Kế toán, kiểm toán - Chương 18: Revenue recognition

Prepared by Coby Harmon University of California, Santa BarbaraIntermediate AccountingIntermediate Accounting14th Edition18Revenue RecognitionKieso, Weygandt, and Warfield Apply the revenue recognition principle.Describe accounting issues for 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.Identify the proper accounting for losses on long-term contracts.Describe the installment-sales method of accounting.Explain the cost-recovery method of accounting.Learning ObjectivesCurrent EnvironmentGuidelines for revenue recognitionDepartures from sale basisRevenue Recognition at the Point of SaleRevenue Recognition before DeliveryRevenue Recognition after DeliverySales with discountsSales with right of returnSales with buybacksBill and hold salesPrincipal-agent relationshipsTrade loading and channel stuffingMultiple-deliverable arrangementsInstallment-sales methodCost-recovery methodDeposit methodSummary of basesPercentage-of-completion methodCompleted-contract methodLong-term contract lossesDisclosuresCompletion-of-production basisRevenue RecognitionThe Current EnvironmentRestatements for improper revenue recognition are relatively common and can lead to significant share price adjustments.Revenue recognition is a top fraud risk and regardless of the accounting rules followed (IFRS or U.S. GAAP), the risk or errors and inaccuracies in revenue reporting is significant.The 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 RecognitionChapter 18Chapter 18The Current EnvironmentLO 1 Apply the revenue recognition principle.Illustration 18-1Revenue 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.The Current EnvironmentLO 1 Apply the revenue recognition principle.Illustration 18-2Revenue Recognition AlternativesFASB’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.LO 2 Describe accounting issues for revenue recognition at point of sale.Implementation problems,Sales with DiscountsSales When Right of ReturnSales with BuybacksBill and Hold SalesPrincipal-Agent RelationshipsTrade Loading and Channel StuffingMultiple-Deliverable ArrangementsRevenue Recognition at Point of Sale (Delivery)LO 2 Describe accounting issues for revenue recognition at point of sale.Trade discounts or volume rebates should reduce consideration received or receivable and the related revenue. If payment is delayed, seller should impute an interest rate for the difference between the cash or cash equivalent price and the deferred amount.Sales with DiscountsRevenue Recognition at Point of SaleFacts: Sansung Company has an arrangement with its customers that it will provide a 3% volume discount to its customers if they purchase at least $2 million of its product during the calendar year. On March 31, 2012, Sansung has made sales of $700,000 to Artic Co. In the previous two years, Sansung sold over $3,000,000 to Artic in the period April 1 to December 31. Sansung makes the following entry on March 31, 2012.LO 2 Describe accounting issues for revenue recognition at point of sale.Accounts receivable 679,000 Sales revenue 679,000Illustration 18-3Revenue Recognition at Point of SaleVOLUME DISCOUNTIllustration 18-3LO 2 Describe accounting issues for revenue recognition at point of sale.Cash 679,000 Accounts receivable 679,000Illustration 18-3Facts: Sansung Company has an arrangement with its customers that it will provide a 3% volume discount to its customers if they purchase at least $2 million of its product during the calendar year. On March 31, 2012, Sansung has made sales of $700,000 to Artic Co. In the previous two years, Sansung sold over $3,000,000 to Artic in the period April 1 to December 31. Assuming Sansung’s customers meet the discount threshold, Sansung makes the following entry.Revenue Recognition at Point of SaleVOLUME DISCOUNTIllustration 18-3VOLUME DISCOUNTLO 2Cash 700,000 Accounts receivable 679,000 Sales discounts forfeited 21,000Illustration 18-3Facts: Sansung Company has an arrangement with its customers that it will provide a 3% volume discount to its customers if they purchase at least $2 million of its product during the calendar year. On March 31, 2012, Sansung has made sales of $700,000 to Artic Co. In the previous two years, Sansung sold over $3,000,000 to Artic in the period April 1 to December 31. Sansung makes