After studying this chapter, you should be able to:
- 1 Understand revenue recognition issues.
- 2 Identify the five steps in the revenue recognition process.
- 3 Identify the contract with customers.
- 4 Identify the separate performance obligations in the contract.
- 5 Determine the transaction price.
- 6 Allocate the transaction price to the separate performance obligations.
- 7 Recognize revenue when the company satisfies its performance obligation.
- 8 Identify other revenue recognition issues.
- 9 Describe presentation and disclosure regarding revenue.
Revenue recognition practices are the most prevalent reasons for accounting restatements. A number of the revenue recognition issues relate to possible fraudulent behavior by company executives and employees. Consider the following situations.
- Rolls-Royce (GBR) was questioned by investors about the revenue recognition practices for its “Totalcare” contracts, where engines are sold at little or no profit but tie the customer into long-term servicing and parts purchases. When it was revealed that market regulators were exploring these revenue practices and changes in how Rolls booked fees from its risk-sharing partnerships, the company's share price slipped to a one-year low.
- The former co-chairman and CEO of Qwest Communications International Inc. (USA) and eight other former Qwest officers and employees were ...