CPA Financial Accounting and Reporting (FAR)

Certified Public Accountant Financial Accounting and Reporting examination.

Conceptual Framework of Financial AccountingFinancial Statement Preparation and PresentationRevenue Recognition
Accounting for Income TaxesLeases: Lessee and Lessor AccountingBusiness Combinations and Consolidation
Analyzing Financial StatementsApplying GAAP and IFRS to Real-World ScenariosEthics and Professional Responsibility in Financial Reporting
Mastering Multiple-Choice QuestionsTime Management on Exam DayApproaching Simulations and Case Studies
Conceptual Framework...Financial Statement ...Revenue RecognitionAccounting for Incom...Leases: Lessee and L...Business Combination...Analyzing Financial ...Applying GAAP and IF...Ethics and Professio...Mastering Multiple-C...Time Management on E...Approaching Simulati...
Basic Concepts

Revenue Recognition

When and How to Recognize Revenue

Revenue recognition determines when a company can record income from its business activities. The current standard, ASC 606 (and IFRS 15), introduces a five-step model:

  1. Identify the contract with a customer.
  2. Identify the separate performance obligations.
  3. Determine the transaction price.
  4. Allocate the transaction price to the performance obligations.
  5. Recognize revenue when (or as) the entity satisfies a performance obligation.

Importance

Accurate revenue recognition ensures financial statements truly reflect a company’s operations and financial condition.

Real-World Application

Companies must carefully account for long-term contracts, subscriptions, and bundled goods or services.

Examples

  • A software company recognizes subscription revenue over the life of a 12-month contract rather than all at once.

  • A construction firm recognizes revenue based on project milestones instead of only at project completion.

In a Nutshell

Revenue is recognized when it is earned and realizable, not necessarily when cash is received.

Next
Accounting for Income Taxes