Revenue Recognition – Canadian GAAP

//Revenue Recognition – Canadian GAAP

Canadian GAAP has specific rules that apply to revenue recognition. The rules are detailed in the CICA Handbook section 1000 and 3400, but essentially there are two approaches to revenue recognition. Revenue can be recognized at one critical event in the chain of activities, for example, production, delivery or cash collection. Alternatively, revenue can be recognized on a basis consistent with effort expended (Completed-contract method or Percentage-of-completion method) a plan that will result in some revenue being recognized with every activity in the chain. A company must carefully make an accounting choice based on its circumstances, and use this policy on a consistent basis.

As an example – XYZ Corp manufactures and sells furniture. The revenue recognition policy associated with this type of business would normally follow the critical event approach. Within this approach, the company would examine the type of critical event that would trigger revenue recognition. For most companies and most goods and services using the critical event approach, revenue is recognized at the time of delivery of the goods to the customer.

A critical event before delivery, such as production, may be appropriate if the selling and shipping functions are trivial, such as when the product is a commodity for which there is an organized market (e.g., wheat, copper, gold).

A critical event after delivery is appropriate when there are measurement problems surrounding the amount of revenue actually generated, collection uncertainties, and / or when it is not possible to accurately estimate all the costs associated with the earnings process, which must be fully accrued at the critical event.

In the case of the example XYZ Corp, revenue would normally be recognized as revenue at the time of delivery. The two conditions for revenue recognition at delivery are; 1) performance is achieved and 2) the amount is measurable and collectible.

Hope this helps clarify revenue recognition accounting policy in Canadian. Please also refer to SOX Revenue Recognition testing in the Edelkoort Smethurst Schein CPA’s LLP web-site for details on SOX Revenue test designs.

Edelkoort | Smethurst | Schein CPAs LLP is located in Burlington Ontario servicing the Golden Horseshoe and Greater Toronto Area and beyond. The firm is fully licensed with CPA Ontario to provide assurance, tax and accounting services as well as registered as tax preparers with the Canada Revenue Agency (CRA) & Internal Revenue Service (IRS). The firm is also registered as an IRS Certified Acceptance Agent.

All blog posts published on this site are for informational purposes only and do not constitute professional advice. Readers should contact a professional to discuss their individual situation. Neither the author or the accounting firm shall accept any liability for any reliance placed on the information posted.


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