Pincus Ltd. typically records revenue when both parties to the transaction (Pinc
ID: 2584211 • Letter: P
Question
Pincus Ltd. typically records revenue when both parties to the transaction (Pincus and its customer) have signed a master agreement. In the first quarter of 2010, Pincus entered into a master agreement to provide widgets with a sale price of $10,000. On September 30, Pincus is in possession of a signed purchase order from the same customer to buy pinwheels with a sale price of $10,000, which also will be covered by the master agreement signed for the widgets. On September 30, the widgets were delivered. Also on September 30, 2010, Pincus is negotiating an amendment to the master agreement, which Pincus believes is a mere formality, and no further material items are under negotiation. On October 5, 2010, Pincus received from the customer a final, signed copy of the amendment, dated September 30, with no terms materiallly changed. Pincus signed the agreement as soon as it received it from the customer.
How much revenue should Pincus recognized from these events in the third quarter of 2010 (which ends on September 30) under US GAAP?
How much revenue should Pincus recognize from these events in the third quarter of 2010 under IFRS?
Explanation / Answer
As per US GAAP, the revenue from sale of goods should be recognised only when it is realised or realizable provided the all following conditions are met:
1) Persuasive evidence of sale of goods exists. Although the Master agreement of purchase order was signed on 5th October 2010, which does not fall in the 3rd qtr of 2010, but the negotiations on master agreement not affecting the material items was on place on 30th sept as well. So the first condition is met
2)The delivery of goods has been made. This condition is also satisfied as the widgets were delivered on 30th sept.
3) The sale price is fixed which is $10000 which is material item not under negotiation on 30th Sept. Therefore it is fixed nd reliable.
4) Assuming the customer is solvent and payment for sale of goods is assured ,the entire sale revenue should be recorded as per US GAAP by Pincus in 3rd Qtr.But as per the given case pincus recognises revenue when the master agreement is signed by both Pincus and its customer that was on 5th October 2017, so it is the matter of personal judgement of the accountant of Pincus.
As per IFRS, the revenue of sale of goods is recorded when (A) the risk and rewards associated with the goods subject to negotiation have been transferred (b) the future economic benefits from the goods would flow and (c) the cash flow can be measured reliably, so all these conditions are satisfied in the given case. Hence Pincus should record the entire sale revenue in 3rd qtr.
Note: The decision of recognising revenue depends upon personal judgements which may differ.