18-1 C H A P T E R 18 REVENUE Kelompok 1 : 1.Mauludatul Mutia( ) 2.Violitta Putri( ) 3.Sri Mulya ( ) 4.Yunira Susiati M( ) 5.Moch Dion Nurpratama( )

18-2 Current Environment Guidelines for revenue recognition Departures from sale basis Revenue Recognition (At Point of Sale) Revenue Recognition (Long- Term Contracts) Revenue Recognition (Other) Measurement Recognition Summary Service contracts Multiple- deliverable arrangements Other Summary of methods Percentage-of- completion method Cost-recovery method Long-term contract losses Disclosures Revenue

18-3 Restatements for improper revenue recognition are relatively common and can lead to significant share price adjustments. Revenue recognition is a top fraud risk and regardless of the accounting rules followed (IFRS or U.S. GAAP), the risk or errors and inaccuracies in revenue reporting is significant. The Current Environment

18-4 Revenue recognition principle: Revenue is recognized Guidelines for Revenue Recognition The Current Environment LO 1 Apply the revenue recognition principle. (1)when it is probable that the economic benefits will flow to the company and (2)when the benefits can be measured reliably.

18-5 Earlier recognition is appropriate if there is a high degree of certainty about the amount of revenue earned. Delayed recognition is appropriate if the  degree of uncertainty concerning the amount of revenue or costs is sufficiently high or  sale does not represent substantial completion of the earnings process. Departures from the Sale Basis The Current Environment LO 1 Apply the revenue recognition principle.

18-6 Revenue should be measured at the fair value of consideration received or receivable.  Trade discounts or volume rebates should reduce consideration received or receivable and the related revenue.  If payment is delayed, seller should impute an interest rate for the difference between the cash or cash equivalent price and the deferred amount. Measurement of Sale Revenue Revenue Recognition at Point of Sale LO 2 Describe accounting issues for revenue recognition at point of sale.

18-7 When a sales transaction involves a financing arrangement, the fair value is determined by discounting the payment using an imputed interest rate. Imputed interest rate is the more clearly determinable of either 1.the prevailing rate for a similar instrument of an issuer with a similar credit rating, or 2.a rate of interest that discounts the nominal amount of the instrument to the current sales price of the goods or services. Measurement of Sale Revenue Revenue Recognition at Point of Sale LO 2 Describe accounting issues for revenue recognition at point of sale.

18-8 Revenue from the sale of goods is recognized when all the following conditions are met: 1.Company has transferred to the buyer the significant risks and rewards of ownership of the goods; 2.Company retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold; 3.The amount of revenue can be measured reliably; 4.It is probable that the economic benefits will flow to the company; and 5.The costs incurred or to be incurred can be estimated reliably. Recognition of Sale Revenue Revenue Recognition at Point of Sale LO 2

18-9 Sales with Right of Return Revenue Recognition at Point of Sale LO 2 Describe accounting issues for revenue recognition at point of sale. Two possible revenue recognition methods are available when the right of return exposes the seller to continued risks of ownership: 1.not recording a sale until all return privileges have expired or 2.recording the sale, but reducing sales by an estimate of future returns.

18-10 Principal-Agent Relationships Revenue Recognition at Point of Sale LO 2 Describe accounting issues for revenue recognition at point of sale.  Amounts collected on behalf of the principal are not revenue of the agent.  Revenue for the agent is the amount of the commission it receives.

18-11 Consignments Revenue Recognition at Point of Sale LO 2 Describe accounting issues for revenue recognition at point of sale.  Manufacturers (or wholesalers) deliver goods but retain title to the goods until they are sold.  Consignor (manufacturer or wholesaler) ships merchandise to the consignee (dealer), who is to act as an agent for the consignor in selling the merchandise.  Consignor makes a profit on the sale.  Consignee makes a commission on the sale.

18-12 Trade Loading and Channel Stuffing Revenue Recognition at Point of Sale LO 2 Describe accounting issues for revenue recognition at point of sale. Trade loading - a crazy, uneconomic, insidious practice through which manufacturers—trying to show sales, profits, and market share they don’t actually have—induce their wholesale customers, known as the trade, to buy more product than they can promptly resell. Channel stuffing. When a software maker needed to make its financial results look good, it offered deep discounts to its distributors to overbuy, and then recorded revenue when the software left the loading dock.

18-13 Two methods of accounting for long-term construction contracts:  Percentage-of-completion method.  Cost-recovery (zero-profit) method. Long-Term Contracts (Construction)

18-14 Rationale for using percentage-of-completion accounting is that under most of these contracts, the  Buyer and seller have enforceable rights.  Buyer has the legal right to require specific performance on the contract.  Seller has the right to require progress payments that provide evidence of the buyer’s ownership interest.  As a result, a continuous sale occurs as the work progresses and companies should recognize revenue according to that progression. Long-Term Contracts (Construction)

18-15 Companies must use the percentage-of-completion method when all of the following conditions exist. 1.Total contract revenue can be measured reliably; 2.It is probable that the economic benefits associated with the contract will flow to the company; 3.Both the contract costs to complete the contract and the stage of contract completion at the end of the reporting period can be measured reliably; and 4.The contract costs attributable to the contract can be clearly identified and measured reliably so the actual contract costs incurred can be compared with prior estimates. Long-Term Contracts (Construction)

18-16 Companies should use the cost-recovery method when one of the following conditions applies: 1.When a company cannot meet the conditions for using the percentage-of-completion method, or 2.When there are inherent hazards in the contract beyond the normal, recurring business risks. Long-Term Contracts (Construction)

18-17 Calculation for Revenue to Be Recognized LO 3 Apply the percentage-of-completion method for long-term contracts. Illustration Illustration Illustration Percentage-of-Completion Method Long-Term Contracts (Construction)

18-18 LO 3 Apply the percentage-of-completion method for long-term contracts. Illustration: KC Construction Company has a contract to construct a €4,500,000 bridge at an estimated cost of €4,000,000. The contract is to start in July 2010, and the bridge is to be completed in October The following data pertain to the construction period. Long-Term Contracts (Construction)

18-19 LO 3 Apply the percentage-of-completion method for long-term contracts. Illustration: Compute percentage complete. Illustration 18-6 Long-Term Contracts (Construction)

18-20 LO 3 Apply the percentage-of-completion method for long-term contracts. Illustration: KC would make the following entries to record (1) the costs of construction, (2) progress billings, and (3) collections. Illustration 18-7 Long-Term Contracts (Construction)

18-21 Percentage-of-Completion, Revenue and Gross Profit, by Year Illustration Long-Term Contracts (Construction)

18-22 LO 3 Apply the percentage-of-completion method for long-term contracts. Illustration: KC’s entries to recognize revenue and gross profit each year and to record completion and final approval of the contract. Illustration Long-Term Contracts (Construction)

18-23 LO 3 Apply the percentage-of-completion method for long-term contracts. Illustration: Content of Construction in Process Account— Percentage-of-Completion Method Illustration Long-Term Contracts (Construction)

18-24 LO 3 Apply the percentage-of-completion method for long-term contracts. Financial Statement Presentation—Percentage-of- Completion Illustration Computation of Unbilled Contract Price at 12/31/10 Long-Term Contracts (Construction)

18-25 Financial Statement—Percentage-of-Completion Long-Term Contracts (Construction) Illustration LO 3

18-26 Illustration: For the bridge project illustrated on the preceding pages, Hardhat Construction would report the following revenues and costs. Cost-Recovery (Zero-Profit) Method LO 4 Apply the cost-recovery method for long-term contracts. Illustration 18-21

18-27 Illustration: Hardhat’s entries to recognize revenue and gross profit each year and to record completion and final approval of the contract. Cost-Recovery (Zero-Profit) Method LO 4 Apply the cost-recovery method for long-term contracts. Illustration 18-22

18-28 Illustration: Comparison of gross profit recognized under different methods. Cost-Recovery (Zero-Profit) Method LO 4 Apply the cost-recovery method for long-term contracts. Illustration 18-23

18-29 Financial Statement—Cost-Recovery Method Long-Term Contracts (Construction) Illustration LO 4 Apply the cost-recovery method for long-term contracts.

18-30 A) Prepare the journal entries for 2010, 2011, and LO 3 Apply the percentage-of-completion method for long-term contracts. Illustration: Long-Term Contracts (Construction) Casper Construction Co.

18-31 LO 3 Apply the percentage-of-completion method for long-term contracts. Illustration: Long-Term Contracts (Construction)

18-32 LO 3 Apply the percentage-of-completion method for long-term contracts. Long-Term Contracts (Construction) Illustration:

18-33 LO 3 Apply the percentage-of-completion method for long-term contracts. Long-Term Contracts (Construction) Illustration:

18-34 Companies recognize revenue only to the extent of costs incurred that are expected to be recoverable. Only after all costs are incurred is gross profit recognized. LO 4 Apply the cost-recovery method for long-term contracts. Cost-Recovery Method Long-Term Contracts (Construction)

18-35 Cost-Recovery Method Illustration: LO 4 Apply the cost-recovery method for long-term contracts.

18-36 Illustration: Cost-Recovery Method LO 4 Apply the cost-recovery method for long-term contracts.