the following entry on March 31, 2012. If Sansung’s customers fail to meet the discount threshold, Sansung makes the following entry upon payment.Revenue Recognition at Point of SaleSales with Right of ReturnRevenue Recognition at Point of SaleLO 2 Describe accounting issues for revenue recognition at point of sale.Three possible revenue recognition methods are available when the right of return exposes the seller to continued risks of ownership: not recording a sale until all return privileges have expired or recording the sale, but reducing sales by an estimate of future returns.Recording the sale and accounting for the returns as they occur.Recognize revenue only if six conditions have been met.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.Revenue Recognition at Point of SaleSales with Right of ReturnLO 2 Describe accounting issues for revenue recognition at point of sale.Revenue Recognition at Point of SaleSales with Right of ReturnRecognize revenue only if six conditions have been met.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.Question: When should Pesido recognize the revenue for the sale of the new laser equipment?Facts: Pesido Company is in the beta-testing stage for new laser equipment that will help patients who have acid reflux problems. The product that Pesido is selling has been very successful in trials to date. As a result, Pesido has received regulatory authority to sell this equipment to various hospitals. Because of the uncertainty surrounding this product, Pesido has granted to the participating hospitals the right to return the device and receive full reimbursement for a period of 9 months.Revenue Recognition at Point of SaleLO 2Illustration 18-5SALES WITH RETURNSIllustration 18-5Solution: Given that the hospital has the right to rescind the purchase for a reason specified in the sales contract and Pesido is uncertain about the probability of return, Pesido should not record revenue at time of delivery.Revenue Recognition at Point of SaleLO 2Pesido sold $300,000 of laser equipment on August 1, 2012, and retains only an insignificant risk of ownership. On October 15, 2012, $10,000 in equipment was returned.August 1, 2012Accounts receivable 300,000 Sales 300,000October 15, 20121Sales returns and allowances 10,000 Accounts receivable 10,000SALES WITH RETURNSRevenue Recognition at Point of SaleAt December 31, 2012, based on prior experience, Pesido estimates that returns on the remaining balance will be 4 percent. Pesido makes the following entry to record the expected returns.December 31, 2012Sales returns and allowances 11,600 Allowance for sales returns and allowances 11,600[($300,000 - $10,000) x 4% = 11,600]LO 2 Describe accounting issues for revenue recognition at point of sale.SALES WITH RETURNSIf a company sells a product in one period and agrees to buy it back in the next period, has the company sold the product? The economic substance of this transaction is that the seller retains the risks of ownership. Sales with BuybacksLO 2 Describe accounting issues for revenue recognition at point of sale.Revenue Recognition at Point of SaleRevenue Recognition at Point of SaleFacts: Morgan Inc., an equipment dealer, sells equipment to Lane Company for $135,000. The equipment has a cost of $115,000. Morgan agrees to repurchase the equipment at the end of 2 years at its fair value. Lane Company pays full price at the sales date, and there are no restrictions on the use of the equipment over the 2 years. Morgan records the sale as follows:Cash 135,000 Sales Revenue 135,000Cost of Goods Sold 115,000 Inventory 115,000LO 2SALES WITH BUYBACKBill and Hold SalesRevenue Recognition at Point of SaleBuyer is not yet ready to take delivery but does take title.Illustration 18-4BILL AND HOLDIllustration 18-7Facts: Butler Company sells $450,000 of fireplaces to a local coffee shop, Baristo, which is planning to expand its locations around the city. Under the agreement, Baristo asks Butler to retain these fireplaces in its warehouses until the new coffee shops that will house the fireplaces are ready. Title passes to Baristo at the time the agreement is signed.Question: Should Butler report the revenue from this bill and hold arrangement when the agreement is signed, or should revenue be deferred and reported when the fireplaces are