According to the Financial Accounting Standard Board (FASB), “Revenues are inflows or
other enhancements of assets of an entity or settlements of its liabilities from delivering or
producing goods, rendering services, or other activities that constitute the entity’s ongoing
major or central operations.” Revenue tracks the positive inflows from the goods or
services that the company provides. These inflows of net assets should be reported in the
income statement for the time period specified in the report. That is why it is important to
choose the timing to recognize revenue. Revenue recognition reflects the company’s actual
accomplishment in generating cash flows in the period.
The FASB Statement of Financial Accounting Concepts No. 5 “Recognition and
Measurement in Financial Statements of Business Enterprises” sets forth an operational
guideline on which, when and how financial elements should be reported in financial
statements. According to SFAC No.5, an item should be recognized when it fulfills the
requirements in the following criteria: Definition, Measurable, Relevance and Reliability.
Based on the realization principle, revenue should be recognized when the following
criteria are met. First, the earning process is judged to be complete or virtually complete.
Second, there is reasonable certainty as to the collectibility of the asset to be received.
There are three methods that are related to the recognition of revenue, which are revenue
recognition prior to delivery, at delivery and after delivery.
Revenue can be recognized before delivery under many different circumstances.
Long-term construction contracts are a notable example. For long-term contracts, it is
inappropriate to recognize revenue when the earnings process is virtually completed
