Financial Education - Property risks and ordinary income of business entities

Yesterday I mentioned to you that when a company retains significant risks of ownership, the transaction will not be a sale and therefore revenue will not be recognized. An entity may retain significant risks in different ways. Examples of situations in which an entity may retain significant risks and rewards.

On the other hand, when the entity assumes obligations arising from the unsatisfactory performance of products, which do not fall under normal warranty conditions, also when the receipt of revenue from a particular sale is contingent in nature because it is dependent on the purchaser obtaining revenue from the subsequent sale of the goods.

Also when the goods are sold together with the installation of the goods and the installation is a substantial part of the contract, which has not yet been completed by the entity.

Another aspect to consider is when the buyer, by virtue of a condition agreed in the contract, has the right to terminate the transaction and the entity is uncertain about the likelihood of this occurring.

If an entity retains only an insignificant portion of the risks and rewards of ownership, the transaction is a sale and therefore revenue is recognized.