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Revenue Recognition

August 20, 2015

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:

  • Section 3400, Revenue (for sale of goods and provision of services),
  • AcG-2: Franchise fee revenue,
  • Section 4410, Contributions – revenue recognition,
  • Section 3051, Investments (for revenue arising from investments accounted for under the equity method),
  • Section 3065, Leases (for revenue arising from lease agreements), and
  • Section 3800, Government assistance (for revenue arising from government grants and other similar subsidies).

Revenue is recognized when collectability is reasonably assured and

  • Significant risks and rewards of ownership have been transferred to the buyer;
  • All significant acts have been completed and the seller retains no continuing managerial involvement in the control of goods;
  • collectability is reasonably assured;

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:

  • Rights to return the product
  • Requirements to repurchase the product
  • Bill and hold arrangements
  • Customer acceptance of the product
  • Layaway sales arrangements
  • Non-refundable fee arrangements
  • Licensing and similar fee arrangements
  • Cancellable sales arrangements
  • Right of return arrangements
  • Price protections and/or inventory credit arrangements
  • Refundable fee for service arrangements

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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