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U.S. GAAP Codification Topic 600: Revenue


Revenues are recognized
                  when 
            (a)  realized or realizable 
                  and
            (b)  earned. 
                  [SFAC No. 5, Para. 83]
 
      Revenues 
            --> not recognized until realized or realizable.
            --> not recognized until earned.

      Revenues are realized 
            --> when products are exchanged for cash or claims to cash.

      Revenues are realizable 
            --> when related assets received are readily convertible
                  to cash or claims to cash.

      Revenues are earned 
            --> when the products are delivered 
                  or 
            --> services are performed.

  Recognition is the process of 
           --> recording an item in the financial statements.

  Realization is the process of 
           --> converting non-cash resources into cash.
              
  Revenues are 
           --> inflows of assets or settlements of liabilities (or both)
           --> from activities of the entity's central operations. 
     
  Gains are 
           --> increases in net assets 
           --> from peripheral or incidental transactions of an entity.

Accounting Research Bulleting (ARB) No. 43
        a.  Chapter 1A
        b.  Issued in June 1953

Unrealized Profit
        --> should not be credited to income.

Profit is deemed to be realized
        --> when a sale (in the ordinary course of business) is effected.
        --> unless the collection of sale price is not reasonably assured.
      
Profit is NOT deemed to be realized
        --> if the collection of sale price is not reasonably assured.

Accounting Principles Board (APB) Opinion No. 10
        a.  Omnibus Opinion
        b.  Issued in December 1966

Revenues
        --> should (ordinarily) be accounted for
        --> at the time of a transaction is completed
        --> with appropriate provision for uncollectible accounts.
              [Para. 12]

Installment Method of Recognizing Revenue
        --> is not acceptable, with the exception of cases
        --> where receivables are collectible over an extended period of time
        --> and there is no reasonable basis for estimating the degree of collectibility.

When the following conditions are met
        --> either installment method
        --> or cost recovery method may be used.
      
Conditions
        --> receivables are collectible over an extended period of time
        --> and there is no reasonable basis for estimating the degree of collectibility

Cost Recovery Method
        --> equal amounts of revenue and expense are recognized
        --> as collections are made
        --> until all costs have been recovered.

        --> recognition of profit is postponed until all costs are recovered.              

Statement of Financial Accounting Standards (SFAS) No. 48
        a.  Revenue Recognition When Right of Return Exists
        b.  Issued in June 1981

Sale that gives buyer the right to return the product
        --> Revenue from such sales shall be recognized
        --> at the time of sale
        --> ONLY IF all of the following conditions are met.

Conditions
        a.  Seller's price
                --> is substantially fixed or determinable at the date of sale.
        b.  Buyer's obligation to pay seller
                --> is not contingent on resale of the product.
        c.  Buyer's obligation to pay seller
                --> does not change when the product is lost or damaged.
        d.  Buyer acquiring the product for resale
                --> has economic substance apart from that provided by seller.
        e.  Seller does not have significant obligations
                --> for future performance to directly bring about
                --> resale of the product by buyer.
        f.  Amount of future returns
                ---> can be reasonably estimated.

Revenues that are not recognized at the time of sale
        --> because the above conditions are not met
        --> shall be recognized
                     either
                     when the return privilege has substantially expired
                     or
                     when the above conditions are subsequently met
        --> whichever occurs first.
      
Cost of returns
        --> if sales revenue is recognized because the above conditions are met
        --> any costs or losses expected due to any returns
        --> shall be accrued as required by SFAS No. 5, Accounting for Contingencies.

Estimated returns
        --> Sales revenue and cost of sales
        --> shall be reduced to reflect estimated returns.