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Revenue & Expense Recognition
Revenue & Expense Recognition:
Accrual Accounting - revenues are recognized when earned and expenses when incurred (not received or paid)
Revenues or Gains are recognized when:
- Earned - goods are delivered
- Realizable - collect or claim to cash
Revenue Recognition:
- Binding arrangement exists (contract)
- Services rendered/ delivered
- Fixed or determinable price exists
- Collection is reasonably assured
Sales = buyer has a right of return (reasonably estimable or with expiration date)
Recognize Expenses or Losses as Incurred:
- Economic benefit is used up/ consumed or assets lose future benefit (incurred)
- Cause & Effect - expenses that produce revenue at identifiable points in time to match directly to revenue
- Systematic & Rational Allocation - produce revenue over long periods (reasonable allocation, e.g. dep)
- Immediate Recognition - expenses can't be directly related to specific benefits (e.g. salaries - SG&A exp)
Risks & Uncertainties:
4 areas of disclosure:
- Nature of operations - how entity generate revenue
- Use of estimates - GAAP or other frameworks
- Certain significant estimates - reasonably possible change in estimate
- Current vulnerability associated with certain concentrations - entity does not diversify, possible future events
FASB Accounting Std Codification: Stmts on Fin Accounting Concepts (SFAC)
Emerging Issues Task Force (EITF) - account for new & unusual financial transactions
Summary of significant accounting policies (notes in F/S).
Summary of significant assumptions - for prospective F/S
Other notes to F/S