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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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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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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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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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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LO2
• Apply where Percentage-of-Completion method cannot be used, under Accounting
Standards for Private Enterprises (ASPE).
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