Accounting: The Language of Business - Vol. 2 (Intermediate: Part 115)

“The most successful entrepreneurs I know are optimistic. It’s part of the job description.”
— Caterina Fake, co-founder of Flickr

 Revenue Recognition (Part B)

by

Charles Lamson

 THE CONCEPTUAL FRAMEWORK

Revenue Recognition

The conceptual framework outlines the objectives of financial reporting and the qualities of good accounting information, precisely defines commonly used terms such as asset and revenue, and provides guidance about appropriate recognition, measurement, and reporting (MyEducator).

The revenue recognition standards discussed in the next series of parts of this analysis are relatively new and are effective for public companies with fiscal years beginning after December 15th, 2017. They are not completely aligned with the conceptual framework. That is, the revenue recognition standards indicate that the overarching principle of revenue recognition is the notion of the transfer of control of the goods or services. In contrast, the current conceptual framework does not mention transfer of control but rather states that a company recognizes revenue when it meets two conditions:

/

1. The revenue has been earned, and

2.  the revenue is realized (revenue that a company has already received) or realizable (when revenues are readily convertible to cash or claim to cash).

Although transfer of control often occurs simultaneously with the culmination of the earning process, there are scenarios in which they do not happen at the same time. How then can the standards and the conceptual framework that both come from the Financial Accounting Standards Board (FASB) conflict? The FASB is currently in the process of rewriting the conceptual framework. we expect that the FASB will align the conceptual framework with the new standard when it rewrites the framework. 

-----------

In the next several parts, we cover each of the five steps (Exhibit 8.1 from Part 114, and reintroduced below) in the revenue recognition process in depth. In this post we focus on Step 1: Identify the Contract(s) with a Customer. Note that we do not actually record a journal entry until the 5th step. The point of the five step approach is to determine when to recognize revenue and how much revenue to recognize. Thus, we will not know the proper journal entry to record the sale until we complete the entire process.

Step 1: Identify the Contract(s) with a Customer

The first step in the revenue recognition process is to identify the contract, or contracts with the customer. A contract is an agreement between two or more parties that creates enforceable rights and obligations (FASB ASC 606-10-20 - Revenue from Contracts with Customers - Overall - Glossary).

Contract Criteria

If the seller meets the following five criteria related to the contract, then it continues through the remaining four steps to determine the timing and measurement of revenue recognition.

1. All parties to the contract have agreed to the contract and are committed to performing under the contract. The approval by the parties can be in writing, provided orally, or implied by an entity's customary business practices.

2. Each party's rights with respect to the goods or services that are being transferred are identifiable.

3. The payment terms for the goods or services that are being transferred are identifiable.

4. The contract has commercial substance, meaning that the risk, timing, or amount of the entity's future cash flows is expected to change as a result of the contract.

5. It is probable that the seller will collect the consideration to which it is entitled in exchange for the goods or services. To assess the probability of collection, the seller considers the customer's ability and intention to pay this specific amount of consideration when it is due.

For purposes of the fifth criterion, Generally Accepted Accounting Principles (GAAP or U.S. GAAP) defines probable as “ likely to occur.” The seller assesses collectability on the expected consideration (the estimated transaction price), not the contract price. For example, if the seller intends to offer a price concession, which is a reduction in the contract price, then the estimated transaction price will be less than the contract price.

Also related to the fifth criterion, the company should consider only the amount that is at risk of not being collected, which may be less than the entire consideration. For example, if the customer is required to pay a portion of the consideration before delivery, then the seller would consider only the probability of collecting the amounts due after delivery. Or, if the seller is contractually allowed to stop transferring goods or services should the customer fail to pay, then only the consideration related to the goods or services that would be delivered is considered. Exhibit 8.2 summarizes the five criteria to identify a contract with customers.

Example 8.2 illustrates the collectability assessment.

*GORDON, RAEDY, SANNELLA, 2019, INTERMEDIATE ACCOUNTING, 2ND ED., PP. 375-377*

end

Catholic Daily Mass - Daily TV Mass - November 30, 2023

Rosary from Lourdes - 30/11/2023

Training Vlog: Day 25 of Year 3 of Operation Great Reset - Build Back Be...

What is the Fourth Industrial Revolution? Industry 4.0, the Fourth Industrial Revolution, and 4IR all refer to the current era of connectivity, advanced analytics, automation, and advanced-manufacturing technology that has been transforming global business for years.

