conditions exist:Revenue Recognition Before Delivery1. The contract clearly specifies the enforceable rights regarding goods or services by the parties, the consideration to be exchanged, and the manner and terms of settlement.2. The buyer can be expected to satisfy all obligations.3. The contractor can be expected to perform under the contract.LO 2 Describe accounting issues for revenue recognition at point of sale.Companies should use the Completed-Contract method when one of the following conditions applies when:Revenue Recognition Before DeliveryCompany has primarily short-term contracts, or Company cannot meet the conditions for using the percentage-of-completion method, or There are inherent hazards in the contract beyond the normal, recurring business risks.LO 2 Describe accounting issues for revenue recognition at point of sale.Measuring the Progress toward CompletionMost popular measure is the cost-to-cost basis.LO 3 Apply the percentage-of-completion method for long-term contracts.Percentage-of-Completion MethodThe percentage that costs incurred bear to total estimated costs, can be applied to the total revenue or the estimated total gross profit on the contract.A) Prepare the journal entries for 2007, 2008, and 2009. Casper Construction Co. LO 3 Apply the percentage-of-completion method for long-term contracts.Percentage-of-Completion MethodIllustration:LO 3 Apply the percentage-of-completion method for long-term contracts.Percentage-of-Completion MethodIllustration:LO 3 Apply the percentage-of-completion method for long-term contracts.Percentage-of-Completion MethodIllustration:LO 3 Apply the percentage-of-completion method for long-term contracts.Percentage-of-Completion MethodIllustration:Companies recognize revenue and gross profit only at point of sale—that is, when the contract is completed. Under this method, companies accumulate costs of long-term contracts in process, but they make no interim charges or credits to income statement accounts for revenues, costs, or gross profit.Completed Contract MethodLO 4 Apply the completed-contract method for long-term contracts.LO 4 Apply the completed-contract method for long-term contracts.Completed Contract MethodIllustration:Illustration:Completed Contract MethodLO 4 Apply the completed-contract method for long-term contracts.Long-Term Contract LossesLO 3 & 4 Losses on percentage-of-completion and completed contract methods on long-term contracts.Two Methods:Loss in the Current Period on a Profitable ContractPercentage-of-completion method only, the estimated cost increase requires a current-period adjustment of gross profit recognized in prior periods.Loss on an Unprofitable ContractUnder both percentage-of-completion and completed-contract methods, the company must recognize in the current period the entire expected contract loss.Illustration: Loss on Profitable ContractLong-Term Contract Lossesb) Prepare the journal entries for 2007, 2008, and 2009 assuming the estimated cost to complete at the end of 2008 was $215,436 instead of $170,100.Casper Construction Co. LO 3 & 4 Losses on percentage-of-completion and completed contract methods on long-term contracts.Long-Term Contract LossesIllustration: Loss on Profitable ContractLO 3 & 4 Losses on percentage-of-completion and completed contract methods on long-term contracts.Long-Term Contract LossesIllustration: Loss on Profitable ContractLO 3 & 4 Losses on percentage-of-completion and completed contract methods on long-term contracts.Illustration: Loss on Unprofitable ContractLong-Term Contract Lossesc) Prepare the journal entries for 2007, 2008, and 2009 assuming the estimated cost to complete at the end of 2008 was $246,038 instead of $170,100.Casper Construction Co. LO 3 & 4 Losses on percentage-of-completion and completed contract methods on long-term contracts.Long-Term Contract Losses$683,438 – 678,500 = 8,438 cumulative lossIllustration: Loss on Unprofitable ContractPlugLO 3 & 4 Losses on percentage-of-completion and completed contract methods on long-term contracts.Long-Term Contract LossesIllustration: Loss on Unprofitable ContractLO 3 & 4 Losses on percentage-of-completion and completed contract methods on long-term contracts.Long-Term Contract LossesIllustration: Loss on Unprofitable ContractFor the Completed-Contract method, companies would recognize the following loss :LO 4 Apply the completed contract method for long-term contracts.Construction contractors should disclosure:the method of recognizing revenue, the basis used to classify assets and liabilities as current (length of the operating cycle),the basis for recording inventory, the effects of any revision of estimates, the amount of backlog on uncompleted contracts, and the details about receivables.Disclosures in Financial StatementsRevenue Recognition Before DeliveryLO 4 Apply the completed contract method for long-term contracts.In certain cases companies recognize revenue at the completion of production even though no sale has been made.Completion-of-Production BasisRevenue Recognition Before DeliveryExamples are: precious metals oragricultural products.LO 4 Apply the completed contract method for long-term contracts.When the collection of the sales price is not reasonably assured and revenue recognition is deferred.Revenue Recognition After DeliveryLO 5 Describe the installment-sales and cost-recovery methods of accounting.Methods of deferring revenue: Installment-sales methodCost-recovery methodDeposit methodGenerally EmployedRecognizes income in the periods of collection rather than in the period of sale.Recognize both revenues and costs of sales in the period of sale, but defer gross profit to periods in which cash is collected.Selling and administrative expenses are not deferred.Installment-Sales MethodRevenue Recognition after DeliveryLO 5 Describe the installment-sales and cost-recovery methods of accounting.The profession concluded that except in special circumstances, “the installment method of recognizing revenue is not acceptable.”* The rationale: because the installment method does not recognize any income until cash is collected, it is not in accordance with the accrual concept.Acceptability of the Installment-Sales Method*“Omnibus Opinion,” Opinions of the Accounting Principles Board No. 10 (New York: AICPA, 1966), par. 12.Revenue Recognition after DeliveryLO 5 Describe the installment-sales and cost-recovery methods of accounting.Recognizes no profit until cash payments by the buyer exceed the cost of the merchandise sold.APB Opinion No. 10 allows a seller to use the cost-recovery method to account for sales in which “there is no reasonable basis for estimating collectibility.” In addition, FASB Statements No. 45 (franchises) and No. 66 (real estate) require use of this method where a high degree of uncertainty exists related to the collection of receivables.Cost-Recovery MethodRevenue Recognition after DeliveryLO 5 Describe the installment-sales and cost-recovery methods of accounting.Seller reports the cash received from the buyer as a deposit on the contract and classifies it on the balance sheet as a liability.The seller does not recognize revenue or income until the sale is complete.Deposit MethodRevenue Recognition after DeliveryLO 5 Describe the installment-sales and cost-recovery methods of accounting.Measuring the Progress toward CompletionCost-to-cost basisLO 3 Apply the percentage-of-completion method for long-term contracts.Percentage-of-Completion MethodIllustrations 7-3,4,& 5Costs incurred to dateMost recent estimate of total costs=Percent completePercent complete x Estimated total revenue = Revenue to be recognized to date Revenue to be recognized to dateCurrent-period Revenue -Revenue recognized in prior periods=Copyright © 2008 John Wiley & Sons, Inc. 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