LO2 - McGraw-Hill Ryerson

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Learning Objectives

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

Revenue Recognition

• 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 Copyright © 2013 McGraw-Hill Ryerson Limited 2

LO2

Critical Events

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 Copyright © 2013 McGraw-Hill Ryerson Limited 3

LO2

Revenue recognition

• 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 Copyright © 2013 McGraw-Hill Ryerson Limited 4

LO2

Cost-Recovery Method

• 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 Copyright © 2013 McGraw-Hill Ryerson Limited 5

LO2

Completed Contract Method

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

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