Learning Objectives After studying the material in this chapter you will be able to do the following: LO1 Explain and apply criteria for revenue recognition. LO2 Describe the critical-event and gradual approaches of recognizing revenue. LO3 Explain the effects that different approaches to recognizing revenue have on the income statement and on financial ratios. LO4 Describe how multi-deliverables are accounted for. LO5 Describe expense recognition and the matching principle. Copyright © 2013 McGraw-Hill Ryerson Limited

Revenue Recognition Criteria under IFRS LO2 Criteria under IFRS Significant risks and rewards transferred Seller has no involvement or control Amount of revenue can be reasonably measured Costs can be reasonably measured Collection is probable Copyright © 2013 McGraw-Hill Ryerson Limited

Critical Events LO2 When a critical event occurs it triggers recognition of revenue and matching of expenses Critical events include: Delivery of goods or services Completion of production Cash collection Completion of warranty period or right-of-return period Copyright © 2013 McGraw-Hill Ryerson Limited

Revenue recognition LO2 Gradual approach – recognizes revenue gradually over the entire earnings process - used when critical event approach not appropriate Percentage of completion method Revenue and expenses recognized in each accounting period Completed-contract method Revenue and expenses only recognized at the end of the contract Cost-recovery method Revenue and expenses recorded with no profit until end of contract Copyright © 2013 McGraw-Hill Ryerson Limited

Cost-Recovery Method LO2 Apply where requirements not met for percentage-of-completion method, under IFRS Revenue recognized to the amount of costs incurred each period – zero profit recognized until final year of contract Copyright © 2013 McGraw-Hill Ryerson Limited

Completed Contract Method LO2 Apply where Percentage-of-Completion method cannot be used, under Accounting Standards for Private Enterprises (ASPE). Copyright © 2013 McGraw-Hill Ryerson Limited