[Pete]

At my current organization, upper management (ie. board and CEO) is requesting that we (the organization) recognize the principle on debt as revenue. Is there any justification for doing this? I fear we will probably get in trouble for it on the audit. We use GAAP, so I guess maybe you could argue an accidental switch to cash-basis on the debt.

We currently recognize debt on the balance sheet as a liability (which I think is correct).

B=84 This exam was such a b**** that I thought I failed-don't know how these things work
A=76 Slacker I am, I'll happily take it
R=81 I LOVE taxes
F=80 I don't wanna get banned for an expletive I'm thinking with "yea" proceeding it

[Recked]

…. wut….
Is there more to this story?
This strikes me as incredibly fishy.

[aaronmo]

Are you a CPA/accountant?

How would you recognize the principal on a liability as revenue? Do you mean expensing the repayment? Cash basis doesn't let you recognize a loan as revenue.

[aaronmo]

Recked – this sounds like fraud.

[Pete]

True cash basis-all money coming in is revenue all money going out is debt. So the principle in is revenue, the principle out + interest is an expense.

We (me and my boss) aren’t happy with the decision, but they’re the ones requesting it. I’m trying to find a new job, but I need this one for the time being.

Tempted to have the board sign something along the lines of “we wish to have debt recognized as revenue.”

B=84 This exam was such a b**** that I thought I failed-don't know how these things work
A=76 Slacker I am, I'll happily take it
R=81 I LOVE taxes
F=80 I don't wanna get banned for an expletive I'm thinking with "yea" proceeding it

[SheilaTX]

No, no, no. Revenue is for services performed, goods sold, etc. Principal on debt is never revenue.

[aaronmo]

You can not go anywhere near this if you are a CPA. I have no idea what your legal obligations are as an employee…but do not touch this as a CPA.

[Pete]

Insurance proceeds are not the sale of goods incurred in the ordinary course of business, but the amount over the repair cost is revenue. The entire expense and revenue are probably separate lines. We agree that principle is not revenue under GAAP though.

B=84 This exam was such a b**** that I thought I failed-don't know how these things work
A=76 Slacker I am, I'll happily take it
R=81 I LOVE taxes
F=80 I don't wanna get banned for an expletive I'm thinking with "yea" proceeding it

[Earla Riopel (NYCARE)]

Not sure exactly what the situation and original transaction(s) with your company (for-profit, I assume). Based on my experience in accounting and tax courses, the following would be possibilities of “debt recognizing as revenue”:
– The original debt has an ‘interest income' component.
– The original debt has been ‘bartered/exchanged' to your company rendered services or products sold to this creditor.
– The debts have been ‘donated' or written-off by the creditor.
– The original debt has been forgiven by the creditor; thus, the services and products bought on credit became taxable benefits and added to your company's assets. This type of account(s) usually uses cash; very similar to the preparation of the Statement of Cash Flows.
– Lastly, perhaps it was mistakenly categorized as ‘revenue' instead of ‘fundings', such as investments that normally affect the assets, liabilities and equity sections of the Balance Sheet and Statement of Cash Flows. The only time it would affect the Income Statement(IS) if the debt was related to inventory/purchases; thus, affect the COGS and the Gross Profit sections of IS.
Following GAAP is the best route.

[Recked]

Seems like fraud to me as well.
What is the industry? Are there some specific considerations that need to be taken in to account?
Are you taking out loans to generate the debt?
Who is repaying the debt, and for what purpose? Are you a bank of lending entity?
Are you sure you are using the terms here correctly? Do they want it in cash flows, vs revenue?
This seems so blatantly fraudulent that I am worried you might have your terms mixed up.

[Recked]

Insurance proceeds are income, or other income. Not revenue. At least in my line of work.
–
In accounting, revenue is the income that a business has from its normal business activities, usually from the sale of goods and services to customers.

[aaronmo]

^^^ Yep…or, potentially, a gain. It's not revenue, and it doesn't really matter. This isn't a grey area.

On an income statement, it would be other income.

[Pete]

That’s what I meant by revenue (income) – I confused the terms. Revenue only pertains to sales as you said. My apologies, still don’t think regular debt is income, unless it’s a forgivable and the condition of forgiveness is complete or nearly complete. They want to recognize all debt as income, even unforgivable debt.

I work at a nonprofit organization. We are in dire straights right now. Payroll is getting tougher and tougher to make.

B=84 This exam was such a b**** that I thought I failed-don't know how these things work
A=76 Slacker I am, I'll happily take it
R=81 I LOVE taxes
F=80 I don't wanna get banned for an expletive I'm thinking with "yea" proceeding it

[Earla Riopel (NYCARE)]

NPOs recognized services and products contributed/donated to the organization, as revenues. For example, a carpenter wanted to donate his service for repair and maintenance or a licensed CPA who performed an audit to an organization is considered as income or revenue, even though there wasn't any actual transfer of funds. The service of a carpenter or the CPA will be recorded as revenues (CR) and the repair/maintenance and audit work (DR) will be recorded accordingly. The reasoning behind this is, the services are the type of services that required expertise from a carpenter or CPA, not just as a volunteer with no related training as to the services provided, which can be disallowed in this case.

Meanwhile, I read it somewhere that “FASB’s new revenue recognition standard will become effective for most not-for-profit (NFP) entities in 2019”. To accomplish this objective, reporting entities are to apply a five-step approach:
– Identify the contract with the customer.
– Identify the performance obligations in the contract.
– Determine the transaction price.
– Allocate the transaction price to the performance obligations in the contract.
– Recognize revenue when (or as) the entity satisfies a performance obligation.
(Turpen, R., CPA Journal – April 2017: cpajournal.com/2017/05/01/not-profit-entities-new-revenue-recognition-standard)

I find this article interesting since it has NPOs JE and F/S (Statement of Activities) illustrations, specifically as to ‘revenue recognition'; it has great explanations as well. Check it out.

[Taxman06]

There is something called debt forgiveness income. Essentially when an entity is not able to pay off a debt and lender cuts its losses, then the debt forgiven is recognized as income. Debit Notes Payable or Debt and Credit Revenue. This is the only instance that I'm aware of where debt can be recognized as income. This is for tax purposes, I assume to same rule would apply to GAAP, but not sure.

[turo9992000]

@Pete, Did the board and CEO give a reason why they wanted to recognize debt as revenue? The whole thing sound fishy.

[Author]

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