Final answer:
Companies disclose their revenue recognition policies in the notes to their financial statements, as required by accounting standards such as GAAP and IFRS, providing details on how and when they recognize revenue.
Step-by-step explanation:
Companies disclose their revenue recognition policies in their financial statements, specifically within the notes (also known as footnotes) to the financial statements. According to accounting standards such as Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS), these notes must include a comprehensive summary of the significant accounting policies used by the company, including how they recognize their revenue. This is critical information for investors, analysts, and other stakeholders who need to understand a company’s performance and financial position.
For example, a software company might recognize revenue over the period of a subscription, while a construction company might use the percentage-of-completion method for long-term contracts. By reviewing the notes to the financial statements, one can identify the specific revenue recognition principle applied and any relevant details about the underlying contracts or sales that impact when revenue is recognized.