Revenue Recognition (Alberta Council)

From SJA

The Need

Revenue recognition refers to the timing for recording sales and other revenues. It is necessary to have clear policies to ensure that information is recorded correctly for accounting purposes.

The rules for recognizing revenue have become more complex. It is particularly important to have established practices and policies because a company may not recognize revenue until its customary business practices for documenting sales transactions have occurred. In the case of a new business, or a new type of revenue for an existing business, it is important to have written policies to establish precisely what those customary business practices are.

Policy

Revenue shall be recognized at the time it is earned. Revenue is earned when a product or service is delivered to the customer, the price is determined and is likely to be collected, and there is a revenue arrangement with the customer.

For retail operations, this is typically at the time the customer pays for the product.

For service operations, revenue is typically recognized when the service has been performed. Sometimes, the service is performed in several chunks and each chunk successfully performed represents a corresponding chunk or revenue earned. When a customer prepays for a product or service, revenue is deferred until the product or service is actually delivered.

Purpose

The purpose of this Statement of Policy and Procedure is to set out when to recognize a sale transaction as revenue for financial reporting.

Scope

This policy applies to the Finance Department. The Administrative Department must be familiar with the considerations set out herein.

Responsibilities

The Finance Department is responsible for:

Determining when to recognize sales as revenues
Deferring or accruing revenues when the flow of cash or the set-up of an account receivable does not correspond to the timing of revenue recognition

Definitions

"Accrue" means the act of taking into the income statement revenues or expenses which have not yet been invoiced or paid in order to recognize them in the current fiscal period.
"Arrangement" (also "revenue arrangement") means the final understanding between the seller and the buyer as to the specific nature and the terms of the transaction.
"Barter transactions" means an exchange of goods or services between two or more parties where no money changes hands.
"Contra account" means an account which operates as an offset to another related account in order that the amounts in each account may continue to be tracked separately as well as the net effect of the two together.
"Defer" means the act of holding a revenue or expense in an asset or liability account in order that it can be reflected in the income statement of another period.
"Delivery" refers to the risk and reward of ownership being transferred from the seller to the purchaser. This occurs once there is physical delivery and the purchaser bears the responsibility for any physical loss or damage (which may be insured).
"Revenue Recognition" refers to the policy for recognizing sales as revenue for financial reporting purposes. A sale that does not qualify as revenue under revenue recognition policy must be deferred and reported in the period in which it may be recognized.
"Title" means legal ownership.

References and Related Statements of Policy and Procedure

Procedures

Revenue Recognition for Point of Sale Revenues

Revenue from all point of sale transactions involving the following must be recognized daily.
- Cash
- Cash-equivalents including debit cards
- Credit cards
- Personal/Corporate cheques
Credit transactions posted at the point of sale must be recognized daily.

Revenue Recognition for Invoiced Revenues

Invoiced revenues are recognized at the time of sale. A sale occurs when the following conditions are satisfied:
- The product has been delivered or the service rendered to the customer.
- The price is agreed upon with the customer.
- All of the terms of the sale have been agreed with the customer and the documentation required under Sales Contracts (Alberta Council) has been executed.
At month end, billings and shipments should be reviewed to identify:
- Items invoiced for which the product or service has not been delivered. These revenues should be deferred until the product or service is actually delivered and any other conditions for recognizing revenue are satisfied.
- Items not invoiced for which the product or service has been delivered. These revenues should be accrued to the extent that the product or service has been delivered and any other conditions for recognizing revenue are satisfied.
Interest income on overdue accounts is recognized in the month in which it has been invoiced. (Depending upon industry standards and payment history, it may be appropriate to only recognize this interest income when it is received. This policy should be modified appropriately. See Overdue Accounts and Bad Debts (Alberta Council).

Revenue Recognition for Contract Revenues

Contract revenues are recognized according to the terms of the contract and any other conditions for recognizing revenue are satisfied. Where services are provided on an ongoing basis under the contract, revenues are recognized evenly over time. Other cases must be reviewed by the Finance Manager.
Subject to the foregoing, contract revenues may be recognized when the following conditions are satisfied:
- The product has been delivered or the service rendered to the customer.
- The price is agreed upon with the customer.
- All of the terms of the sale have been agreed with the customer and the documentation required under Sales Contracts (Alberta Council) has been executed.
- The terms of the contract have been fulfilled.

Revenue Recognition for Payments made in Advance

Revenue should be recognized in the same period as the product or service is delivered and matched as closely as possible to the period in which expenses related to the delivery of the product or service were incurred.
If a payment is made in advance, it will be accounted for as deferred revenue until the period to which it should be matched. At that time, the deferred revenue entry is reversed and the revenue recognized.

Revenue Recognition for Barter Transactions

If the company has bartered for a good or service, the value of the good or service received is identical to the value of the good or service delivered. Revenue should be booked for the "sale" of the product or service at the estimated amount that would have been received had the transaction been undertaken for cash. An identical amount should be booked for the "purchase" of the product or service received. See Payments for Purchased Goods and Services (Alberta Council). The revenue should be recorded at the time the company delivers the good or service to the other party.

Revenue Recognition for Sales Involving Discounts

Retail sales revenue is booked at the full retail value (net of taxes). When a discount is offered, it is recorded on point of sale order along with the full value of the sale, or shown as a credit entry on customer invoices.
Service revenue is booked at the full invoice value (net of taxes).
The discount values are booked in a separate account for discounts and sales promotions. This operates as a contra account, effectively reducing gross sales in the income statement, but preserving the information for analytical purposes.

Revenue Recognition for Sales Involving Foreign Exchange

For sales priced in a foreign currency, sales revenue is booked at the Canadian dollar equivalent.

Attachments

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