Wed, Nov 29 - Holy Catholic Mass from the National Shrine of The Divine ...

HOLY ROSARY FROM LOURDES - 2023-11-29

Virgin Mary Healing You While You Sleep With Delta Waves, Heal All the D...

Reflect. Ask. Respond.

Reflect – Reflect and take an inventory of your life. Ask God what he’s given to you. What has been entrusted to you? Have you been faithful with what God has given to you? Ask – How is God calling you to respond? Dream with the Lord. Get excited. Allow God to place vision and passion within your heart. So often we settle. There are so many things worth pursuing and worth doing that can give glory to God. Respond – Start aiming for God’s call. Respond to the passion from God. Take the leap of faith and embrace the amazing adventure with the Lord.

Accounting: The Language of Business - Vol. 2 (Intermediate: Part 114)

“Do not focus on numbers. Focus on doing what you do best. It’s about building a community who want to visit your site every day because you create value and offer expertise.”
— Cassey Ho

 

Revenue Recognition (Part A)

by

Charles Lamson

Introduction

Revenue is the first line item on any company's income statement. Depending on the nature of a company's business, revenue may be called sales revenue, rental revenue, royalty revenue, investment revenue, or service revenue. Some revenues are accounted for easily, such as Target recording sales revenue for a customer purchase. Other sales transactions are more complex due to timing issues related to when the company should recognize the revenue.

When to record revenue is an important issue in many companies. Consider the purchase of a Kindle from Amazon. A Kindle buyer typically receives the device, wireless access, and software upgrades. That is, the buyer pays one sales price and receives multiple items. What does Amazon record as a sale—the sale of the Kindle, the wireless service, the software upgrades, or the sum of all three? In practice, Amazon allocates the sales price to these three items, recording the revenue for each item in different time periods based on when it transfers the good or service. That is, the seller recognizes the revenue related to the device, which is a substantial portion of the sales price on the date of the delivery. Amazon then recognizes revenues related to wireless access and software upgrades as it provides the services over the average life of the device.

In the next several parts of this analysis, we discuss revenue recognition and the primary accounting issues of determining the timing and amount of revenue recognition. Usually, a company recognizes revenue when it delivers a good or provides a service. Sometimes a company recognizes revenue before the delivery of a good, such as with long-term construction contracts. We will also discuss these scenarios and other more complex revenue recognition cases. The revenue recognition standard is fully converged between U.S. GAAP and IFRS. 

Revenue Recognition Overview

Revenue recognition involves issues dealing with both timing (i.e., when revenue is recognized) and measurement (i.e., how much is recognized). With regard to timing, the fundamental principle of revenue recognition is that a company should recognize revenue when it transfers control of an asset (either a good or service) to the customer. With regard to measurement, the fundamental principle is that a company should recognize the amount of revenue that it expects to be entitled to receive in exchange for the goods or services. Finally, the company recognizes revenue as it satisfies each performance obligation.

In order to accomplish these objectives of revenue recognition, companies must follow five steps. These five steps are outlined in Exhibit 8.1.

The seller must meet the Step 1 requirement, to identify the contract, in order to continue with the revenue recognition process. Once the contract is identified, the seller must identify both the separate performance obligations (Step 2) and the transaction price (Step 3) in order to continue with Step 4. Step 4 takes the transaction price that is determined in Step 3 and allocates it to the separate performance obligations that are identified in Step 2. Once the seller has identified the separate performance obligations and has a price attached to each, it determines the appropriate timing for the recognition of revenue for each performance obligation separately. Example 8.1 provides a simplified illustration of the five-step approach to provide a conceptual understanding of the steps. 

*GORDON, RAEDY, SANNELLA, 2019, INTERMEDIATE ACCOUNTING, 2ND ED., PP. 373-375*

end

Tue, Nov 28 - Holy Catholic Mass from the National Shrine of The Divine ...

Rosary from Lourdes - 28/11/2023

Catholic Daily Mass - Daily TV Mass - November 27, 2023

Rosary from Lourdes - 27/11/2023

741Hz | Dissolve Toxins, Cleanse Infections & Boost Immune System | Emot...

HOLY ROSARY FROM LOURDES - 2023-11-26

Catholic Daily Mass - Daily TV Mass - November 26, 2023

Geronimo and the Apache Resistance.

HOLY ROSARY FROM LOURDES - 2023-11-25

English Audio Bible - 1 Chronicles (COMPLETE) - New American Standard Bi...

