The Implementation Of Revenue Recognition

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Introduction Revenue Recognition is a widely debated topic amongst businesses and entities when it comes to preparing financial statements. Generally, companies tend to recognize their revenue when it is earned; however, this process does tend to vary depending on the company’s point of view. The FASB Codification outlines this process in detail and provides guidelines to companies that come across any issues when recognizing revenue. Part A: Factors that Impair Estimates of Returns Reliable estimates of future returns are paramount for companies when predicting future cash flows. Referring to FASB Codification, the following key factors impair the ability to make a reasonable estimate: 1. The susceptibility of the product to…show more content…
2. The buyer has paid the seller, or the buyer is obligated to pay the seller and the obligation is not contingent on resale of the product. If the buyer does not pay at time of sale and the buyer 's obligation to pay is contractually or implicitly excused until the buyer resells the product, then this condition is not met. 3. The buyer 's obligation to the seller would not be changed in the event of theft or physical destruction or damage of the product. 4. The buyer acquiring the product for resale has economic substance apart from that provided by the seller. This condition relates primarily to buyers that exist on paper, that is, buyers that have little or no physical facilities or employees. It prevents entities from recognizing sales revenue on transactions with parties that the sellers have established primarily for the purpose of recognizing such sales revenue. 5. The seller does not have significant obligations for future performance to directly bring about resale of the product by the buyer. 6. The amount of future returns can be reasonably estimated because detailed record keeping for returns for each product line might be costly in some cases, this Subtopic permits reasonable aggregations and approximations of product returns. Exchanges by ultimate customers of one item for another of the same kind, quality, and price (for example, one color or size for another) are not considered returns for purposes of this Subtopic. In the case that
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