312 SECTION 1 The Role of Accounting as an Information System (concluded) To see this difference between the completed contract and cost recovery methods, here is a version of Illustration 5–24B that compares revenue, cost, and gross profit recognition under the two methods: 2016 2017 2018 Completed Contract Construction in progress (CIP) .............................. 900,000 Cost of construction ......... 4,100,000 Revenue from long-term contracts ... 5,000,000 To record gross profit. Cost Recovery Construction in progress (CIP) .............................. 900,000 Cost of construction ......... 1,500,000 1,000,000 1,600,000 Revenue from long-term contracts ... 1,500,000 1,000,000 2,500,000 To record gross profit. Revenue recognition occurs earlier under the cost recovery method than under the completed contract method, but gross profit recognition occurs near the end of the contract for both methods. As a result, gross profit as a percentage of revenue differs between the two methods at various points in the life of the contract. International Financial Reporting Standards Multiple-Deliverable Arrangements. IFRS contained very little guidance about multipledeliverable arrangements. IAS No. 18 simply states that: “. . . in certain circumstances, it is necessary to apply the recognition criteria to the separately identifiable components of a single transaction in order to reflect the substance of the transaction” and gives a couple of examples. 44 Allocations of total revenue to individual components were based on fair value, with no requirements to focus on VSOE. Also, IFRS tended to encourage focus on the underlying economics of revenue transactions, so particular contractual characteristics like contingencies mattered less under IFRS than they do under U.S. GAAP. Questions For Review of Key Topics Q 5–29 What are the two general criteria that must be satisfied before a company can recognize revenue? Q 5–30 Explain why, in most cases, a seller recognizes revenue when it delivers its product rather than when it produces the product. Q 5–31 Revenue recognition for most installment sales occurs at the point of delivery of the product or service. Under what circumstances would a seller delay revenue recognition for installment sales beyond the delivery date? 44“Revenue,” International Accounting Standards No. 18 (IASCF), as amended effective January 1, 2014, par. 13.
Spiceland_Inter_Accounting8e_Ch05
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