In this article we will discuss about the effects of uncertainties on revenue recognition.
Revenue recognition inevitably falls short of its objective because of uncertainty and its effects on business and economic activities and their depiction and measurement.
Uncertainty often clouds whether a particular event has occurred or what an event’s effects on assets or liabilities or both may have been. Uncertainty refers to a quality or state in which something is not surely or certainly known and thus is, at least to some extent, questionable, problematical, or doubtful.
In case of uncertainties, the following guidelines may be helpful in revenue recognition:
Recognition of revenue requires that revenue is measurable and that at the time of sale or the rendering of the service it would not be unreasonable to expect ultimate collection. Where the ability to assess the ultimate collection with reasonable certainty is lacking at the time of raising any claim, e.g., for escalation of price, export incentives, interest etc., revenue recognition is postponed.
In such cases, it may be appropriate to recognise revenue only as cash is received. Where there is no uncertainty as to ultimate collection, revenue is recognised at the time of sale or rendering of service even though cash payments are made by instalments.
When the uncertainty relating to collectability arises subsequent to the time of sale or the rendering of the service, it is more appropriate to make a separate provision to reflect the uncertainty rather than to adjust the amount of revenue originally recorded.
An essential criterion for the recognition of revenue is that the consideration receivable for the sale of goods, the rendering of services or from the use by others of enterprise resources is reasonably determinable. When such consideration is not determinable within reasonable limits, the recognition of revenue is postponed.