Subtle Issues in Revenue Recognition

Overview: The article illustrates the fact that concerns related to the recognition of revenue in accordance with GAAP have risen in significance. Not only the fraudulent acts of recording revenue improperly through sham transactions, but subtler practices, such as recognizing revenue before it is earned, have drawn more intense regulatory scrutiny. New, less obvious issues involving revenue recognition in the growing online economy have also come to light. Not surprisingly, these problems have caught the attention of both the SEC and FASB. GAAP for revenue recognition seems fairly straightforward: According to FASB Statement of Financial Accounting Concepts No. 5, revenue is recognized when a transaction occurs and 1) the revenue is realized or realizable and 2) the revenue is earned. Revenue from a transaction must meet both criteria in order to be recognized. Revenue is generally considered realized when cash is received for the sale of a product or performance of a service. Revenue generally becomes realizable when a promise to pay is received in exchange for the sale of a product or performance of a service. Revenue is generally earned when a legally enforceable exchange takes place. The article explains the transactions such as bill and hold transactions, barter advertising transactions and agent or facilitator transactions. The recommendations for improving accounting practices, mentioned in this article are very useful.

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Format: HTML | Date: Mar 2001 | Pages: 1