741Hz Music || Cleanse Infections & Dissolve Toxins || Aura Cleanse & Sp...

Sat, Nov 25 - Holy Catholic Mass from the National Shrine of The Divine ...

Healing Gregorian Chants || Angelic Choir || 432Hz Music

VIRGIN MARY - HOLY MOTHER OF GOD ELIMINATE ALL NEGATIVE ENERGY, RECEIVE ...

HOLY ROSARY FROM LOURDES - 2023-11-24

Catholic Daily Mass - Daily TV Mass - November 24, 2023

Living in Slab City from Rabbitside camp perspective

Catholic Daily Mass - Daily TV Mass - November 23, 2023

Rosary from Lourdes - 23/11/2023

Accounting: The Language of Business - Vol. 2 (Intermediate: Part 113)

“Some people dream of success, while other people get up every morning and make it happen.”

— Wayne Huizenga

Accounting and the Time Value of Money (Part W)

by

Charles Lamson

Computing Bond Issue Proceeds

A common application of time value of money concepts is determining the amount of cash received when a company issues a bond to raise capital. With a bond, a company receives cash from a lender today, usually in return for the commitment to pay a fixed amount back at a certain future date when the bond matures, called the face value. The company typically also promises to pay periodic interest payments at fixed amounts until that date the interest payment is based on an interest rate the company agrees to when it issues the bond. We will discuss bonds in detail in later posts. Here we focus on using the time value of money to determine how much cash a company will receive when it issues a bond.

To determine the amount of cash received we take the present value of the future cash outflows on the bond. The present value combines the present value of an amount paid when the bond matures and the present value of periodic interest payments. The interest rate used to discount these cash flows is the interest rate at which the company borrows the cash, the market interest rate.

Exhibit 7.14 summarizes the different types of time value of money problems and related solution techniques from throughout preceding parts of this analysis.

EXHIBIT 7.14  Summary of Time Value of Money Problems

Type of Problem                                                 Table       

Future Value of a Single Sum (Part 92)                     7A.1         

Present Value of a Single Sum (Part 94)             7A.2       

Future Value of an Ordinary Annuity (Part 97)     7A.3      

Future Value of an Annuity Due (Part 100)                7A.4     

Present Value of an Ordinary Annuity (Part 103)        7A.5        

Present Value of an Annuity Due (Part 105)           7A.6      

*GORDON, RAEDY, SANNELLA, 2019, INTERMEDIATE ACCOUNTING, 2ND ED., PP. 355-357*

end

Catholic Daily Mass - Daily TV Mass - November 22, 2023

741Hz Music || Cleanse Infections & Dissolve Toxins || Aura Cleanse & Sp...

HOLY ROSARY FROM LOURDES - 2023-11-22

Training Vlog: Day 17 of Year 3 of Operation Great Reset - Build Back Be...

Change can be frightening, and the temptation is often to resist it. But change almost always provides opportunities - to learn new things, to rethink tired processes, and to improve the way we work. Klaus Schwab It is cold out there today.

Catholic Daily Mass - Daily TV Mass - November 21, 2023

Rosary from Lourdes - 21/11/2023

HOLY ROSARY FROM LOURDES - 2023-11-20

Catholic Daily Mass - Daily TV Mass - November 20, 2023

Catholic Daily Mass - Daily TV Mass - November 19, 2023

Rosary from Lourdes - 19/11/2023

The Sami | How They Live In The North Of Russia | Indigenous Peoples Of ...

Gregorian Chants by Angelic Choir @432Hz l Powerful Positive Energy Music

Healing Gregorian Chant Music @432Hz || DEEPEST HEALING MUSIC || Agnus Dei

Rosary from Lourdes - 18/11/2023

Catholic Daily Mass - Daily TV Mass - November 18, 2023

St. Francis de Sales—Introduction to the Devout Life, Pt. 2 (Ch.10-15) |...

Fri, Nov 17 - Holy Catholic Mass from the National Shrine of The Divine ...

Rosary from Lourdes - 17/11/2023

King David

Joseph | Bible Movie 1995 | Joseph The Dreamer

The kingdom of God is among you

Luke 17:20-25 ©

Asked by the Pharisees when the kingdom of God was to come, Jesus gave them this answer, ‘The coming of the kingdom of God does not admit of observation and there will be no one to say, “Look here! Look there!” For, you must know, the kingdom of God is among you.’