delivered?LO 2Revenue Recognition at Point of SaleSolution: Butler should record the revenue at the time title passes, provided the risks of ownership have passed to Baristo, that is, Butler does not have specific performance obligations other than storage; Baristo makes a fixed commitment to purchase the goods, requests that the transaction be on a bill and hold basis, and sets a fixed delivery date; and goods must be segregated, complete, and ready for shipment.LO 2 Describe accounting issues for revenue recognition at point of sale.Revenue Recognition at Point of SaleLO 2 Describe accounting issues for revenue recognition at point of sale.Accounts receivable 450,000 Sales 450,000Illustration 18-4BILL AND HOLDIllustration 18-7Facts: Butler Company sells $450,000 of fireplaces to a local coffee shop, Baristo, which is planning to expand its locations around the city. Under the agreement, Baristo asks Butler to retain these fireplaces in its warehouses until the new coffee shops that will house the fireplaces are ready. Title passes to Baristo at the time the agreement is signed. Butler makes the following entry.Principal-Agent RelationshipsRevenue Recognition at Point of SaleLO 2 Describe accounting issues for revenue recognition at point of sale.Amounts collected on behalf of the principal are not revenue of the agent. Revenue for the agent is the amount of the commission it receives.ConsignmentsRevenue Recognition at Point of SaleLO 2 Describe accounting issues for revenue recognition at point of sale.Manufacturers (or wholesalers) deliver goods but retain title to the goods until they are sold. Consignor (manufacturer or wholesaler) ships merchandise to the consignee (dealer), who is to act as an agent for the consignor in selling the merchandise. Consignor makes a profit on the sale.Consignee makes a commission on the sale.“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 StuffingLO 2 Describe accounting issues for revenue recognition at point of sale.Revenue Recognition at Point of SaleA similar practice is referred to as channel stuffing. When a software maker needed to make its financial results look good, it offered deep discounts to its distributors to overbuy, and then recorded revenue when the software left the loading.Trade Loading and Channel StuffingLO 2 Describe accounting issues for revenue recognition at point of sale.Revenue Recognition at Point of SaleMDAs provide multiple products or services to customers as part of a single arrangement. The major accounting issues related to this type of arrangement are how to allocate the revenue to the various products and services and how to allocate the revenue to the proper period.Multiple-Deliverable ArrangementsLO 2 Describe accounting issues for revenue recognition at point of sale.Revenue Recognition at Point of SaleAll units in a multiple-deliverable arrangement are considered separate units of accounting, provided that:A delivered item has value to the customer on a standalone basis; andThe arrangement includes a general right of return relative to the delivered item; andDelivery or performance of the undelivered item is considered probable and substantially in the control of the seller.Multiple-Deliverable ArrangementsLO 2 Describe accounting issues for revenue recognition at point of sale.Revenue Recognition at Point of SaleMultiple-Deliverable Evaluation ProcessMultiple-Deliverable ArrangementsLO 2 Describe accounting issues for revenue recognition at point of sale.Revenue Recognition at Point of SaleIllustration 18-9Two 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 DeliveryContract clearly specifies the enforceable rights regarding goods or services by the parties, the consideration to be exchanged, and the manner and terms of settlement.Buyer can be expected to satisfy all obligations.