Answered Essay: Chapter 8 questions:

Chapter 8 questions:

1. What are the two general revenue recognition criteria?

2. What 4 revenue recognition factors are identified in FASB ASC Section 605-45-45, and how do these four factors relate to the two general revenue recognition criteria?

Answer the two questions above and submit your work in the assignment section. Due date: Sunday, 11:59pm.

Expert Answer


1. What are the two general revenue recognition criteria?

Generally there are a few revenue recognition criteria have been developed by SEC, where a publicly-held company must meet in order to recognize the revenue from a transaction.

  1. Collection possibility
  2. Delivery is complete.

2. What 4 revenue recognition factors are identified in FASB ASC Section 605-45-45, and how do these four factors relate to the two general revenue recognition criteria?

Below are the 4 factors identified in FASB ASC Section 605-45-45.

  1. Variable consideration—If the promised amount of consideration in a contract is variable, an entity would estimate the transaction price by using either the expected value (that is, probability-weighted amount) or the most likely amount, depending on which method the entity expects to better predict the amount of consideration to which it will be entitled.
  2. The time value of money— An entity would adjust the promised amount of consideration to reflect the time value of money if the contract has a financing component that is significant to the contract. An entity would consider various factors in assessing whether a financing component is significant to a contract. As a practical expedient, an entity need not adjust the promised amount of consideration to reflect the time value of money if the entity expects at contract inception that the period between payment by the customer and the transfer of the promised goods or services to the customer will be one year or less.
  3. Noncash consideration—If a customer promises consideration in a form other than cash, an entity would measure the noncash consideration (or promise of noncash consideration) at fair value. If an entity cannot reasonably estimate the fair value of the noncash consideration, it would measure the consideration indirectly by reference to the standalone selling price of the goods or services promised to the customer in exchange for the consideration.
  4. Consideration payable to the customer—If an entity pays, or expects to pay, consideration to a customer (or to other parties that purchase the entity’s goods or services from the customer) in the form of cash, credit, or other items that the customer can apply against amounts owed to the entity, the entity would account for the consideration payable to the customer as a reduction of the transaction price unless the payment is in exchange for a distinct good or service.

All these factors are closely related to the two general revenue recognition criteria developed by SEC to the companies. If it is not promising to make a reasonable estimate of the amount considered in the contract for doubtful accounts, then a sale cannot forward. The time value of money should be considered effectively as the SEC would not like bill and hold transactions, and only allows them under restricted circumstances. The substance of a noncash transaction should indicate that a sale untile the consignee sells the goods to a third party. The SEC explicitly points out that the transfer of goods solely for demonstration purpose is not actual sale, nor is a transfer when the seller is appreciative to take the goods back at ta specific price. The buyer no longer has the contractual right to individually lay off the contract and be paid back for any amounts already paid.

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