July 10, 2014
Article by Ted Lucas, Assurance Services Senior Manager & Timothy Landry, Assurance Services Senior Manager, "Revenue Recognition - Why Is It So Important?" Featured in Connecticut Innovations
By Ted Lucas, Assurance Services Senior Manager & Timothy Landry, Assurance Services Senior Manager
Today's financial world puts a great emphasis on meeting targets. From the perspective of those who run businesses and their employees, it can mean the difference between a large bonus or being let go. From a stockholder's perspective, it could mean the difference between selling or holding a stake in a company. The most common measure used to gauge whether one has met targets is revenue. Revenue typically drives the success of most businesses, as it is a means of generating profits and increasing equity. For this reason, attaining proper revenue recognition is paramount.
Revenue recognition in some instances can be simple. Consider a manufacturer that sells a non-warranty product to a customer. In this instance, revenue is recognized when all four of the traditional revenue recognition criteria are met: (1) the price can be determined, (2) collection is probable, (3) there is persuasive evidence of an arrangement, and (4) delivery has occurred.
Revenue recognition gets complicated when the above criteria do not apply, which is typically due to the type of industry that companies operate in. For instance, some of the more complicated industries include technology, real estate, media and entertainment, construction and healthcare.