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Analysis of Revenues

Difficulty: Advanced

Revenue Recognition Accounting Policy

Sales of Machinery, Energy & Transportation are recognized and earned when all the following criteria are satisfied: (a) persuasive evidence of a sales arrangement exists; (b) price is fixed and determinable; (c) collectibility is reasonably assured; and (d) delivery has occurred. Persuasive evidence of an arrangement and a fixed or determinable price exist once Caterpillar receives an order or contract from an end user or independently owned and operated dealer. Caterpillar assesses collectibility at the time of the sale and if collectibility is not reasonably assured, the sale is deferred and not recognized until collectibility is probable or payment is received. Typically, where product is produced and sold in the same country, title and risk of ownership transfer when the product is shipped. Products that are exported from a country for sale typically pass title and risk of ownership at the border of the destination country.

Sales of certain turbine machinery units, draglines and long wall roof supports are recognized under accounting for construction-type contracts, primarily using the percentage-of-completion method. Revenue is recognized based upon progress towards completion, which is estimated and continually updated over the course of construction. Caterpillar provides for any loss that Caterpillar expects to incur on these contracts when that loss is probable.

Caterpillar’s remanufacturing operations are primarily focused on the remanufacture of Cat engines and components and rail related products. In this business, used engines and related components (core) are inspected, cleaned and remanufactured. In connection with the sale of most of the remanufactured product, Caterpillar collects a deposit from the dealer that is repaid if the dealer returns an acceptable core within a specified time period. Caterpillar owns and has title to the cores when they are returned from dealers and end users. The rebuilt engine or component (the core plus any new content) is then sold as a remanufactured product to dealers and end users. Revenue is recognized pursuant to the same criteria as Machinery, Energy & Transportation sales noted above (title to the entire remanufactured product passes to the dealer upon sale). At the time of sale, the deposit is recognized in Other current liabilities. In addition, the core to be returned is recognized as an asset in Prepaid expenses and other current assets at the estimated replacement cost (based on historical experience with useable cores). Upon receipt of an acceptable core, Caterpillar repays the deposit and relieve the liability. The returned core is then included in inventory. In the event that the deposit is forfeited (i.e. upon failure by the dealer to return an acceptable core in the specified time period), Caterpillar recognizes the core deposit and the cost of the core in Sales and Cost of goods sold, respectively.

Except for replacement parts, no right of return exists on the sale of Caterpillar’s products. Replacement part returns are estimable and accrued at the time a sale is recognized.

Caterpillar provides discounts to dealers through merchandising programs. Caterpillar has numerous programs that are designed to promote the sale of the products. The most common dealer programs provide a discount when the dealer sells a product to a targeted end user. The cost of these discounts is estimated based on historical experience and known changes in merchandising programs and is reported as a reduction to sales when the product sale is recognized.

Caterpillar’s standard dealer invoice terms are established by marketing region. Caterpillar’s invoice terms for end user sales are established by the responsible business unit. When a sale is made to a dealer, the dealer is responsible for payment even if the product is not sold to an end user. Dealers and end users must make payment within the established invoice terms to avoid potential interest costs. Interest at or above prevailing market rates may be charged on any past due balance, and generally Caterpillar’s practice is to not forgive this interest. In 2017, 2016 and 2015 terms were extended to not more than one year for $267 million, $406 million and $635 million of receivables, respectively, which represent approximately 1 percent of consolidated sales.

Caterpillar establishes a bad debt allowance for Machinery, Energy & Transportation receivables when it becomes probable that the receivable will not be collected. Caterpillar’s allowance for bad debts is not significant.

Revenues of Financial Products are generated primarily from finance revenue on finance receivables and rental payments on operating leases. Finance revenue is recorded over the life of the related finance receivable using the interest method, including the accretion of certain direct origination costs that are deferred. Revenue from rental payments received on operating leases is recognized on a straight-line basis over the term of the lease.

Recognition of finance revenue and rental revenue is suspended and the account is placed on non-accrual status when management determines that collection of future income is not probable (generally after 120 days past due). Recognition is resumed, and previously suspended income is recognized, when the account becomes current and collection of remaining amounts is considered probable.

Sales and revenues are presented net of sales and other related taxes.

Source: 10-K (filing date: 2018-02-15).

Revenues as Reported

Caterpillar Inc., Income Statement, Revenues

USD $ in millions

Microsoft Excel LibreOffice Calc
12 months ended Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
Construction Industries hidden hidden hidden hidden hidden
Resource Industries hidden hidden hidden hidden hidden
Energy & Transportation hidden hidden hidden hidden hidden
Machinery, Energy & Transportation hidden hidden hidden hidden hidden
Financial Products Segment hidden hidden hidden hidden hidden
External sales and revenues from reportable segments hidden hidden hidden hidden hidden
All other operating segment hidden hidden hidden hidden hidden
Other hidden hidden hidden hidden hidden
Sales and revenues hidden hidden hidden hidden hidden

Based on: 10-K (filing date: 2018-02-15), 10-K (filing date: 2017-02-15), 10-K (filing date: 2016-02-16), 10-K (filing date: 2015-02-17), 10-K (filing date: 2014-02-18).

Item Description The company
Sales and revenues Amount of revenue recognized from goods sold, services rendered, insurance premiums, or other activities that constitute an earning process. Includes, but is not limited to, investment and interest income before deduction of interest expense when recognized as a component of revenue, and sales and trading gain (loss). Caterpillar Inc.’s sales and revenues declined from 2015 to 2016 but then increased from 2016 to 2017 not reaching 2015 level.