Revenue Recognition: Fundamental Principles, written by Lisa Marie Starczewski, J.D., J. Randolph Mallek, CPA, Ph.D., Accounting Consultant at Buchanan Ingersoll & Rooney, PC, and Frank J. Beil, Jr., CPA, Carlson School of Management at University of Minnesota, represents the first of four anticipated Portfolios on revenue recognition. This Portfolio analyzes the general and “fundamental” principles, those principals that apply to all types of transactions, whether they are completed in one step or involve a long-term contract, governing revenue recognition.  

This Portfolio surveys the concept of revenue recognition, the relevant accounting literature, and the methodology of researching a revenue recognition issue. It discusses in detail the four basic recognition criteria: persuasive evidence of an arrangement; delivery of goods or performance of services; fixed or determinable sales price; and reasonably assured collectibility.  

This Portfolio also discusses such issues as: 

• accounting for nonmonetary transactions,
• reporting revenue gross vs. net,
• measuring revenue when the consideration is stock,
• determining whether certain amounts collected by a vendor should be included in revenue,
• determining whether certain types of discounts or sales incentives should be recorded as a reduction in revenue, and
• adhering to key principles in a financial statement disclosure. 

In addition, this Portfolio analyzes multiple-element arrangements. Transactions involving multiple elements must be analyzed to identify the deliverables (if any) that must be examined separately with respect to revenue recognition. Revenue Recognition: Fundamental Principles analyzes when a transaction is considered a multiple-element arrangement, how to determine the separate units of accounting within a multiple-element arrangement, and how to allocate the total arrangement consideration among the units of accounting.

Revenue Recognition: Fundamental Principles allows you to benefit from: 

• Hundreds of hours of original research on specific tax planning topics from leading practitioners in this area.
• Invaluable practice documents including tables, charts and lists.
• Guidance from world-class experts.
• Real-world and in-depth analysis that lets you explore various options.
• Time-saving access to relevant sections of tax laws, regulations, court cases, IRS documents and more.
• Alternative approaches to both common and unique tax scenarios. 

This Portfolio is included in the Accounting Policy & Practice Series, a comprehensive series of titles which explain, explicate, and offer commentary on a wide range of accounting and financial management topics, including revenue recognition, income taxes, leasing, business combinations, debt instruments, risk management, internal controls and more. 

Detailed Analysis

I. Overview

A. Concept of Revenue Recognition

B. Nature of Accounting Literature on Revenue Recognition

C. Significance of Revenue Recognition

D. Methodology for Researching a Revenue Recognition Issue

1. In General

2. Steps Summarized

3. Steps Detailed

E. Fundamental Principles of Revenue Recognition-In General

F. Multiple Element Arrangements

G. Generally Accepted Accounting Principles and the GAAP Hierarchy

H. Principles-Based Accounting Standards

1. In General

2. The Proposed FASB Revenue Recognition Project

3. Sarbanes-Oxley Act of 2002 and SEC Study

a. In General

b. Revenue Recognition

I. SEC Guidance on Revenue Recognition

1. Staff Accounting Bulletins

2. SEC AAERs and LRs

a. In General

b. Need for Adequate System of Internal Accounting Controls

J. Topics Addressed in Other Portfolios

1. Product Sales

2. Service Revenues

3. Long-Term Contracts

4. Software

5. Specialized Industries

6. Accounting Fraud

II. Fundamental Principles of Revenue Recognition

A. Role of Fundamental Principles

B. Definitional Guidance-"Revenue" and "Recognition"

1. In General

2. What is "Revenue"?

3. What is the Definition of "Recognized Revenue?"

4. Conflict Between FASB CONs 5 and 6

C. The SEC's Four-Pronged Revenue Recognition Test

1. In General

2. Persuasive Evidence of an Arrangement

a. In General

(1) Effect of Pre-Sale Negotiations and/or Anticipatory Inventory Shipments

(2) Non-Binding or Incomplete Agreements

b. Indicia of an Arrangement

(1) Written and/or Authorized Sales Agreements

(a) Written Sales Agreement and Authorized Signature Requirement

(b) Approval by Seller's Management Committee or Board of Directors Requirement

(c) Effect of "Side Agreements"

(d) Absence of Formal Continuation Provisionâ€"Effect on Current Revenue Recognition

(2) E-Commerce Issues

3. Fixed or Determinable Price

a. General Rule

(1) Factors in the Customer's Control

(2) Factors in Seller's Control

(3) Factors in Control of a Third Party

(4) Factors Based on an Index

4. Performance and Delivery

a. Accounting for Advance Payments and Unearned Revenue

5. Reasonable Assurance of Collectibility

a. Credit Card Sales

b. Sales Returns and Allowances

D. Fundamental Principles Related to Measuring Revenue

1. Accounting for Nonmonetary Transactions (Barter Transactions)

2. Reporting Revenue Gross Versus Net

a. Emerging Issues Task Force-Background

b. Analysis of EITF Issue 99-19

(1) In General

(2) How Indicators Are Evaluated

(3) Sample Disclosure

3. Accounting by a Grantee For an Equity Instrument to be Received in Conjunction With Providing Goods or Services

4. Income Statement Characterization of Reimbursements Received for "Out-of-Pocket" Expenses Incurred

5. Accounting for Consideration Given by a Vendor to a Customer (Including Resellers of the Vendor's Products) or to a Third-Party Manufacturer or Reseller

a. General Application

b. Scope

c. Issues

(1) EITF Issue 01-9

(2) EITF Issue 06-1

d. Income Statement Characterization-Reduction in Revenue or Expense?

