Subject 2. Revenue Recognition

There are two revenue and expense recognition issues when accrual accounting is used to prepare financial statements:

  • Timing: when should revenue and expense be recognized?
  • Measurement: how much revenue and expense should be recognized?

Revenue is generally recognized when it is (1) realized or realizable, and (2) earned.

The general rule for revenue recognition includes the "concept of realization." Two conditions must be met for revenue recognition to take place:

1. Completion of the earnings process

The company must have provided all or virtually all the goods or services for which it is to be paid, and it must be possible to measure the total expected cost of providing the goods or services. No remaining significant contingent obligation should exist. This condition is not met if the company has the obligation to provide future services (such as warranty protection) but cannot estimate the associated expenses.

2. Assurance of payment

The quantification of cash or assets expected to be received for the goods or services provided must be reliable.

These conditions are typically met at the time of sale, but there are many exceptions, which will be discussed next.

User Contributed Comments 6

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Naufil2004: Makes sense.
Creg: the general rule for revenue recognition includes the concept of realizability.
teddajr: Completion of earning process criterion is not satisfied:
A)when the firm has obligation to provide future services ?
B) when the firm cannot estimate the associated expenses with such future services?
C) Both A and B.
D) Either A or B.
SDCFA: Future service should not be an obstacle for completing earning process. Companies provide for provision to cover such future expenses.
oneashok: It should be B) that is when it is not able to estimate the expenses for future services..
am I right?
MathLoser: Full version:

- According to FASB, revenue is recognized in the income statement when: (a) realized or realizable and (b) earned

- According to IASB (remain in LV 1 CFA textbook) revenue is recognized when:
1. The risk and reward of ownership is transferred.
2. There is no continuing control or management over the goods sold.
3. Revenue can be reliably measured.
4. There is a probable flow of economic benefits.
5. The cost can be reliably measured. <<<<<< (Quiz)