My client provides web-based marketing services to a number of customers. During Month 1, my client performs the services, but in almost all cases, revenue is calculated at the beginning of Month 2, after traffic & other objectives are analysed.
I was taught that the revenue should be booked to the month when it was earned, but "earned" depends on both transaction (or event) completion *and* measurability.
It would be my first instinct to put the revenue in Month 1, when the work was completed, but I'm getting hung up on the measurability requirement -- the revenue cannot be measured until the month has finished and all analytics are available.
My question is not about accrual v cash or invoiced v paid, but rather about the fundamental requirements for recognising revenue - that the transaction/event has to have occurred and that the revenue is measurable.
In our case, the work is completed within Month 1. The revenue is hypothetically measurable, in that the method of measurement is in the SLA, but the actual calculations cannot be completed until after the end of the month.
To oversimplify, if we get paid 10 per click-thru and 10 sign-up, we don't know the total click-thrus and sign-ups until after the month ends, we have our "rates" but cannot calculate the final invoice amount until Month 2.
So should the revenue be booked to Month 1 or Month 2 in this case?
Service has been provided, or the question wouldn't exist.
Is measurability satisfied by the terms of the SLA, or does the revenue need to be recognized in Month 2, when the analytics are known and the calculations can be completed?
Before looking at the scenario just a brief note of the rules for other readers of the thread :
Revenue and expenditure are accounted for as earned or incurred, not as received or paid.
And putting that into the context of the scenario.
To quote Kate :
My client provides web-based marketing services to a number of customers.
During Month 1, my client performs the services,
That is the point at which the revenue is earned so I am with Kate in that the revenue should be recognised in month 1, not month 2.
but in almost all cases, revenue is calculated at the beginning of Month 2
the point of invoicing is to my mind immaterial. The work has already been performed. To allow the alternate treatment being used by Kates client undermines the reasoning behind the financial reporting standards aimed at erradicating earnings management.
If a business can make the transaction seem as though it occured in a different period to which the costs related to it relate and / or effect a different profit (or loss) figure then the earnings are being manipulated.
My view of this is that Kates gut feel was completely correct and her client is currently treating revenue recognition incorrectly.
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Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
Before looking at the scenario just a brief note of the rules for other readers of the thread :
Revenue and expenditure are accounted for as earned or incurred, not as received or paid. Is this not what I said in my first post Shaun?
And putting that into the context of the scenario.
To quote Kate :
My client provides web-based marketing services to a number of customers.
During Month 1, my client performs the services,
That is the point at which the revenue is earned so I am with Kate in that the revenue should be recognised in month 1, not month 2.
Again, in first post.
but in almost all cases, revenue is calculated at the beginning of Month 2
the point of invoicing is to my mind immaterial. The work has already been performed. To allow the alternate treatment being used by Kates client undermines the reasoning behind the financial reporting standards aimed at erradicating earnings management.
If a business can make the transaction seem as though it occured in a different period to which the costs related to it relate and / or effect a different profit (or loss) figure then the earnings are being manipulated.
My view of this is that Kates gut feel was completely correct and her client is currently treating revenue recognition incorrectly.
If using accruals accounting yes, if using cash basis - no. IMO.
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Johnny - Owner of an overly-active keyboard.
A man who can read, yet doesn't, is in no way wiser than a man who can't.
With reference to the definition of revenue for service organisations I can see where you are coming from :
The amount of revenue can be measured reliably
It is probable that the economic benefits will flow to the seller
The stage of completion can be measured reliably
The costs incurred, or to be incurred, in respect of the transaction can be measured reliably
Your argument emphasises the first of the above criteria.
However, my counter is that the the service had all of the same criteria when it was rendered, the business simply chose not to calculate it at that time. So, nothing has changed to mean that it can be measured more reliably now than then.
The business owners choosing not to calculate until a later date, or even not being able to calculate until a later date, simply gives evidence to criteria that already existed. So, I see the scenario as more akin to a post balance sheet event that gives evidence to criteria that existed at the period end which would cause a post balance sheet adjustment and in doing so fits in with the fundamental principle of revenue and costs being recognised as earned or incurred.
Considering the above argument I maintain that this should be recognised in period 1.
__________________
Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
Before looking at the scenario just a brief note of the rules for other readers of the thread :
Revenue and expenditure are accounted for as earned or incurred, not as received or paid. Is this not what I said in my first post Shaun?
And putting that into the context of the scenario.
To quote Kate :
My client provides web-based marketing services to a number of customers.
During Month 1, my client performs the services,
That is the point at which the revenue is earned so I am with Kate in that the revenue should be recognised in month 1, not month 2.
Again, in first post.
but in almost all cases, revenue is calculated at the beginning of Month 2
the point of invoicing is to my mind immaterial. The work has already been performed. To allow the alternate treatment being used by Kates client undermines the reasoning behind the financial reporting standards aimed at erradicating earnings management.
If a business can make the transaction seem as though it occured in a different period to which the costs related to it relate and / or effect a different profit (or loss) figure then the earnings are being manipulated.
My view of this is that Kates gut feel was completely correct and her client is currently treating revenue recognition incorrectly.
If using accruals accounting yes, if using cash basis - no. IMO.
Hi Johnny,
I didn't repond to your first post as when I read that I thought fair enough, looks good. It was the later posts where the discussion took a different direction that I had some disagreement (As shown by you would go with Month 2 where I would go with month 1).
Its quite interesting to see how we get to our respective positions as I can see your point and I can even see your reading of the definition. I'm just coming at it more from the perspective of what was the intention of the phrasing of the regulations the way they did which of course is the prevention of earnings management.
Any system that allows the value to be calculated after the event is going against the fundamental principles of the revenue and presentation standards so whilst I can see and fully appreciate your logic of how you get to month 2 I still believe that using a principles based approach it should be recognised in month 1.
__________________
Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
I also see your point Shaun. I'm interested to know the logic / reasoning why the client has been recognising in the following month? Was this from an advisor? Or was he completing his own accounts?
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Johnny - Owner of an overly-active keyboard.
A man who can read, yet doesn't, is in no way wiser than a man who can't.
Thanks all -
This has been very helpful.
I'll write up a brief for the client to discuss with the auditor, and let them make the final decision.
Thank you!
(And yes, the client was doing the bookkeeping, and essentially treating it as cash basis, so there are a lot of changes needed.)
