Wiley GAAP: Practical Implementation Guide and Workbook

Chapter 9. REVENUE RECOGNITION (ASC 605)

BACKGROUND AND INTRODUCTION

According to CON 5, Recognition and Measurement in Financial Statements of Business Enterprises, "an entity's revenue-earning activities involve delivering or producing goods, rendering services, or other activities that constitute its ongoing major or central operations, and revenues are considered to have been earned when the entity has substantially accomplished what it must do to be entitled to the benefits represented by the revenues."

In order to be recognized, revenue must be realized or realizable, and it must have been earned. CON 5 notes that "the two conditions (being realized or realizable, and being earned) are usually met by the time product or merchandise is delivered or services are rendered to customers, and revenues from manufacturing and selling activities and gains and losses from sales of other assets are commonly recognized at the time of sale (usually meaning delivery)."

"Revenue" should be distinguished from "gains." Revenue arises from an entity's ordinary activities. Gains, however, include such nonroutine items as the profit on disposal of noncurrent assets, or on retranslating balances in foreign currencies, or fair value adjustments to financial and nonfinancial assets.

The SEC, reflecting on the conceptual foundation for revenue recognition, observed first in Staff Accounting Bulletin 101, and then in its replacement, SAB 104, that "revenue generally is realized or realizable and earned ...