CFA CFA Level 1 FRA – Understanding Balance Sheet – Revenue Recogniton

FRA – Understanding Balance Sheet – Revenue Recogniton

  • This topic has 26 replies, 7 voices, and was last updated Mar-17 by Snippy.
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  • Snippy
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    This is one of the questions under concept checkers whose answer i didn’t seem to agree with or completely understand. So i am putting it here to get everyone’s views.

    Q. How should the proceeds received from the advance sale of tickets to a sporting event be treated by the seller, assuming the tickets are nonrefundable?

    A. Unearned revenue is recognized to the extent that costs have been incurred.
    B. Revenue is recognized to the extent that costs have been incurred.
    C. Revenue is deferred until the sporting event is held.

    The correct answer is C.

    vincentt
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    This is rather tricky for me when I was doing my level 1.
    Basically, revenues are recognized when they are realised or realisable, and are earned (usually when goods are transferred or services rendered), no matter when cash is received.

    The keyword to your question is “advance sale of tickets“.

    The amount of the advance sale will be in the liability until the day of the event and then the revenue will be realised.

    Something similar to magazine subscriptions, if you have prepaid the subscription for the whole year, the magazine company could only recognise the revenue up to the time when they send the magazine out for the month.

    Hope that helps.

    Snippy
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    Okay. I got that. So, to summarise, revenue is recognized when the good/service is delivered and the liability of unearned revenue here, is deducted when that happens.

    vincentt
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    @sidmenon yes pretty much. Here are some summaries of both US GAAP vs IFRS as they are slightly different.

    US GAAP
    It specifies that revenue should be recognized when it is “realized or realizable and earned.”
    1. There is evidence of an arrangement between buyer and seller.
    2. The product has been delivered, or the service has been rendered.
    3. The price is determined, or determinable.
    4. The seller is reasonably sure of collecting money.

    IFRS
    The basic revenue recognition deal with the definition of “earned.” The conditions are:
    1. The entity has transferred to the buyer the significant risks and rewards of ownership of the goods;
    2. The entity retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold;
    3. The amount of revenue can be measured reliably;
    4. It is probable that the economic benefits associated with the transaction will flow to the entity; and
    5. The costs incurred or to be incurred in respect of the transaction can be measured reliably.

    As the highlighted ones above would explain the question you mentioned.

    Snippy
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    That helped a lot. Thanks @vincentt! 🙂

    vincentt
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    @sidmenon no prob 🙂

    Zee Tan
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    Good one @vincentt! =D>

    lulu123
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    How come Vincentt’s post is with a yellow background?

    And @sidmenon

    generally speaking, there are three rev rec criteria: amount measurable, collectible, risks/rewards transfered, PERFORMANCE COMPLETE

    since concert did not take place, performance was not completed! so defer recognition until end!

    Zee Tan
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    @lulu @vincentt’s post is in a yellow background because @sophie promoted it. Moderators can promote really good posts – in general that answers the original discussion question or is generally awesome content to read. And @vincentt gets 3 points which is nice too. 🙂

    And I agree with @Vincentt’s interpretation 🙂

    Snippy
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    I don’t see a yellow background o.o

    vincentt
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    more points! =D>

    Sophie Macon
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    @marc, @lulu123 and @kate are leading so far. Time to keep up @vincentt 😛 Great answer btw.

    Zee Tan
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    I don’t see a yellow background o.o

    It’s @vincentt’s second response in this thread 🙂

    Snippy
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    @Zee It isn’t yellow for me 😛 I’m the glitch in the system!

    Zee Tan
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    @sidmenon you don’t see it as a different colour?

    lulu123
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    @sophie

    doesn’t Vincentt have like 40 more points than me? how am I leading ahha

    Sophie Macon
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    @sidmenon you’ve been unplugged from the matrix…. (sorry have been watching a bit of slow-mo bullet dodging)

    Zee Tan
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    @sophie

    doesn’t Vincentt have like 40 more points than me? how am I leading ahha

    It’s the Weekly Leader table, not the All Time Leader table @lulu123 🙂

    Sophie Macon
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    @lulu123, it doesn’t work like that. It’s the weekly points that count for the weekly contest! The ‘all-time’ score board is accumulated score since joining. Obviously we wouldn’t penalise the late(r) joiners 🙂

    So yes, better start badge hunting babes

    lulu123
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    @zee @sophie

    where can I see the weekly board?

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