Cost Recoverability Method of Revenue Recognition
The cost recovery method does not recognize any income on a sale until the cost of the item sold has been fully recovered through cash receipts. Once the seller has recovered all costs, any subsequent cash receipts are included in income. The cost recovery method is used when the uncertainty of collection of the sales price is so great that even use of the installment method cannot be justified.
Under the cost recovery method, both revenues and cost of sales are recognized at the point of sale, but the related gross profit is deferred until all costs of sales have been recovered. Each installment must also be divided between principal and interest, but unlike the installment method where a portion of the principal recovers the cost of sales and the remainder is recognized as gross profit, the entire principal is first applied to recover the cost of the asset sold. After all costs of sales have been recovered, any subsequent cash receipts are realized as gross profit.
Under U.S. 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.
When those two conditions are not fully met, under U.S. GAAP some of the profit is deferred. Two of the methods may be appropriate in these limited circumstances and relate to the amount o f profit to be recognized each year from the transaction: the installment method and the cost recovery method. 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, when the outcome of a contract cannot be
Under the cost recovery method, both revenues and cost of sales are recognized at the point of sale, but the related gross profit is deferred until all costs of sales have been recovered. Each installment must also be divided between principal and interest, but unlike the installment method where a portion of the principal recovers the cost of sales and the remainder is recognized as gross profit, the entire principal is first applied to recover the cost of the asset sold. After all costs of sales have been recovered, any subsequent cash receipts are realized as gross profit.
Under U.S. 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.
When those two conditions are not fully met, under U.S. GAAP some of the profit is deferred. Two of the methods may be appropriate in these limited circumstances and relate to the amount o f profit to be recognized each year from the transaction: the installment method and the cost recovery method. 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, when the outcome of a contract cannot be