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.Formula for Total Revenue to Be Recognized to DateLO 3 Apply the percentage-of-completion method for long-term contracts.Illustration 18-13Percentage-of-Completion MethodIllustration 18-14Illustration 18-15Percentage-of-Completion MethodLO 3 Apply the percentage-of-completion method for long-term contracts.Percentage-of-Completion MethodIllustration: Blue Diamond Construction Company has a contract to construct a $4,500,000 bridge at an estimated cost of $4,000,000. The contract is to start in July 2012, and the bridge is to be completed in October 2014. The following data pertain to the construction period. LO 3 Apply the percentage-of-completion method for long-term contracts.Percentage-of-Completion MethodIllustration: Compute percentage complete.Illustration 18-16LO 3 Apply the percentage-of-completion method for long-term contracts.Percentage-of-Completion MethodIllustration: Blue Diamond would make the following entries to record (1) the costs of construction, (2) progress billings, and (3) collections.Illustration 18-17Percentage-of-Completion MethodIllustration: Percentage-of-Completion Revenue, Costs, and Gross Profit by YearIllustration 18-18LO 3 Apply the percentage-of-completion method for long-term contracts.LO 3 Apply the percentage-of-completion method for long-term contracts.Percentage-of-Completion MethodIllustration: Blue Diamond’s entries to recognize revenue and gross profit each year and to record completion and final approval of the contract.Illustration 18-19LO 3 Apply the percentage-of-completion method for long-term contracts.Percentage-of-Completion MethodIllustration: Content of Construction in Process Account—Percentage-of-Completion MethodIllustration 18-20LO 3 Apply the percentage-of-completion method for long-term contracts.Percentage-of-Completion MethodFinancial Statement Presentation—Percentage-of-CompletionIllustration 18-21Computation of Unbilled Contract Price at 12/31/12LO 3 Apply the percentage-of-completion method for long-term contracts.Percentage-of-Completion MethodFinancial Statement—Percentage-of-CompletionIllustration 18-22Blue Diamond Construction Company2012LO 3 Apply the percentage-of-completion method for long-term contracts.Percentage-of-Completion MethodFinancial Statement—Percentage-of-CompletionIllustration 18-23Blue Diamond Construction Company2013A) Prepare the journal entries for 2010, 2011, and 2012. 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.LO 4 Apply the completed-contract method for long-term contracts.Revenue Recognition Before DeliveryCompleted Contract MethodLO 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.LO 5 Identify the proper accounting for losses on long-term contracts.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.Long-Term Contract LossesRevenue Recognition Before DeliveryIllustration: Loss on Profitable ContractLong-Term Contract LossesLO 5 Identify the proper accounting for losses on long-term contracts.b) Prepare the journal entries for 2010, 2011, and 2012 assuming the estimated cost to complete at the end of 2011 was $215,436 instead of $170,100.Casper Construction Co. Long-Term Contract LossesLO 5 Identify the proper accounting for losses on long-term contracts.Illustration: Loss on Profitable ContractLong-Term Contract LossesLO 5 Identify the proper accounting for losses on long-term contracts.Illustration: Loss on Profitable ContractIllustration: Loss on Unprofitable ContractLong-Term Contract LossesLO 5 Identify the proper accounting for losses on long-term contracts.c) Prepare the journal entries for 2010, 2011, and 2012 assuming the estimated cost to complete at the end of 2011 was $246,038 instead of $170,100.Casper Construction Co. Long-Term Contract LossesLO 5 Identify the proper accounting for losses on long-term contracts.$675,000 – 683,438 = (8,438) cumulative lossIllustration: Loss on Unprofitable ContractPlugLong-Term Contract LossesLO 5 Identify the proper accounting for losses on long-term contracts.Illustration: Loss on Unprofitable ContractLong-Term Contract LossesLO 5 Identify the proper accounting for losses on long-term contracts.Illustration: Loss on Unprofitable ContractFor the Completed-Contract method, companies would recognize the following loss :Construction contractors should disclosure:the method of recognizing revenue, the basis used to classify assets and liabilities as current (nature and 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 5 Identify the proper accounting for losses on 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 DeliveryLO 5 Identify the proper accounting for losses on long-term contracts.Examples are: precious metals oragricultural products.When the collection of the sales price is not reasonably assured and revenue recognition is deferred.Revenue Recognition After DeliveryLO 6 Describe the installment-sales method 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 6 Describe the installment-sales method 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 MethodRevenue Recognition After DeliveryLO 6 Describe the installment-sales method of accounting.Recognizes no profit until cash payments by the buyer exceed the cost of the merchandise sold.A seller is permitted to use the cost-recovery method to account for sales in which “there is no reasonable basis for estimating collectibility.” In addition, use of this method is required where a high degree of uncertainty exists related to the collection of receivables.Cost-Recovery MethodRevenue Recognition After DeliveryLO 7 Explain the cost-recovery method of accounting.Illustration: In 2012, Fesmire Manufacturing sells inventory with a cost of $25,000 to Higley Company for $36,000. Higley will make payments of $18,000 in 2012, $12,000 in 2013, and $6,000 in 2014. If the cost-recovery method applies to this transaction and Higley makes payments as scheduled, Fesmire recognizes cash collections, revenue, cost, and gross profit as follows.Cost-Recovery MethodLO 7Illustration 18-41Illustration: Fesmire’s journal entry to record the deferred gross profit on the Higley sale transaction (after recording the sale and the cost of sale in the normal manner) at the end of 2012 is as follows.Cost-Recovery MethodLO 7 Explain the cost-recovery method of accounting.Sales 36,000 Cost of Sales 25,000 Deferred Gross Profit 11,000Illustration: In 2013 and 2014, the deferred gross profit becomes realized gross profit as the cumulative cash collections exceed the total costs, by recording the following entries.Cost-Recovery MethodLO 7 Explain the cost-recovery method of accounting.Deferred Gross Profit 5,000 Realized Gross Profit 5,000Deferred Gross Profit 6,000 Realized Gross Profit 6,00020132014Seller 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 7 Explain the cost-recovery method of accounting.Summary of Product Revenue Recognition Illustration 18-42LO 7FranchisesFour types of franchising arrangements have evolved: manufacturer-retailer,manufacturer-wholesaler, service sponsor-retailer, and wholesaler-retailer. LO 8 Explain the revenue recognition for franchises.APPENDIX 18AREVENUE RECOGNITION FOR SPECIAL SALES TRANSACTIONSFastest-growing category is service sponsor-retailer:Soft ice cream/frozen yogurt stores (Tastee Freeze, TCBY, Dairy Queen)Food drive-ins (McDonald’s, KFC, Burger King)Restaurants (TGI Friday’s, Pizza Hut, Denny’s)Motels (Holiday Inn, Marriott, Best Western)Auto rentals (Avis, Hertz, National)Others (H & R Block, Meineke Mufflers, 7-Eleven Stores)FranchisesAPPENDIX 18AREVENUE RECOGNITION FOR SPECIAL SALES TRANSACTIONSLO 8 Explain the revenue recognition for franchises.FranchisesTwo sources of revenue: Sale of initial franchises and related assets or services, and Continuing fees based on the operations of franchises. APPENDIX 18AREVENUE RECOGNITION FOR SPECIAL SALES TRANSACTIONSLO 8 Explain the revenue recognition for franchises.FranchisesThe franchisor normally provides the franchisee with:Assistance in site selection.Evaluation of potential income.Supervision of construction activity.Assistance in the acquisition of signs, fixtures, and equipment.Bookkeeping and advisory services.Employee and management training.Quality control.Advertising and promotion.APPENDIX 18AREVENUE RECOGNITION FOR SPECIAL SALES TRANSACTIONSLO 8 Explain the revenue recognition for franchises.Franchisors record initial franchise fees as revenue only when and as they make “substantial performance” of the services they are obligated to perform and when collection of the fee is reasonably assured. Substantial performance occurs when the franchisor has no remaining obligation to refund any cash received or excuse any nonpayment of a note and has performed all the initial services required under the contract.Initial Franchise FeesAPPENDIX 18AREVENUE RECOGNITION FOR SPECIAL SALES TRANSACTIONSLO 8 Explain the revenue recognition for franchises.Illustration: Tum’s Pizza Inc. charges an initial franchise fee of $50,000 for the right to operate as a franchisee of Tum’s Pizza. Of this amount, $10,000 is payable when the franchisee signs the agreement, and the