1. 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.
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2. 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
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3. 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
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4. 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
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5. 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
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6. Completed Contract Method
LO2
Apply where Percentage-of-Completion method cannot be used, under Accounting Standards for Private Enterprises (ASPE).
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