- CFA Exams
- 2025 Level I
- Topic 4. Financial Statement Analysis
- Learning Module 2. Analyzing Income Statements
- Subject 1. Revenue Recognition
Why should I choose AnalystNotes?
AnalystNotes specializes in helping candidates pass. Period.
Subject 1. Revenue Recognition PDF Download
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.
The Converged Revenue Recognition Standard
In May 2014, the IASB and FASB each issued a converged standard for revenue recognition. Key aspects of the converged accounting standards:
The core principle of the new standard is for companies to recognize revenue to depict the transfer of goods or services to customers in amounts that reflect the consideration (that is, payment) to which the company expects to be entitled in exchange for those goods or services.
Companies under contract to provide goods or services to a customer will be required to follow a five-step process to recognize revenue:
- Identify contract(s) with a customer
- Identify the separate performance obligations in the contract
- Determine the transaction price
- Allocate the transaction price to the separate performance obligations
- Recognize revenue when the entity satisfies each performance obligation
There is new guidance on whether revenue should be recognized at a point in time or over time. The standard provides detailed guidance on various issues such as identifying distinct performance obligations, accounting for contract modifications, and accounting for the time value of money. Detailed implementation guidance is included on topics such as sales with a right of return, customer options for additional goods or services, etc. The standard also introduces new guidance on costs of fulfilling and obtaining a contract and specifying the circumstances in which such costs should be capitalized. Costs that do not meet the criteria must be expensed when incurred.
The standard introduces new, increased requirements for disclosure of revenue in a reporter's financial statements.
User Contributed Comments 6
User | Comment |
---|---|
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) |
I passed! I did not get a chance to tell you before the exam - but your site was excellent. I will definitely take it next year for Level II.
Tamara Schultz
My Own Flashcard
No flashcard found. Add a private flashcard for the subject.
Add