Lesson 2 of 8 · 14 min
Revenue recognition in practice and what it means for analysis
The same economic activity can produce very different revenue and margins depending on whether the seller is a principal or an agent, whether control passes at a point in time or over time, and how progress is measured.
In short
- Principal (controls the goods before transfer): revenue = gross amount. Agent (arranges the sale for someone else): revenue = commission only. Agents show lower revenue but higher margins.
- Franchisors recognise royalties, not franchisees' sales; up-front franchise fees are deferred and spread over the agreement.
- Software sold 'as is' is recognised when the licence transfers; a licence the provider keeps significantly changing, and cloud subscriptions, are recognised over time.
- Long-term contracts are recognised over time when the customer controls the work in progress, consumes the benefit as it is delivered, or the asset has no alternative use and the seller has a right to payment for work done. Progress can be measured by inputs (cost incurred / total cost) or outputs.
- Bill-and-hold revenue is allowed only if the arrangement is substantive, the goods are identified as the customer's, ready for transfer and cannot be redirected.
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