balance is payable in five annual payments of $8,000 each. The credit rating of the franchisee indicates that money can be borrowed at 8 percent. The present value of an ordinary annuity of five annual receipts of $8,000 each discounted at 8 percent is $31,941.68. The discount of $8,058.32 represents the interest revenue to be accrued by the franchisor over the payment period. Example of Entries for Initial Franchise FeeAPPENDIX 18AREVENUE RECOGNITION FOR SPECIAL SALES TRANSACTIONSLO 8 Explain the revenue recognition for franchises.Illustration: 1. If there is reasonable expectation that Tum’s Pizza Inc. may refund the down payment and if substantial future services remain to be performed by Tum’s Pizza Inc., the entry should be:Example of Entries for Initial Franchise FeeCash 10,000.00Notes Receivable 40,000.00 Discount on Notes Receivable 8,058.32 Unearned Franchise Fees 41,941.68APPENDIX 18AREVENUE RECOGNITION FOR SPECIAL SALES TRANSACTIONSLO 8 Explain the revenue recognition for franchises.Illustration: 2. If the probability of refunding the initial franchise fee is extremely low, the amount of future services to be provided to the franchisee is minimal, collectibility of the note is reasonably assured, and substantial performance has occurred, the entry should be:Example of Entries for Initial Franchise FeeCash 10,000.00Notes Receivable 40,000.00 Discount on Notes Receivable 8,058.32 Revenue from Franchise Fees 41,941.68APPENDIX 18AREVENUE RECOGNITION FOR SPECIAL SALES TRANSACTIONSLO 8 Explain the revenue recognition for franchises.Illustration: 3. If the initial down payment is not refundable, represents a fair measure of the services already provided, with a significant amount of services still to be performed by Tum’s Pizza in future periods, and collectibility of the note is reasonably assured, the entry should be:Example of Entries for Initial Franchise FeeCash 10,000.00Notes Receivable 40,000.00 Discount on Notes Receivable 8,058.32 Revenue from Franchise Fees 10,000.00 Unearned Franchise Fees 31,941.68APPENDIX 18AREVENUE RECOGNITION FOR SPECIAL SALES TRANSACTIONSLO 8 Explain the revenue recognition for franchises.Illustration: 4. If the initial down payment is not refundable and no future services are required by the franchisor, but collection of the note is so uncertain that recognition of the note as an asset is unwarranted, the entry should be:Example of Entries for Initial Franchise FeeCash 10,000.00 Revenue from Franchise Fees 10,000.00APPENDIX 18AREVENUE RECOGNITION FOR SPECIAL SALES TRANSACTIONSLO 8 Explain the revenue recognition for franchises.Illustration: 5. Under the same conditions as those listed in case 4 above, except that the down payment is refundable or substantial services are yet to be performed, the entry should be:Example of Entries for Initial Franchise FeeCash 10,000.00 Unearned Franchise Fees 10,000.00In cases 4 and 5 — where collection of the note is extremely uncertain—franchisors may recognize cash collections using the installment-sales method or the cost-recovery method.APPENDIX 18AREVENUE RECOGNITION FOR SPECIAL SALES TRANSACTIONSLO 8 Explain the revenue recognition for franchises.Continuing franchise fees are received in return for the continuing rights granted by the franchise agreement and for providing such services as management training, advertising and promotion, legal assistance, and other support. Franchisors report continuing fees as revenue when they are earned and receivable from the franchisee.Continuing Franchise FeesAPPENDIX 18AREVENUE RECOGNITION FOR SPECIAL SALES TRANSACTIONSLO 8 Explain the revenue recognition for franchises.Sometimes the franchise agreement grants the franchisee the right to make bargain purchases of equipment or supplies after the franchisee has paid the initial franchise fee. If the bargain price is lower than the normal selling price of the same product, or if it does not provide the franchisor a reasonable profit, then the franchisor should defer a portion of the initial franchise fee. The franchisor would account for the deferred portion as an adjustment of the selling price when the franchisee subsequently purchases the equipment or supplies.Bargain PurchasesAPPENDIX 18AREVENUE RECOGNITION FOR SPECIAL SALES TRANSACTIONSLO 8 Explain the revenue recognition for franchises.As a