(1) Application

(2) Examples

(a) Exchanges That Do Not Represent Identifiable Benefits

(b) Exchanges That Represent Identifiable Benefits

e. Accounting for "Negative Revenue"

f. Up-Front Nonrefundable Consideration

g. Measuring the Cost of Consideration

h. Application of EITF Issue 01-9 to Gift Cards and Gift Certificates

i. Application of EITF Issue 01-9 to Below-Market Financing

6. Accounting for "Points" and Other Time-Based or Volume-Based Sales Incentive Offers for Free Products or Services to be Delivered in the Future

7. Accounting by a Customer (Including a Reseller) for Certain Consideration Received From a Vendor

a. In General

b. Reasonable Estimates of Future Refunds and Rebates

c. Up-Front Nonrefundable Consideration

III. EITF Issue 00-21, "Revenue Arrangements with Multiple Deliverables"

A. In General

B. Scope of EITF Issue 00-21

1. EITF Issue 00-21 Does Not Establish New Revenue Measurement Rules

2. EITF Issue 00-21 Excludes Open-Ended Contracts Involving Future Benefits and Award Credit Sales

3. Relationship Between EITF Issue 00-21 and Other Accounting Literature

C. Application of EITF Issue 00-21

1. Existence of an Arrangement

2. Tripartite Methodology

a. Issue 1: Identifying Units of Accounting

b. Issue 2: Determining the Total Arrangement Consideration

c. Issue 3: Allocating the Total Arrangement Consideration to the Separate Units of Accounting

3. Limitations on Consideration Allocated to Delivered Items

D. Examples of Accounting for Revenue Arrangements With Multiple Deliverables

1. Identifying the Deliverables

2. Unit of Accounting

a. First Condition of Separation: Stand-Alone Value Requirement

b. Second Condition of Separation: Evidence of Fair Value Requirement for Undelivered Item(s)

c. Third Condition for Separation: General Right of Return for Delivered Item(s)

3. Determining the Total Arrangement Consideration

4. Allocating the Total Arrangement Consideration to the Units of Accounting

a. Fair Value Method

5. Effect of Contingencies on Revenue Recognition

a. Effect of Contingency-Limitation on Consideration Allocation

b. Effect of Contingency-Postponement of Revenue Recognition

c. Residual Method

6. Revenue Recognition-Accounting Illustrations

a. Equipment Sales With Installation

b. Service Contracts and Ancillary Product Sales

c. Limitation on Revenue Recognition Per Period, Effect of Arrangement Cancellation, and Amounts Reported as Assets

E. Conclusion

IV. Financial Disclosures and Income Statement Presentation

A. In General

B. Required Disclosure of Revenue Recognition Accounting Policies and Income Statement Presentation

1. Footnote Disclosure of Accounting Policies

2. Income Statement Presentation

3. Accounting Changes-APB Opinion No. 20

4. Disclosure of Gain Contingencies

5. Disclosure of Risks and Uncertainties

6. Related Party Disclosures

C. Management's Discussion & Analysis

1. Critical Accounting Estimates and Assumptions

2. Revenue and Sales Trends

Working Papers

TABLE OF WORKSHEETS

Worksheet 1 Relevant History of Generally Accepted Accounting Principles

Worksheet 2 Hierarchy of Generally Accepted Accounting Principles

Worksheet 3 EITF Issue No. 00â€"21, Revenue Arrangements with Multiple Deliverables

Worksheet 4 EITF Issue 00â€"10, Accounting for Shipping and Handling Fees and Costs

Worksheet 5 EITF Issue 99â€"19, Reporting Revenue Gross as a Principal versus Net as an Agent

Worksheet 6 EITF Issue 00â€"08, Accounting by a Grantee for an Equity Instrument to be Received in Conjunction with Providing Goods or Services

Worksheet 7 EITF Issue 01â€"14, Income Statement Characterization of Reimbursements Received for "Out-of-Pocket" Expenses Incurred

Worksheet 8 EITF Issue 01â€"9, Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor's Products)

Worksheet 9 Excerpts from Annual Report of Black & Decker Corp. on Form 10â€"K (Dec. 31, 2004)

Worksheet 10 Excerpts From Annual Report of Nucor Corp. on Form 10-K (Dec. 31, 2004)

Worksheet 11 Excerpts from Annual Report of Wal-Mart Stores Inc. on Form 10-K (Dec. 31, 2004)

Worksheet 12 Excerpts from Annual Report of BearingPoint, Inc. on Form 10-K (Dec. 31, 2004)

Worksheet 13 Excerpts from Annual Report of Perot Systems Corp. on Form 10-K (Dec. 31, 2004)

Worksheet 14 Principal Acronyms and Abbreviations Used in Portfolio

Worksheet 15 EITF Issue 06-1, Accounting for Consideration Given by a Service Provider to a Manufacturer or Reseller of Equipment Necessary for an End-Customer to Receive Service from the Service Provider

Worksheet 16 List of Significant Accounting Pronouncements Principally Discussed

Bibliography

OFFICIAL

Securities and Exchange Commission:

Accounting and Auditing Enforcement Releases

Staff Accounting Bulletins

Court Cases:

American Institute of Certified Public Accountants:

Accounting Principles Board Opinions

Accounting Research Bulletins

Audit and Accounting Guides

Statements on Auditing Standards

Statements of Position

Emerging Issues Task Force

Financial Accounting Standards Board:

Concepts Statements

Statements of Financial Accounting Standards

Proposals, Reports, Updates

UNOFFICIAL

Textbooks, Handbooks, and Articles:

BNA Tax and Accounting Portfolios: