Revenue Recognition & Reporting
Financial Performance
Stephenie Fox CA
Principal, CICA
Revenue Recognition
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CICA Handbook Section 3400 REVENUES
Issued 1986
Revenue generating activities increasingly
complex
Current environment – sales figures used as
indicator in evaluating stock prices
Section 3400
Addresses timing of revenue recognition
(not measurement)
Revenue Defined
Revenue is the inflow of cash, receivables or other
consideration arising in the course of the ordinary
activities of an enterprise, normally from the sale of
goods, the rendering of services and the use by
others of enterprise yielding interest royalties or
dividends. Revenue is net of items such as trade or
volume discounts, returns and allowances, claims for
damaged goods, and certain excise and sales taxes.
Revenue Recognition
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¶.06 – recognize when performance
requirements (¶ 07&08) are satisfied and
ultimate collection is reasonably assured
Revenue Recognition (cont)
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¶ .07 sale of goods – seller of goods has
transferred to the buyer the significant risks
and rewards of ownership in that all
significant acts have been completed and the
seller retains no continuing managerial
involvement in or effective control of the
goods transferred to a degree usually
associated with ownership
Revenue Recognition (cont)
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¶.08 rendering of services and long-term
contracts – performance determined using
percentage of completion or completed
contract method – performance achieved
when reasonable assurance exists regarding
the measurement of the consideration that
will be derived from rendering the service or
performing the long-term contract
Recognition
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Transferring risks and rewards of ownership
Need to assess whether these have been
transferred – look at circumstances
Usually coincides with transfer of legal title
Do any significant acts of performance
remain to be completed
Recognition (cont)
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Must have certainty of collection
e.g. does payment depend on resale of
goods by the buyer
Returns – are they significant and
unpredictable
Problems of interpretation
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What does significant acts mean?
OSC notice 52-701 – review of revenue
recognition to determine if appropriate
application of Section 3400.
Revenue has direct effect on reported
earnings- also becoming an indicator of
value and performance especially in tech
sector
OSC Findings
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Need for significant improvement in nature
and extent of disclosure
Referred to more detailed literature like SAB
101 – effectively makes this part of Canadian
GAAP for public listed companies
Feeling that issuers have not looked at all
existing sources of accounting literature
when applying Canadian GAAP
Transfers of Risks and Rewards
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Completion of significant acts
Not always easy to assess
E.g. bill and hold sales, contracts with
multiple elements
SAB 101 – U.S. SEC
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General FASB principles – revenue
recognized when realized or realizable and
earned
Earned when substantially accomplished
what it must do to be entitled to benefits
represented by revenues
Problems of uncertainties and interpretation
CICA – New EIC’s
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EIC 141 revenue recognition
EIC 142 revenue arrangements with multiple
deliverables
EIC 143 accounting for separately priced
extended warranty and product maintenance
contracts
EIC 141 Revenue Recognition
Performance achieved under 3400.07 when:
 Persuasive evidence of an arrangement exists
 Delivery has occurred or service have been
rendered; and
 The seller’s price to the buyer is fixed or
determinable
Recognize revenue in the period in which all of these
criteria are met
Persuasive Evidence of an
Arrangement
Arrangement:
final understanding between the parties as to
the specific nature and terms of the agreed
upon transaction
Determining Whether an Arrangement
Exists
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Customary business practices
Side arrangements
Consignment arrangements
Title passes but revenue recognition
precluded
Delivery and Performance
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Revenue recognized when seller has
substantially accomplished what it should do
under terms of the arrangement – usually on
delivery of product or performance of
services
Fixed or Determinable Sales Price
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Cancellable sales arrangement
Right of return
Price protections/inventory credit
arrangements
Refundable fee for service arrangements
Disclosure of accounting policies
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Always disclose revenue recognition policy
Policy for each type of transaction
If multiple elements, policy for each element
EIC 142 Multiple deliverables
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Provides guidance for determining if
arrangements with multiple deliverables
consist of separate units of accounting
Presumption is that separate contracts with
same entity entered into at same or near the
same time are a package
EIC 142 looks at when these can be
separated and accounted for separately
EIC 143 Extended warranty and
product maintenance contracts
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Defer and recognize over life of contract
Costs incurred should be deferred
Reporting Financial Performance
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Display and presentation of items in the
operating statement
Cash flow statement
Should certain items not recognized in
income statement be recognized in a
statement of financial performance?
Background
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Concerns with income statement including
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Undue emphasis on bottom line
Classification of items
Transparency for gains and losses that don’t go
through the I/S
Gains and losses from changes in fair value
Comprehensive Income
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Change in equity of an enterprise from
transactions and events from non-owners.
All changes in equity except those from
investments by owners and distributions to
owners.
Other Comprehensive Income
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Revenues expenses gains and losses
required by primary sources of GAAP to be
included in comprehensive income but
excluded from net income
Presentation
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Net income
Other comprehensive income
Total
One or two statements
Terms may vary
Statement of Comprehensive Income
20X2
Net income
20X1
651
22
Other comprehensive
income net of tax
2102
702
Comprehensive
Income
2753
724
Reporting Financial Performance
Convergence project
Reporting Financial Performance
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Maximize predictive value with respect to forecasts
of comprehensive income and its components
Bottom line not a useful number – aggregates a
range of components of financial performance – goal
is useful disaggregation
Ambiguity in definition of operational earnings –
companies defining own measures of profit-lack of
consistency and comparability between
Proposed Format of Performance
Report (Preliminary)
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Part A – Revenue, Cost of sales (excludes
depreciation), Pension expense, Other (selling
general and admin)
Part B - Investing (= changes in assets) e.g. Interest
Dividends, Depreciation & amortization
Part C – Financing (=changes in liabilities)
+/- Income taxes, Discontinuing operations, Other
Total changes in net assets before transactions with
owners
Reporting Financial Performance
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Work in process
International convergence a goal by all
standard setters
Discussion paper planned 2005 joint IASB &
FASB
Working principles developed – issues still to
be resolved