Revenue Recognition: D&T 99-7 “Class Act”. Finance and accounting When should revenue associated with the above agreement be recognized by Act?International accounting standards (IAS) defines revenue as part of income that arises from the ordinary course of business activities of an organization/entity. The main objective of the norm is prescribing the treatment of revenue resulting from several types of transactions. In prescribing the accounting treatment of this income, an idea of when to recognize should be borne in mind. The standard identifies the situation under which the criterion would be met, and consequently revenue being recognized. According to the Class Act, revenue is often recognized when it is probable by respective organization/entity that indeed the future cash inflows will flow to the entity and more so, these can be measured without vices of biases and material error.
Revenue can be recognized at different scenarios as comprehensively discussed below. The first recognition is when there is certainty in sale transaction. In the above case, it is clearly spelled out that Broad Venues generates its income through sale of tickets for theatrical performances at its venues. Additionally revenue is legitimately recognized after the farm has rendered some lawful services typically performed by the business organization under the respective agreement. The firm has rights in booking pencil pushers as it is lucrative parse and under its going concern business operations, nonetheless, it is silent on when it will shun away from the activity of booking pencil pushers. The agreement narrates that Broadway Venues will be entitled to schedule tour presentation for more than 30 play weeks in a span of four economic year period that commence with tour opening. In the agreement, Class Act share in the gate tour receipts in the ratio of 13 to 7 with the Broadway Venues.
In addition, revenue is recognized in accordance with the implied conditions and consequent consideration requirements of the contracts. In this case, Broadway made an agreement of paying Class Act sum of about $5million. Broadway Venues paid Class Act 1$ upon signing of the accord in 1997. This amount should be recognized as revenue in the books of account of Class Act. A mutual agreement was made, and a resolution of installments payments of the remaining amount was passed. The periodic installments are recognized as revenue in the financial statements to reflect the transaction.
Revenue for an entity is recognized when it is highly probable that economic benefits that associated with certain transaction will flow to the entity. When there are some uncertainties over the collectivity of already included amount in the revenue amount, it is recognized as an expense hence calling for an adjustment of initially recognized revenue.
Finally revenue is recognized when the event from which it arises has taken place. In this case, Class Act concluded the full agreement to be $5million upon signing of the agreement. Allocable gate receipts to be recorded when products are displayed.
From the above scenario, revenue can be recognized at various levels of transactions i.e. contract agreements, selling of goods and rendering of services. However, revenue is recognized when incurred and not as monetary value is paid or received.