The text discussion of RRA is in terms of the relevance and reliability of the asset valuation of oil and gas reserves. RRA can also be evaluated in terms of the criteria for revenue recognition. CICA Handbook, Section 3400, states that revenue involving the sale of goods and services should be recognized when the seller has transferred to the buyer the significant risks and rewards of ownership, and reasonable assurance exists regarding the measurement of the consideration that will be received.

Required

a. At what point in their operating cycle do most industrial and retail firms regard revenue as having been earned (i.e., realized)? Use the two CICA Handbook criteria above to explain why.

b. Suppose that X Ltd. is an oil and gas producer. X Ltd. uses RRA on its books and prepares its financial statements on this basis. When (i.e., at what point in the operating cycle) is revenue recognized under RRA? Does this point meet the criteria for revenue recognition under GAAP as given in the CICA Handbook above? Explain why or why not.