When should an asset be recognized for amounts related to the master settlement agreement with tobacco companies?

An asset related to the master settlement agreement with tobacco companies should be recognized as of the date of shipment of qualifying tobacco products. This is based on the principle that revenue and thus related assets should be recognized when they are earned and realizable, which for the tobacco settlement agreements occurs when the products are shipped.

During this process, the shipment signifies that the products have been delivered, meeting the criteria necessary for recognizing the associated revenue from the settlement. The underlying accounting principle is that the company has made an exchange that supports the recognition of an asset. If the product is shipped, it indicates that the company has engaged in a transaction that justifies acknowledging the related receivable or asset.

On the contrary, recognizing the asset as of the date of the sale of tobacco-related debt or the date of the settlement may not accurately reflect the earning process or the regulatory acknowledgment required by accounting standards for revenue recognition. The rules state that it is not merely upon settlement or sale that recognition is proper; the timing of the shipment of products is critical to determining when the benefits of the settlement materialize effectively.