Discuss the definition, recognition, and measurement of revenue

Answer 1

Revenue

The FASB's conceptual framework defines revenues as inflows or other enhancements
of assets of an entity or settlements of its liabilities from delivering or producing goods, rendering services, or other activities that constitute the entity's ongoing major or central operations. The IASB's conceptual framework defines income as increases in economic
benefits during an accounting period in the form of inflows or enhancements of assets or
decreases in liabilities that result in increases in equity, other than those relating to contributions from equity participants. Firms recognize revenue, or income, when they satisfy two conditions:

1 . Completion of the earnings process. The firm has done all, or nearly all, it has promised to do for the customer.

2 . Receipt of assets from the customer. The firm has received either cash or some other asset
that the firm can convert into cash, for example, by collecting an account receivable. Firms measure revenue at the amount of cash they expect to collect from customers. If firms expect to receive cash more than one year after the time of recognizing revenue, they measure revenues at the present value of the amount of cash they expect to receive.

Arrangements with multiple deliverables create difficulties in both the timing and measurement
of revenues. For example, if a firm sells a product bundled with an obligation to provide additional services over time, should the firm recognize the selling price for the bundled product and services at the time of delivery of the product? Or, should the firm recognize
revenue from the sale of the product at the time of delivery and revenue from the services
as the firm renders the services? How should the firm measure the portion of the selling price
related to the product and the portion related to the services?