When accounting for revenue, there are few areas of the CPA Canada Handbook one might need to look at depending on which accounting framework is used and the type of revenue generated. The major sections for establishing standards for the timing of recognizing revenue are:
Revenue is recognized when collectability is reasonably assured and
For service contracts and long-term contracts, an entity shall either use the percentage of completion method or the
completed contract method that best measures work accomplished. The completed-contract method would only be
appropriate when performance consists of the execution of a single act or when the enterprise cannot reasonably estimate the extent of progress toward completion. The percentage of completion method is used when the contract requires the execution of more than one act and revenue would be recognized proportionately by performing each act. Revenue recognized under this method could be based on sales value, associated costs, the extent of progress, or the number of acts. However, for practical purposes, when services are provided by an indeterminate number of acts over a specific period of time, revenue would be recognized on a straight-line basis over the period unless there is evidence that some other method better reflects the pattern of work performed.
When recognizing revenue for a period, an organization must also consider the following:
For example, if an entity has a history of consistent sales returns of 5% or more, the organization needs to provide a provision for at least 5% of estimated sales returns and reduce sales accordingly.
If you would like more information on this topic, please contact a member of the Empire CPA team by filling out the contact form below.
Canadian and foreign tax laws are complex and have a tendency to change on a frequent basis. As such, the content published above is believed to be accurate as of the date of this post. Before implementing any tax planning, please seek professional advice from a qualified tax professional. Empire, Chartered Professional Accountants will not accept any liability for any tax ramifications that may result from acting based on the information contained above.
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