The following is not meant to be legal or financial advice.
On October 13, 2006, Andrew Cotton presented to attorneys in Redwood City, CA on financial literacy. Topics included revenue recognition, accruals for litigation and other loss contingencies, equity compensation.
Revenue recognition occurs when delivery and performance are substantially complete. Delivery generally occurs when a customer has taken title and assumed the risks of owning a product. Delivery is based on shipping terms.
Customer acceptance provisions require deferral of revenue until acceptance evidence is received, or acceptance provisions have lapsed. Types of customer acceptance provisions include: trial and evaluation, right of return or exchange, seller-specified objective criteria, customer-specified objective criteria. For example, if a vendor is an established company has a product with a 30 day right of return that does not have a history of being defective for over two years, the company may be able to recognize revenues upon sale. If it were a new product with no history, the company may not be able to recognize revenues upon sale.
A fee that is fixed or determinable means a fee that is known or estimable with reasonable certainty. Indicators that a fee is not fixed or determinable include: cancellation privileges, price protection, extended payment terms, warranty obligations. Price protection may require deferral of revenues until the price protection period elapses. Extended payment terms not only involve collectibility, but also whether there will be a concession to the customer before the customer pays. Any payment terms beyond the company’s standard payment terms are indicative of extended payment terms.
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