304 SECTION 1 The Role of Accounting as an Information System much of that industry-specific guidance, including special treatment of software sales and franchise arrangements. We cover that guidance in a later section of this appendix. Second, the realization principle’s requirement that there be reasonable certainty as to collectibility meant that revenue recognition sometimes was delayed until cash had been collected. As discussed in the next section of this appendix, the installment sales method and the cost recovery method were used to tie revenue recognition to cash collection. Those methods aren’t allowed by the ASU. 35 Instead, the ASU only requires that collectibility be probable, and ties subsequent revenue recognition to satisfying performance obligations rather than cash collection. 34 These criteria are addressed in SFAC 5, “Recognition and Measurement in Financial Statements,” Statement of Financial Accounting Concepts No. 5 (Stamford, Conn.: FASB, 1984). 35 The tax law still requires the use of the installment sales method for certain types of properties unless a taxpayer elects not to use the method. Illustration 5–A2 The Realization Principle The Realization Principle 34 Revenue should only be recognized when both: 1. The earnings process is judged to be complete or virtually complete (the earnings process refers to the activity or activities performed by the company to generate revenue). 2. There is reasonable certainty as to the collectibility of the asset to be received (usually cash). International Financial Reporting Standards Revenue Recognition Concepts. The IFRS version of ASU No. 2014-09, called IFRS No. 15, replaces preexisting IFRS. Prior to IFRS No. 15, IAS No. 18 governed most revenue recognition under IFRS. It allowed revenue to be recognized when the following conditions had been satisfied: (a) The amount of revenue and costs associated with the transaction can be measured reliably, (b) it is probable that the economic benefits associated with the transaction will flow to the seller, (c) (for sales of goods) the seller has transferred to the buyer the risks and rewards of ownership, and doesn’t effectively manage or control the goods, and (d) (for sales of services) the stage of completion can be measured reliably. These general conditions typically led to revenue recognition at the same time and in the same amount as would occur under U.S. GAAP, but there were exceptions. Also, IFRS had much less industry-specific guidance than did U.S. GAAP, leading to fewer exceptions to applying these revenue recognition conditions. Installment Sales Customers sometimes are allowed to pay for purchases in installments over a long period of time. Many large retail stores, such as Sears and J.C. Penney, sell products on such installment plans. In most situations, the increased uncertainty concerning the collection of cash from installment sales can be accommodated satisfactorily by estimating uncollectible amounts. However, if it is not possible to make a reasonable assessment of future bad debts, the seller lacks reasonable certainty as to collectibility, and the realization principle requires that revenue recognition be delayed. These circumstances occur relatively rarely in practice, because sellers typically don’t want to enter into transactions when they can’t estimate how much cash they will be paid. However, exceptions do occur. For example, real estate sales often are made on an installment The installment sales and cost recovery methods are only used when extreme uncertainty exists regarding future cash collections.
Spiceland_Inter_Accounting8e_Ch05
To see the actual publication please follow the link above