Revenue is defined in the revenue standard as:
Definition from ASC 606-10-20
Revenue: Inflows or other enhancements of assets of an entity or settlements of its liabilities (or a combination of both) from delivering or producing goods, rendering services, or other activities that constitute the entity’s ongoing major or central operations.
The distinction between revenue and other types of income, such as gains, is important as many users of financial statements focus more on revenue than other types of income. Income comprises revenue and gains, and includes all benefits (enhancements of assets or settlements of liabilities) other than contributions from equity participants. Revenue is a subset of income that arises from the sale of goods or rendering of services as part of a reporting entity’s ongoing major or central activities, also described as its ordinary activities. Transactions that do not arise in the course of a reporting entity’s ordinary activities do not result in revenue. For example, gains from the disposal of the reporting entity’s fixed assets are not included in revenue.
The distinction between revenue and other types of income, such as gains, depends on the specific circumstances and may require judgment. Example FSP 33-1, Example FSP 33-2, and Example FSP 33-3 illustrate the assessment of whether a transaction results in the recognition of revenue.
EXAMPLE FSP 33-1
Revenue versus gains - sale of demonstration cars
A car dealership has cars available that can be used by potential customers for test drives (“demonstration cars”). The cars are used for more than one year and then sold as used cars. The dealership sells both new and used cars.
Is the sale of a demonstration car accounted for as revenue or as a gain?
The car dealership is in the business of selling new and used cars. The sale of demonstration cars is therefore revenue since selling used cars is part of the dealership’s ordinary activities.
EXAMPLE FSP 33-2
Revenue versus gains - sale of rental equipment
FSP Corp, an equipment rental entity, purchases equipment to be used to generate rental revenue. The costs to acquire the equipment are capitalized as revenue-generating equipment and depreciated over their useful lives. In 20X1, several pieces of equipment are sold to a third party at the end of their useful lives after being fully depreciated, resulting in an amount being recovered that exceeds the residual value.
Should FSP Corp present the total sale amount or the excess over the residual value as revenue?
Based on the fact pattern, FSP Corp should not recognize any amount as revenue. If FSP Corp’s “ongoing major or central operations” consist of renting equipment, proceeds from the sale of revenue-generating equipment generally should not be characterized as revenue. Rather, the activity constitutes the disposal of an asset for which an operating gain (in this case) should be recorded.
EXAMPLE FSP 33-3
Revenue versus gains - sale of a patent
FSP Corp is a pharmaceutical company that is in the business of licensing and selling patents in its patent portfolio. FSP Corp enters into an agreement with a third party to sell a recently approved patent for cash.
How should FSP Corp present the consideration received for the sale of the patent?
As FSP Corp is in the business of routinely licensing and selling patents in its patent portfolio, it would be appropriate to present the consideration received as revenue.
If FSP Corp was not in the business of routinely licensing and selling its patents, but nonetheless sold one of its patents to a third party, it would be appropriate to present a gain or loss on sale of the patent.
Question FSP 33-2
A reporting entity negotiates directly with third parties to sell the byproducts resulting from its manufacturing process. How should the reporting entity classify the sale of byproducts in its statement of comprehensive income?
There is no specific guidance addressing the classification of the proceeds from sales of byproducts. Reporting entities should first consider whether these sales represent a contract with a customer and therefore are in the scope of the revenue standard. This assessment may require judgment. For example, sales of byproducts may represent revenue if these items are an output of the reporting entity’s recurring manufacturing process and the reporting entity negotiates contracts with counterparties to purchase the byproducts as part of its ongoing major or central operations. If a reporting entity concludes sales of byproducts do not meet the definition of revenue, then it may be appropriate to present the proceeds as “other income.”
In other fact patterns, a reporting entity may sell scrap materials to third parties; for example, a reporting entity may take advantage of volume purchasing discounts by intentionally purchasing more raw materials than it needs for its own production and then sells the excess as scrap as a means of managing raw material costs. In that scenario, we believe it may be acceptable to present proceeds from those scrap sales as a reduction of costs of sales.