Revenue Recognition: Product Sales and Services, written by Lisa Marie Starczewski, J.D., Frank J. Beil, Jr., CPA, Carlson School of Management at University of Minnesota, and J. Randolph Mallek, CPA, Ph.D., Accounting Consultant at Buchanan Ingersoll & Rooney, PC, is the second of four portfolios dedicated to revenue recognition. This Portfolio analyzes the fundamental revenue recognition principles—those that apply to all types of transactions, whether they are completed in one step or involve a long-term contract—applicable to both product sales and the provision of services.
This Portfolio begins by examining how to distinguish a product sale from a service transaction. It identifies revenue recognition methods and outlines revenue recognition issues for both products and services.
This Portfolio then provides a detailed analysis of the fundamental principles as they apply to a product’s delivery and performance. Issues addressed include:
Revenue Recognition: Product Sales and Services then provides a thorough analysis of revenue recognition issues that arise when services are provided. These issues focus primarily on the timing of revenue recognition and the completion of performance and include:
This Portfolio addresses these issues in the context of nonrefundable fees and refundable fees (and services) subject to cancellation privileges and discusses revenue recognition issues relevant to franchise fee revenue, license and patent fees, and sales of future revenues.
Revenue Recognition: Product Sales and Services allows you to benefit from:
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. Introduction
A. General Background
B. Distinguishing a Product Sale From a Service Transaction
1. Definition of Product Sale
2. Definition of Service Transaction
C. Revenue Recognition Methods
1. In General
2. Product Sales
3. Service Transactions
D. Application of Fundamental Principles to Product Sales and Service Transactions
2. Earned and Realized or Realizable
3. Four "Recognition" Criteria
4. Substantial Accomplishment of Benefits Represented by Revenue
E. Determining Whether a Multiple Element Arrangement Exists
F. Revenue Recognition Issues - Product Sales
G. Revenue Recognition Issues - Service Transactions
II. Product Sales
A. Delivery and Performance
2. Bill and Hold Arrangements
3. Layaway Sales Arrangements
4. Consignment
5. Other Title Issues
a. Transactions That Resemble Consignment or Financing
(1) In General
(2) Effect of Retained Security Interest - U.S. Jurisdiction
(3) Foreign Jurisdictions Without a U.S. UCC Equivalent
(4) U.S. Companies With UCC Lien That Also Retain Title in Shipped Goods
6. Significance of Shipping Terms
a. In General
b. Other Shipping Issues
(1) Partial Shipments
(2) Fraudulent Shipping Practices
7. Customer Acceptance Clauses
b. When Is Customer Acceptance Deemed to Occur?
c. Accounting for Returns
8. Effect of Installation Provisions
9. Upfront Fees in Supply Contracts
B. Fixed or Determinable Price
2. Loyalty Cards
3. Estimates and Changes in Estimates Relevant to Product Returns
C. Accounting for Separately Priced Extended Warranty and Product Maintenance Contracts
D. Revenue Recognition When Right of Return Exists
2. Application of Statement 48
3. Recognizing Revenue Upon Sale Notwithstanding Right of Return
4. "Reasonable Estimates" of Future Returns
E. Product Financing Arrangements
2. The Relevance of Statement No. 49 to Revenue Recognition
3. Distinguishing Financings From Sales
4. Transactions Specifically Excepted From Application of Statement No. 49
5. Accounting for Product Financing Arrangements
a. Comprehensive Example
b. Accounting for Purchase Commitment as Product Financing - Example
F. Sales With a Guaranteed Minimum Resale Value
G. Sales Arrangements That Include Specified Trade-In Rights
H. Accounting for Shipping and Handling Fees and Costs
I. Finance Charges
J. Sales of Leased/Licensed Departments
K. Bulk Sales
L. Accounting for Product Sales
a. Cash Sales of Merchandise
b. Credit Sales of Merchandise
2. Collections on Behalf of Third Parties - Sales and Other Taxes
III. Service Revenue
A. Upfront Membership Fees
2. Nonrefundable Fees
3. Refundable Fees/Services Subject to Cancellation Privileges
b. To What Types of Service Transactions Will the Staff Allow an Analogy to Statement 48?
c. If an Analogy to Statement 48 Is Available, Is a Company Required to Apply it?
d. If an Analogy to Statement 48 Is Available, Is a Company Allowed to Change From the Statement 140 Method to Application of Statement 48?
B. Franchise Fee Revenue
1. FAS 45 â€" "Accounting for Franchise Fee Revenue"
a. Overview
b. The General Rules
c. Special Rules Relevant to Substantial Performance in Area Franchise Sales
d. Specialized Rules Applicable to Both Individual and Area Franchise Sales
(1) Relationships Between Franchisor and Franchisee
(2) Commingled Revenue
(3) Continuing Franchise Fees
(4) Continuing Product Sales
(5) Agency Sales
(6) Franchising Costs
(7) Repossessed Franchises
e. Disclosure Requirements
2. Are Agreements With "Area Developers" Considered Franchise Agreements?
3. When Do Franchise Agreements Create "Variable Interest Entities"?
4. Using Two Separate Agreements to Circumvent Application of FAS 45
C. Licensing/Royalty/Patent Fees
2. Upfront Fees
3. Effect of Obligation to Defend Patents on Intellectual Property
D. Sales of Future Revenues
IV. Accounting for Contingencies
Working Papers
TABLE OF WORKSHEETS
Worksheet 1 Acronyms and Abbreviations
Worksheet 2 Relevant History of Generally Accepted Accounting Principles
Worksheet 3 Accounting for Franchise Fee Revenue
Worksheet 4 List of Significant Accounting Pronouncements Principally Discussed
Bibliography
OFFICIAL
Securities and Exchange Commission Materials:
SEC Staff Accounting Bulletins (SAB)
SEC Memorandum
SEC AAERs and LRs
Financial Accounting Standards Board Materials:
FASB Concepts Statements
FASB Interpretations
FASB Project Updates
FASB Proposals
FASB Statements
Emerging Issues Task Force (EITF) Issues
FASB Technical Bulletins
FASB Invitation to Comment
American Institute of Certified Public Accountants Materials
Audit and Accounting Guides
Accounting Principles Board Opinions
AICPA Statements of Position (SOP)
AICPA Technical Practice Aids
UNOFFICIAL
Accounting Textbooks, Handbooks, Articles, and Speeches: