Revenue Recognition

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What is Revenue Recognition? Meaning.

Revenue Recognition

The Revenue Recognition principle is a cornerstone of Accrual Accounting, as it determines the specific conditions under which income can be recognized as revenue in the income statement.

Revenue Recognition Criteria under IFRS

Under IAS/IFRS (IAS 18), revenue should be recognized when:

  1. Significant risks and rewards of ownership have been transferred from the seller to the buyer,
  2. Managerial involvement and control over the asset being transferred has passed from the seller to the buyer,
  3. The seller can reliably measure the amount of revenue or consideration received in the exchange,
  4. It is probable that the seller will receive economic benefits, and
  5. The seller can reliably measure the costs of the transaction.

For the rendering of services and long-term construction projects, revenue should be recognized by reference to the stage of completion of the transaction at the balance sheet date (cf. Percentage-of-Completion Method).

Revenue Recognition Criteria under US GAAP

According to U.S. GAAP (mainly covered under ASC 605), revenue should be recognized when:

  1. The critical event in the process of earning the revenue has taken place (usually when goods have been transferred or services have been rendered), and when
  2. The amount of revenue that will be collected is reasonably assured and is measurable with a reasonable degree of reliability.

In case that the collection is not reasonably assured, the recognition of revenue should be deferred (cf. Installment Sales Method, Cost Recovery Method).

For long-term construction projects, the Percentage-of-Completion Method or the Completed-Contract Method should be applied.

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Forum about Revenue Recognition. Below you can ask a question about this topic, share your experiences, report a new development, or explain something.

topic Deferred Revenue | Unearned Revenue
Deferred revenue refers to the accounting treatment of advance payments a company receives for products or services that are to be delivered or performed in the future. The company that receives the p...
topic Main Problems with Revenue Recognition. Issues
Revenue recognition is basically the choice of which transactions a company considers to be part of its sales. In many cases, the process is straightforward. But in some cases it can be very complex. ...
🔥 Accrued Revenue versus Deferred Revenue
Accrued Revenue is an asset. It is recorded as a "Current Asset" in the Assets side of the balance sheet because it will give benefit in the near future when the company will receive cash in the near ...
topic Revenue Recognition Methods
What methods are being used for revenue recognition? What are the main steps? Thanks for sharing your thoughts....

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