When are assets received recognized as revenue by the recipient organization?

• A. When they are received in cash
• B. When transferred with variance power
• C. Upon completion of the service
• D. When liabilities are settled

Answer: (B)

Recognition of revenue from assets received by a recipient organization occurs when those assets are transferred with variance power. Variance power refers to the ability of the recipient to determine how those assets should be used or expended. When the recipient has this control, it signifies that they can recognize the assets as revenue because they are now the owner and can use the assets freely in accordance with their discretion.

This aligns with revenue recognition principles under accounting standards that prioritize the transfer of control and the rights to use assets. The moment the recipient gains variance power, the assets are effectively integrated into their operations, and they have the risks and rewards of ownership.

In scenarios where assets are received in cash, recognized service completion, or liability settlement, they do not meet the criteria for immediate revenue recognition because either the asset has not been effectively received (as in the case of cash), the performance obligation has not been completed (as in the case of services), or the organization is not in a position to derive economic benefits until the liabilities are discharged. Thus, variance power is the key factor in determining when an asset received can be recognized as revenue.