Revenue Recognition

Are you thinking ahead? What next? Revenue recognition standards not only affect publicly traded corporations and large private companies. It could also impact small businesses, especially if they have plans to get more funding.

What is Revenue Recognition?

Revenue recognition principle stipulates that revenue is recorded when realised and earned and not necessarily when received. A good example is an upfront customer payment for SaaS product for an annual contract.

The current UK GAAP instigates all UK company finances to follow FRS 102 except for IFRS and FRSSE for small business. Typically, a good accountant can get you up to speed with all the new accounting methods.

Income for businesses is classified into four categories, each with a unique revenue recognition criteria:

  • Sale of goods.

Revenue gets recognised for goods sold when the vendor has transferred the risks and rewards of ownership. Associated revenue and costs are then measurable.

  • Interest, royalties and dividends.

Interest income on these, is recognised on an effective interest method and adjusted for liable fees and finance charges.

Royalties are acknowledged on the accrual basis. Dividends are also realised when payment is due.

  • Rendering services.

Revenue for services provided is acknowledged when the business benefits economically. Therefore, revenue and costs can be measured with ease. For ongoing services, revenue is acknowledged upon completion.

  • Construction contracts.

In the event the outcome of a contract is measured reliably, the business entity will acknowledge both income costs regarding the percentage of contract completion. In case of a likely loss, it is immediately considered an onerous contract provision.

Implications

For most businesses, the general concept of recognising revenue when it is more likely an inflow may mean that income is realised at an earlier stage than before.

Businesses with transactions that involve contingent fee or reservations may need to seek counsel from a reputable accounting firm. Ostensibly, accounting for revenue for construction contracts is less likely to be affected.

For the fair value of consideration and deferred consideration to be recognised at present value, entities may sort to adjusting revenue recognition.

Disclosure

A business will be required to disclose the revenue recognised in a specific period. It requires separate goods and services entry. Methods involved in determining the revenue and completion stages will also be required.

In a nutshell, revenue recognition means the expedient recording of revenue and payments received in the pipeline. It is a challenging task, especially for businesses that provide a variety of products and services. In a bid to resolving all the business inflated financial statements, Ernest & Co Accountants can implement and ensure a clear revenue recognition.

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