  He said to the disciples, ‘A time will come when you will long to see one of the days of the Son of Man and will not see it. They will say to you, “Look there!” or, “Look here!” Make no move; do not set off in pursuit; for as the lightning flashing from one part of heaven lights up the other, so will be the Son of Man when his day comes. But first he must suffer grievously and be rejected by this generation.’

HOLY ROSARY FROM LOURDES - 2023-11-16

Catholic Daily Mass - Daily TV Mass - November 16, 2023

St. Francis de Sales—Introduction to the Devout Life: Pt. 1 (Ch.1-8) | C...

HOLY ROSARY FROM LOURDES - 2023-11-15

Catholic Daily Mass - Daily TV Mass - November 15, 2023

Rosary from Lourdes - 14/11/2023

Catholic Daily Mass - Daily TV Mass - November 14, 2023

Catholic Daily Mass - Daily TV Mass - November 13, 2023

Rosary from Lourdes - 13/11/2023

Catholic Daily Mass - Daily TV Mass - November 12, 2023

Rosary from Lourdes - 12/11/2023

🔴 Rosary Saturday Joyful Mysteries of the Rosary November 11, 2023 Prayi...

Catholic Daily Mass - Daily TV Mass - November 11, 2023

Catholic Daily Mass - Daily TV Mass - November 10, 2023

Rosary from Lourdes - 10/11/2023

Accounting: The Language of Business - Vol. 2 (Intermediate: Part 112)

“When you find an idea that you just can’t stop thinking about, that’s probably a good one to pursue.”

— Josh James, CEO and co-founder of Omniture

Accounting and the Time Value of Money (Part V)

by

Charles Lamson

In the past, a common application of the time value of money (TVM) in the sports industry was for deferred compensation (Part 110) built into player and staff (e.g., general manager, coach) contracts, using a relatively straightforward net present value calculation to compare the costs and benefits of alternative payment plans. We now rarely enter into deferred payment or front-loaded agreements with other players or our team executives, both by our choice and that of the athlete/staff member. For our teams, collective bargaining agreements and salary cap restrictions have significantly reduced the appeal of such arrangements. Most players and staff realize that tying future payments to a team introduces an element of credit risk (for example, the significant amount the Pittsburgh Penguins owed Mario Lemieux under a deferred compensation agreement and the team's later bankruptcy). Most players now have relatively sophisticated financial advisors and can arrange a “ deferred” payment plan through other means.

The current exception is signing bonuses (up-front payments) with certain athletes. These tend to be relatively small compared to the overall size of the player contract; other considerations such as the players cash flow needs and commitment to the player take precedence. An athlete might defer the receipt of a payment for several reasons, including if the team agreed to make a sufficiently larger payment or series of payments at a later date or if there were tax advantages (i.e., deferring the payment of taxes to a later date) to doing so. Both of these use time value of money calculations. We also consider time value issues in multi-year business agreements with our state tenants, corporate sponsors, and media partners.

The judgments considered depend on and vary dramatically based on the type of agreement we are entering into. For example, when negotiating a player contract, we compare the upfront payment versus the net present value of the deferred payments and the expected player performance in later years. While not time value of money related, we also consider the payments' impact on the team's current and future salary cap position.

With a capital investment, judgment factors include the potential for increased revenues and the payback period (how long it takes to recover our investment) compared to alternative investments or other requirements. For alternative investments, we modify the discount rate depending on the risk of our target investment and the alternatives. Typically, these investments would include either future revenue generation upside (the possible rise in value, gauged in cash or percentage of a given investment) or cost savings. For business agreements, we factor the amount of royalties for merchandising, endorsements, and broadcast revenues into our future revenues and outflows.

Often a capital investment will generate returns to us (increased revenues and/or decreased costs). For example, if we want to increase ticket revenues by adding luxury boxes or upgrade the food concession facilities, we weigh the expected amounts and timing of the returns (higher ticket revenues or concession commissions) against the initial capital outlay for the renovation to determine the attractiveness of the investment. Using time value of money calculations, we compare the costs and benefits to find the difference between the cash inflows and cash outflows for the potential investment. In addition, in an even modestly inflationary environment, we must consider the potential for rising costs if we advance or defer an investment and factor that risk into our analysis by modifying the discount rate (the interest rate the Federal Reserve charges commercial banks and other financial institutions for short-term loans).

*GORDON, RAEDY, SANNELLA, 2019, INTERMEDIATE ACCOUNTING, 2ND ED., P. 354*

end