in the previous lesson we talked about
the timing of revenue recognition and payments and we said the main criteria
for revenue recognition are one if the work is done and two if the seller
company receives a valid promise of payment okay
we probably simplified a little bit but that’s how we usually determine whether
we should recognize revenue from a transaction it’s time to get more
technical we said revenue should be recognized when it is earned when the
goods have been delivered to our client not necessarily when a payment has been
made that’s true but it is also a simplification of how revenue is
recognized in practice according to the international financial reporting
standards revenue should be recognized when five criteria are met risks and
rewards have been transferred from the seller to the buyer the seller has no
control over the goods sold the collection of payment is reasonably
assured the amount of revenue can be reasonably measured costs of earning the
revenue can be reasonably measured okay the first two conditions are about
whether the seller of the goods has delivered all or most of the product or
service he has been paid to deliver if you sell used cars with no warranties
and a person comes by buys one of the cars and takes off with it then the
first two points are satisfied and risks and rewards have been transferred from
the seller to the buyer if your company sells brand-new cars
and issues five year full service warranties then perhaps not all the
risks related to the product have been transferred to the buyer therefore some
portion of unearned revenue should be left on the liability side of the
balance sheet point number three collection of payment
is reasonably assured if the two parties have agreed to certain payment
conditions and there is no reason to believe the buyer would not pay on time
the seller should be able to recognize the sale as revenue tricky right this
means if we are aware of finance difficulties of the buyer or we
typically expect that a certain portion of our clients will default we can’t
register the entire amount as revenue and should leave a certain provision
instead so if a leasing company sells some of its goods to clients with low
income and knows that 60% of them are not likely to pay for the goods they
have purchased then the company can’t register the entire amount of goods it
sold as revenue we must be careful with point number three okay we are almost
there point number four the amount of revenue
can be reasonably measured that’s easier usually given that we talked about a
financial transaction and the amount of money to be paid is pre-established
there can be exceptions of course but that’s rather rare and finally costs of
earning the revenue can be reasonably measured we can only recognize revenue
when selling products and services the costs for which can be reasonably
measured a company must have sustained some form of cost to produce these goods
or deliver these services right these are the five revenue recognition
criteria according to the international financial reporting standards revenue
recognition criteria under US GAAP are almost identical okay this will do for
now thanks for watching