Revenue Recognition

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Revenue Recognition

What is Revenue Recognition? Meaning.

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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