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When and how should the revenue be recorded?

A customer terminated a management services agreement today (signed by both parties). The customer settled and agreed to pay my Company $500,000. The remainder of the agreement (before termination) had revenues of approx. $800,000. My Company has a year end of September 30, 2014. The agreement states the settlement will be paid on October 1, 2014. When should this termination/cancellation/settlement fee be recorded? At date of cancellation? And why? Would this be considered other income? Any reference to authoritative literature would be greatly appreciated.

Answers

Anonymous
(Director, Finance and Accounting) |

GAAP states that revenue should be recognized when earned. The day the agreement was signed the customer has an obligation to pay the $500,000 and as far as I can tell, your company has fulfilled all of its obligations. Therefore, I believe that the the revenue can be recognized in September by debiting AR and crediting revenue.

Revenue is recognized when the product is delivered or the service has been rendered. So long as any services related to the contract, the revenue can be recognized.

Anonymous
(TLA) |

As far as I understand, these "revenue" that you talk about are penalty fee for premature terminating the contract. If so, than you have official memo for terminating the contract and is dated dd.mm.yyyy. This is the date that the conditions of the contract are fullfilled for issuing a debit memo to ask these penalty fees and also to recognize revenue at that moment. The expected payment date has nothing to do with rev.rec. Also, i would book it on other income because these are not revenues from opperatons and should be booked sepparately from op.rev. If you had booked reservations for this situational risk when contract was innitialy signed, you should close everithing at the same date.

Stephen Turk
Title: Principal
Company: Stephen Turk, CPA
(Principal, Stephen Turk, CPA) |

I agree with other comments that the revenue is earned as of the date the parties execute the binding termination agreement. I do think it is revenue, since the payment is received from a customer and relates to a revenue transaction, even if it is a cancelled one. You might want to classify it as "other revenue" so that it can be tracked separately for margin analysis or other purposes.

Rino Patrick Unold
Title: Business Controller
Company: Fresenius Kabi
(Business Controller, Fresenius Kabi) |

Agree. Don't Confuse Cash with Revenue Recognition. As the first Note satys, GAAP states that Revenue is earned/recognized when the product/service has been delivered. However in your case I would choose Other Revenue as the solution to keep your Core Revenue "clean". This will help in various analysis' and e.g. extrapolations/forecasting, as you do not want to include such Cancellation Fees (unless it's an ingrown part of your business - and therefore can be forecasted too).

If you have NO obligations after the 31st of September - and you have a written confirmation of the Cancellation fee to be paid in October - I would record all in September under Other Revenue.

Regards,
Rino

EMERSON GALFO
Title: CFO
Company: C-Suite Services
LinkedIn Profile
(CFO, C-Suite Services) |

I agree with what others have recommended (Other Revenue/Income) but will cite a another reasoning for it. Recognizing it as Revenue without the corresponding cost/s (matching) will skew your Margins (ratios).

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