Question

1) Prepare a detailed analysis of the concept of revenue recognition under ASC 606. Include an in-depth discussion of the five-step revenue recognition process. Also include a discussion on each of the following topics: a) Sale with right of return b) Warranties c) Principle vs. agent considerations

Answer 1

REVENUE RECOGNITION:

Revenue recognition is a generally accepted accounting principle.it identifies the specific conditions in which revenue is recognised and determines how to account for it .typically, revenue is recognised when critical event has occured,and the dollar amount is easily measured.

Revenue recognition principle of ASC 606 requires that revenue is recognized when the delivery of promised goods or services matches the amount expected by the company in exchange for the goods or services.

the revenue recognition principle is a feature of accrual accounting .it requires that revenues are recognized on the income statement in the period when realized and earned,not necessasarily when the was received. realized means that goods or services have been received by the custmer,but the payment for the good or service is expected later.earned revenue account for goods or services that have been provided or performed respectively.the revenue activity must be fully or essentially complete for it to be included in revenue during the respective accounting period.and there must be a reasonable level of certainity that earned revenue payment will be receaved.according to principle revenue and its assosiated costs must be reported in the same accounting period.

FIVE STEP REVENUE RECOGNITION PROCESS:

in order to comply with topic 606 , every bussiness must follow these five steps.

1.identify the contract with customer: a contract can be written ,verbal or implaid.and is based on your business ordinary practices.the contract should outline payment terms and any other rights of your business and the customer related to the goods or services that will be transferred.

2.identify the performence obligations in the contract; once the contract is established,identify each promise you make to the customer.also known as the performance obligation.this performance obligation is a distinct good or service, or a series of distinct goods or services, that are substantially the same and have the same pattern of transfer to the customer.

3.determine the transaction price: fixed consideration ,variable consideration ,or both types may be included in the contract.pay attention to pay the transaction price with in a period.if a significant amount of time passes,ajust the transaction price for the time value of money.

4.allocate the transaction price to the performence obligations in the contract: assign a price to performance obligation in the contract.base the price on relative standalone selling prices like the sale of similar goods or services,a contractully stated price or list price.

5.recognize revenue when, or as,the entity satisfies a performance obligation: you will recognize revenue over time or at a point of time.if revenue recognize over time ,apply a single method of mesuring progress for each performance obligation.if you reconize at a point of time ,if the performance does not meet the criteria to recognize revenue over time.the performance obligation is met at the most practicle point in time when the customer gains control of the asset.

a) sale with right of return: when the buyer has a right to return a product in the future in accordance with formal or informal agreement,a seller may or may not be able to recognize revenue at the time of sale.the seller can record the revenue at the time of sale if the seller can estimate the rate of product returns.

b)warranties: many companies provide or sell additional warranties on their products.the revenue recognition standard,ASC 606 revenue from contract with customers ,specifically addresses defining warranties with in a contract and determining if they should be accounted for as a separate performance obligation.

c)principle vs agent consideration: the principle vs agent assesments when a third party is involved in providing goods or services to a customer .it specifies that an entity is a principle ,and thus records revenue on a gross basis , if it controls a good or service before transferring the good or service to the custmer.