Revenue Recognition

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Revenue Recognition Reporting Financial
Performance

• Stephenie Fox CA
• Principal, CICA

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Revenue Recognition

• CICA Handbook Section 3400 REVENUES
• Issued 1986
• Revenue generating activities increasingly
  complex
• Current environment sales figures used as
  indicator in evaluating stock prices

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Section 3400

• Addresses timing of revenue recognition
• (not measurement)

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Revenue Defined

• Revenue is the inflow of cash, receivables or
  other consideration arising in the course of the
  ordinary activities of an enterprise, normally
  from the sale of goods, the rendering of services
  and the use by others of enterprise yielding
  interest royalties or dividends. Revenue is net
  of items such as trade or volume discounts,
  returns and allowances, claims for damaged goods,
  and certain excise and sales taxes.

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Revenue Recognition

• .06 recognize when performance requirements (
  0708) are satisfied and ultimate collection is
  reasonably assured

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Revenue Recognition (cont)

• .07 sale of goods seller of goods has
  transferred to the buyer the significant risks
  and rewards of ownership in that all significant
  acts have been completed and the seller retains
  no continuing managerial involvement in or
  effective control of the goods transferred to a
  degree usually associated with ownership

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Revenue Recognition (cont)

• .08 rendering of services and long-term
  contracts performance determined using
  percentage of completion or completed contract
  method performance achieved when reasonable
  assurance exists regarding the measurement of the
  consideration that will be derived from rendering
  the service or performing the long-term contract

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Recognition

• Transferring risks and rewards of ownership
• Need to assess whether these have been
  transferred look at circumstances
• Usually coincides with transfer of legal title
• Do any significant acts of performance remain to
  be completed

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Recognition (cont)

• Must have certainty of collection
• e.g. does payment depend on resale of goods by
  the buyer
• Returns are they significant and unpredictable

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Problems of interpretation

• What does significant acts mean?
• OSC notice 52-701 review of revenue recognition
  to determine if appropriate application of
  Section 3400.
• Revenue has direct effect on reported earnings-
  also becoming an indicator of value and
  performance especially in tech sector

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OSC Findings

• Need for significant improvement in nature and
  extent of disclosure
• Referred to more detailed literature like SAB 101
  effectively makes this part of Canadian GAAP
  for public listed companies
• Feeling that issuers have not looked at all
  existing sources of accounting literature when
  applying Canadian GAAP

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Transfers of Risks and Rewards

• Completion of significant acts
• Not always easy to assess
• E.g. bill and hold sales, contracts with multiple
  elements

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SAB 101 U.S. SEC

• General FASB principles revenue recognized when
  realized or realizable and earned
• Earned when substantially accomplished what it
  must do to be entitled to benefits represented by
  revenues
• Problems of uncertainties and interpretation

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CICA New EICs

• D33 revenue recognition
• D34 revenue arrangements with multiple
  deliverables
• D35 accounting for separately priced extended
  warranty and product maintenance contracts

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EIC 33 Revenue Recognition

• Performance achieved under 3400.07 when
• Persuasive evidence of an arrangement exists
• Delivery has occurred or service have been
  rendered and
• The sellers price to the buyer is fixed or
  determinable
• Recognize revenue in the period in which all of
  these criteria are met

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EIC 34 Multiple deliverables

• Provides guidance for determining if arrangements
  with multiple deliverables consist of separate
  units of accounting
• Presumption is that separate contracts with same
  entity entered into at same or near the same time
  are a package
• EIC 34 looks at when these can be separated and
  accounted for separately

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EIC 35 Extended warranty and product maintenance
contracts

• Defer and recognize over life of contract
• Costs incurred should be deferred

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Reporting Financial Performance

• Display and presentation of items in the
  operating statement
• Cash flow statement
• Should certain items not recognized in income
  statement be recognized in a statement of
  financial performance?

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Background

• Concerns with income statement including
• Undue emphasis on bottom line
• Classification of items
• Transparency for gains and losses that dont go
  through the I/S
• Gains and losses from changes in fair value

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Comprehensive Income

• Change in equity of an enterprise from
  transactions and events from non-owners.
• All changes in equity except those from
  investments by owners and distributions to owners.

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Other Comprehensive Income

• Revenues expenses gains and losses required by
  primary sources of GAAP to be included in
  comprehensive income but excluded from net income

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Presentation

• Net income
• Other comprehensive income
• Total
• One or two statements
• Terms may vary

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Statement of Comprehensive Income
20X2 20X1
Net income 651 22
Other comprehensive income net of tax 2102 702
Comprehensive Income 2753 724

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Reporting Financial Performance

• Convergence project

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Reporting Financial Performance

• Maximize predictive value with respect to
  forecasts of comprehensive income and its
  components
• Bottom line not a useful number aggregates a
  range of components of financial performance
  goal is useful disaggregation
• Ambiguity in definition of operational earnings
  companies defining own measures of profit-lack of
  consistency and comparability between

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Proposed Format of Performance Report
(Preliminary)

• Part A Revenue, Cost of sales (excludes
  depreciation), Pension expense, Other (selling
  general and admin)
• Part B - Investing ( changes in assets) e.g.
  Interest Dividends, Depreciation amortization
• Part C Financing (changes in liabilities)
• /- Income taxes, Discontinuing operations, Other
• Total changes in net assets before transactions
  with owners

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Reporting Financial Performance

• Work in process
• International convergence a goal by all standard
  setters