matter of management policy, the franchisor may reserve the right to purchase a profitable franchise outlet, or to purchase one that is in financial difficulty.If it is probable at the time the option is given that the franchisor will ultimately purchase the outlet, then the franchisor should not recognize the initial franchise fee as revenue but should instead record it as a liability. Options to PurchaseAPPENDIX 18AREVENUE RECOGNITION FOR SPECIAL SALES TRANSACTIONSLO 8 Explain the revenue recognition for franchises.Should ordinarily defer direct costs (usually incremental costs) relating to specific franchise sales for which revenue has not yet been recognized. Should not defer costs without reference to anticipated revenue and its realizability. Indirect costs of a regular and recurring nature, such as selling and administrative expenses that are incurred irrespective of the level of franchise sales, should be expensed as incurred.Franchisor’s CostAPPENDIX 18AREVENUE RECOGNITION FOR SPECIAL SALES TRANSACTIONSLO 8 Explain the revenue recognition for franchises.All significant commitments and obligations resulting from franchise agreements. Any resolution of uncertainties regarding the collectibility of franchise fees. Where possible, revenues and costs related to franchisor owned outlets should be distinguished from those related to franchised outlets.Disclosure of FranchisorsAPPENDIX 18AREVENUE RECOGNITION FOR SPECIAL SALES TRANSACTIONSLO 8 Explain the revenue recognition for franchises.RELEVANT FACTSThe IASB defines revenue to include both revenues and gains. GAAP provides separate definitions for revenues and gains.Revenue recognition fraud is a major issue in U.S. financial reporting. The same situation occurs overseas as evidenced by revenue recognition breakdowns at Dutch software company Baan NV, Japanese electronics giant NEC, and Dutch grocer AHold NV. In general, the IFRS revenue recognition principle is based on the probability that the economic benefits associated with the transaction will flow to the company selling the goods, rendering the service, or receiving investment income. In addition, the revenues and costs must be capable of being measured reliably. GAAP uses concepts such as realized, realizable, and earned as a basis for revenue recognition.RELEVANT FACTSIFRS has one basic standard on revenue recognition—IAS 18. GAAP has numerous standards related to revenue recognition (by some counts over 100). Accounting for revenue provides a most fitting contrast of the principles-based (IFRS) and rules-based (GAAP) approaches. While both sides have their advocates, the IASB and the FASB have identified a number of areas for improvement in this area. Under IFRS, revenue should be measured at fair value of the consideration received or receivable. GAAP measures revenue based on the fair value of what is given up (goods or services) or the fair value of what is received—whichever is more clearly evident.RELEVANT FACTSIn general, the accounting at point of sale is similar between IFRS and GAAP.IFRS prohibits the use of the completed-contract method of accounting for long-term construction contracts (IAS 13). Companies must use the percentage-of-completion method. If revenues and costs are difficult to estimate, then companies recognize revenue only to the extent of the cost incurred—a cost-recovery (zero-profit) approach. In long-term construction contracts, IFRS requires recognition of a loss immediately if the overall contract is going to be unprofitable. In other words, GAAP and IFRS are the same regarding this issue.The IASB:has issued over 100 standards related to revenue recognition.has issued one standard related to revenue recognition.indicates that the present state of reporting for revenue is satisfactory.All of the above.IFRS SELF-TEST QUESTIONUnder IFRS, the revenue recognition principle indicates that revenue is recognized when:the benefits can be measured reliably. the sales transaction is initiated and completed.it is probable the benefits will flow to the company.the date of sale, date of delivery, and billing have all occurred.I, II, and III.II and III.I and III.I, II, III and IV.IFRS SELF-TEST QUESTIONCopyright © 2012 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful. 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