18-37 LO 5 Identify the proper accounting for losses on long-term contracts.  Loss in the Current Period on a Profitable Contract ► Percentage-of-completion method only, the estimated cost increase requires a current-period adjustment of gross profit recognized in prior periods.  Loss on an Unprofitable Contract ► Under both percentage-of-completion and completed- contract methods, the company must recognize in the current period the entire expected contract loss. Long-Term Contract Losses Long-Term Contracts (Construction)

18-38 Illustration: Loss in Current Period Long-Term Contract Losses LO 5 Identify the proper accounting for losses on long-term contracts. b) Prepare the journal entries for 2010, 2011, and 2012 assuming the estimated cost to complete at the end of 2011 was €215,436 instead of € 170,100. Casper Construction Co.

18-39 Long-Term Contract Losses LO 5 Identify the proper accounting for losses on long-term contracts. Illustration: Loss in Current Period

18-40 Long-Term Contract Losses LO 5 Identify the proper accounting for losses on long-term contracts. Illustration: Loss in Current Period

18-41 Illustration: Loss on Unprofitable Contract Long-Term Contract Losses LO 5 Identify the proper accounting for losses on long-term contracts. c) Prepare the journal entries for 2010, 2011, and 2012 assuming the estimated cost to complete at the end of 2011 was € 246,038 instead of € 170,100. Casper Construction Co.

18-42 Long-Term Contract Losses LO 5 $675,000 – 683,438 = (8,438) cumulative loss Plug Illustration: Loss on Unprofitable Contract

18-43 Long-Term Contract Losses LO 5 Identify the proper accounting for losses on long-term contracts. Illustration: Loss on Unprofitable Contract

18-44 Long-Term Contract Losses LO 5 Identify the proper accounting for losses on long-term contracts. For the Cost-Recovery method, companies would recognize the following loss: Illustration: Loss on Unprofitable Contract

18-45 Construction contractors should disclosure:  Revenue recognized during the period and the methods used to determine the contract revenue and stage of completion.  For contracts in progress, ► aggregate amount of costs incurred and recognized net income, amount of advances received, and amount of retentions.  Any contingent assets or liabilities related to these contracts. Disclosures in Financial Statements LO 5 Identify the proper accounting for losses on long-term contracts. Long-Term Contract Losses

18-46 Follow the same criteria as long-term contracts. To recognize revenue:  It must be reliably measurable;  Economic benefits are probable;  Stage of completion must be reliably measurable; and  Costs must be reliably measurable. Service Contracts Other Revenue Recognition Issues LO 6 Describe the accounting issues for service contracts.

18-47 Single Act: Revenue recognized at the time of the act. More Than One Act: Revenue recognized as various acts occur. Three circumstances: 1.Specified number of identical or similar acts. 2.Specified number of defined but not identical acts. 3.Unspecified number of identical acts or similar acts with a fixed period for performance. Service Contracts Other Revenue Recognition Issues LO 6 Describe the accounting issues for service contracts.

18-48 Other Revenue Recognition Issues LO 6 Describe the accounting issues for service contracts.

18-49 Other Revenue Recognition Issues LO 6 Assuming R&D services are provided according to the contract in 2011, Jackson makes the following entries in 2011 to recognized revenue on the Andes contract. January 1, 2011 Cash 1,000,000 Unearned R&D service revenue 1,000,000 December 31, 2011 Cash 400,000 Unearned R&D Service Revenue200,000 R&D Service Revenue 600,000

18-50 Other Revenue Recognition Issues LO 6 Describe the accounting issues for service contracts.

18-51 LO 6 Describe the accounting issues for service contracts. Other Revenue Recognition Issues

18-52 LO 6 Describe the accounting issues for service contracts. Other Revenue Recognition Issues

18-53 Other Revenue Recognition Issues SeniorLife makes the following entries related to the contract. January 1, 2011 Cash 300,000 Unearned service revenue 300,000 December 31, 2011 Unearned service revenue 60,000 Service Revenue 60,000 December 31, 2012 Unearned service revenue 105,000 Service Revenue 105,000

18-54 MDAs provide multiple products or services to customers as part of a single arrangement. Major accounting issues  how to allocate the revenue to the various products and services and  how to allocate the revenue to the proper period. Multiple-Deliverable Arrangements (MDAs) Other Revenue Recognition Issues LO 7 Identify the proper accounting for multiple-deliverable arrangements.

18-55 All units in a MDA are considered separate units of accounting, provided that: 1.A delivered item has value to the customer on a standalone basis; and 2.The arrangement includes a general right of return relative to the delivered item; and 3.Delivery or performance of the undelivered item is considered probable and substantially in the control of the seller. Multiple-Deliverable Arrangements (MDAs) Other Revenue Recognition Issues LO 7 Identify the proper accounting for multiple-deliverable arrangements.

18-56 LO 7 Identify the proper accounting for multiple-deliverable arrangements. Illustration 18-34

18-57  Interest, Royalties, and Dividends  Accretion  Completion-of-Production Basis Other Revenue Situations Other Revenue Recognition Issues LO 7 Identify the proper accounting for multiple-deliverable arrangements.