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Revenue Recognition Impact on Manufacturing

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Industry: Manufacturing
Revenue is recognized in the manufacturing industry pursuant to the dictates of FASB Concepts Statement (CON) No. 5, Recognition and Measurement in Financial Statements of Business Enterprises, and SEC Staff Accounting Bulletins (SABs) No. 101, Revenue Recognition in Financial Statements, and No. 104, Revenue Recognition. For example, consider 3M’s revenue recognition policy:

Revenue is recognized when the risks and rewards of ownership have substantively transferred to customers, regardless of whether legal title has transferred. This condition is normally met when the product has been delivered or upon performance of services. The company sells a wide range of products to a diversified base of customers around the world and, therefore, believes there is no material concentration of credit risk. Prior to 2000, the company recognized revenue upon shipment of goods to customers and upon performance of services.

During the fourth quarter of 2000, the company changed its revenue recognition policies. Essentially, the new policies recognize that the risks and rewards of ownership in many transactions do not substantively transfer to customers until the product has been delivered, regardless of whether legal title has transferred. In addition to this change in accounting that affected a substantial portion of its product sales, the company has revised aspects of its accounting for services provided in several of its smaller businesses. These new policies are consistent with the guidance contained in SEC Staff Accounting Bulletin No. 101.

The rules for revenue recognition in the manufacturing industry are summarized below (see also the discussion in Chapter FIN-I C.2.a.iv).

Sales Event
When Is Revenue Recognized?
Delivery FOB

Factory At time of actual delivery or at time of delivery to common carrier.


At time consignor (seller) is paid and notified by consignee (agent) of sale (see Chapter IND-II B)


At time buyback period expires.

High Rates of Return

At time -return period expires (assumes rate of return cannot be estimated).


At time of delivery (see above) if installment receivable has reasonable collection estimate; otherwise not until actual collection.


At time of delivery if irrevocable letter of credit; otherwise at time of actual collection.

Excerpted by permission. Copyright 2007, Specialty Technical Publishers.