Project Revenue Recognition 1 - Essay Example

PROJECT REVENUE RECOGNITION Requirement A number of merchandising concerns recognize revenue at the point of sale because they deal in finished products. This situation is usually regarded as the point the title legally passes to the buyer from the seller. It is logical that this kind of revenue recognition method is often used by many organizations because the accounting theory is often based on objective measurement of the revenue to the recognized (Zhang, 2005). There are also a number of advantages of this type of revenue recognition.

Firstly, it is a perceivable of discerning event on the contrary to the accretion concept. Secondly, the passage of the title to the buyer when the goods are delivered implies that the revenue has been earned hence the dealer has finished their part of the bargain (Caylor, 2010). Thirdly, realization has happened in that near cash assets or cash itself has been received because there is some legitimacy in the position that revenue is unearned until near cash assets or cash itself has been received.

Finally, costs of the seller have been incurred with the outcome that net income can be measured. Requirement 2 Service type transactions often recognize revenue based on the performance of the transaction by the seller. Service type firms may use such methods as completed performance method, specific performance method, collection method and finally, proportional performance method to recognize revenue (Antle & Demski, 1989). However, certain non-service organizations recognize revenue as the productive activity takes place.

The application of percentage-of-completion to construction contracts that are long-term is the best circumstance to recognize revenue under this situation. Here, revenue is often estimated based on the degree of the performance of the contract to date and then the revenue is recorded as earned in the period that the productive activity takes place (Dutta & Zhang, 2002). The same situation is often present in the case of the accretion concept where the revenue recognition takes place when the increment in values results from the aging process or natural growth.

Requirement3 Other than the two circumstances, it may be appropriates to recognize revenue after the point of sale or when the production activity is completed. Revenue is recognized at the completion of production if and only if some conditions are present. Such conditions that are necessary include relatively stable market for the product, nominal marketing costs, and homogenous units (Wustemann & Kierzek, 2005). Under normal circumstances, the three conditions are absent; however, they are only present in the case of agricultural products and certain precious metals.

It is often appropriate to recognize revenue when production is completed provided the situations are present. On the other hand, revenue recognition may be delayed until after the point of sale, however, such a situation is not common (Dutta & Zhang, 2002). It is therefore not usual or unordinary to delay recognition of revenue past the point of sale due to hypothetical attractiveness to recognize revenue at the point of sale. A circumstance where it would be justifiable to defer revenue until such a period would be the time where it is substantially uncertain as to whether the receivable would be collected (Wustemann & Kierzek, 2005).

References Antle, R., & Demski, J. S. (1989). Revenue recognition. Contemporary Accounting Research, 5, 423–451. doi:10.1111/j.1911-3846.1989.tb00713.x Caylor, M. L. (2010). Strategic revenue recognition to achieve earnings benchmarks. Journal of Accounting and Public Policy, 29, 82–95. doi:10.1016/j.jaccpubpol.2009.10.008 Dutta, S., & Zhang, X. (2002). Revenue Recognition in a Multiperiod Agency Setting. Journal of Accounting Research, 40, 67–83. doi:10.1111/1475-679X.00039 Wustemann, J.

, & Kierzek, S. (2005). Revenue Recognition under IFRS Revisited: Conceptual Models, Current Proposals and Practical Consequences. Accounting in Europe. doi:10.1080/09638180500379111 Zhang, Y. (2005). Revenue recognition timing and attributes of reported revenue: The case of software industry’s adoption of SOP 91-1. Journal of Accounting and Economics, 39, 535–561. doi:10.1016/j.jacceco.2005.04.003