Revenue from the sale of goods should be recognized if all of the five conditions mentioned below are met.
- The reporting entity has transferred significant risks and rewards of ownership of the goods to the buyer;
- The entity does not retain either continuing managerial involvement (akin to that usually associated with ownership) or effective control over the goods sold;
- The quantum of revenue to be recognized can be measured reliably;
- The probability that economic benefits related to the transaction will flow to the entity exists; and
- The costs incurred or to be incurred in respect of the transaction can be measured reliably.
The determination of the point in time when a reporting entity is considered to have transferred the significant risks and rewards of ownership in goods to the buyer is critical to the recognition of revenue from the sale of goods.
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