3.2.2. Installment Sales

As noted above, revenue is normally reported when goods are delivered or services are rendered, independent of the period in which cash payments for those goods or services are received. This principle applies even to installment sales—sales in which proceeds are to be paid in installments over an extended period. For installment sales, IFRS separate the installments into the sale price, which is the discounted present value of the installment payments, and an interest component. Revenue attributable to the sale price is recognized at the date of sale, and revenue attributable to the interest component is recognized over time.18 International standards note, however, that the guidance for revenue recognition must be considered in light of local laws regarding the sale of goods in a particular country. Under limited circumstances, recognition of revenue or profit may be required to be deferred for some installment sales. An example of such deferral arises for certain sales of real estate on an installment basis. Revenue recognition for sales of real estate varies depending on specific aspects of the sale transaction.19

Under US GAAP, when the seller has completed the significant activities in the earnings process and is either assured of collecting the selling price or able to estimate amounts that will not be collected, a sale of real estate is reported at the time of sale using the normal revenue recognition conditions.20 When those two conditions are not fully met, under US GAAP some of the profit is deferred. Two of the methods may be appropriate in these limited circumstances and relate to the amount of profit to be recognized each year from the transaction: the installment method and the cost recovery method. Under the installment method, the portion of the total profit of the sale that is recognized in each period is determined by the percentage of the total sales price for which the seller has received cash. Under the cost recovery method, the seller does not report any profit until the cash amounts paid by the buyer—including principal and interest on any financing from the seller—are greater than all the seller’s costs of the property. Note that the cost recovery method is similar to the revenue recognition method under international standards, described above, when the outcome of a contract cannot be measured reliably (although the term cost recovery method is not used in the international standard).

Example 4 illustrates the differences between the installment method and the cost recovery method. Installment sales and cost recovery treatment of revenue recognition are rare for financial reporting purposes, especially for assets other than real estate.