Current Standards For Revenue Recognition

Revenue recognition accounting standard ensures the correct revenue is recorded for each period of the income statement, it was previously based on the realization principle - requires revenue to be recognized when the earning process is virtually complete and is certain to collectability. FASB & IASB developed a new revenue recognition standard, Revenue from Contracts with Customers,” on May 28, 2014, ASU No 2014-09. (RRPA Revenue Recognition and Profitability Analysis-1-LO1-5).

The major benefit of this proposal is that agreement exists that there is more objectivity in measuring and determining changes in assets and liabilities than there is in measuring and determining the completion of the earning process. After taking comment letters on the discussion paper of December 2008 and an initial exposure draft in June of 2010, the boards issued a revision of the proposal in “Proposed Accounting Standards Update (Revised), Revenue Recognition (Topic 605) – Revenue from Contracts with Customers: Revision of Exposure Draft Issued June 24, 2010.” The new document left the basis of the proposal the same and added implementation guidance and a tentative date for adoption. Recognizing revenue under the standard would be a five-step

The most relevant and authoritative is FASB Codification: 605-45-45-1, and it pertains to revenue recognition and most importantly to principal and agent consideration. The standard basically states that if you are considered the principal, then you recognize revenues at gross amounts. On the other hand, if you are considered an agent, then you recognize revenues at net amounts. The standard is broken up in the following two sections.

The Company is planning to adopt International Financial Reporting Standards (IFRS) in the near future and should be made aware of the International Accounting Standards Board’s (IASB) relevant accounting guidelines. While FASB has extensive revenue recognition guidelines, IASB only has one, IAS 18. IASB’s revenue recognition guideline for the sales of goods [IAS 18.14] states that revenue

Collectability of revenues must be explicitly assessed in a contract before applying the revenue recognition model. An entity must take into account the credit risks and probability of revenue collection as the amount of consideration for the transfer of goods or services based on the customer’s capacity and intention to make due payments. This is one essential difference from the previous standards (Wilson and Sobolewski).

The famous accounting scandals of late 1900s and early 2000s believed to cause the legislation, the SEC and FASB to issue changes and updates on its accounting principles on revenue recognition topics. American Institute of Certified Public Accountants (AICPA, 2002) outlined, AU Section 316 and Statement on Auditing Standard No. 99 (SAS 99) Consideration of Fraud in a Financial Statement Audit, as a guide for auditors to focus on two broad areas of fraud such as the fraudulent financial reporting and misappropriation of assets (p. 1722). The Securities and Exchange Commission (SEC, 1999) Staff Accounting Bulletin (SAB 101), Revenue Recognition in Financial Statements, states that revenue is realized or realizable and earned or recognize when persuasive evidence of an arrangement exist, delivery has occurred or services has been rendered, seller’s price to the buyer is fixed or determinable and collectability is reasonably assured (topic13). Any one of the (SAB 101) criteria needs to be meet before the company can recognize revenue (topic 13). FASB ASC 606 new guidance on the requirements for determination of revenue from contracts with customers (topic 606), as

The joint standards board analyzed IAS 18, Revenue, and IAS 11, construction contracts. Trying to go through financial statements that do not use the same standard may be time consuming for auditors, so IASB and FASB deciding to combine those standards and redefine how to record revenue under a new joint standard may be the better option. In 2009 the IASB announced the decision to issue a joint standard with the FASB on revenue recognition. For the past five years, the IASB and the FASB periodically announced updates to the standard previously issued. The businesses and industries that use this revenue recognition standard should constantly watch for updates to existing standards, along with issuance of additional conjoint standards by the FASB and IASB. After thoroughly evaluating existing differences between GAAP and IFRS, recommendations for future joint standards will be discussed.

The new revenue recognition standard changes transaction and industry-specific guidance to a principle-based approach. The main point is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchanging for those goods or services [2]. This new standard has five steps need to be followed. The first one is to identify the contract(s) with a customer. Then entity should identify the performance obligations in the contract. After that, an entity needs to make a decision about the transaction price and to allocate this price to the performance obligations in the contract. At last, the entity recognizes revenue when it satisfies a performance obligation. For the first step, there are some requirements the contract has to meet, like identify the right of parties and payment terms. But the old rule only provides limited disclosure information about revenue contract [3]. In some cases, an entity will combine several contracts as one contract. Also, FASB issued the guidance that helps an entity to modify its contract. Here is a concept for the second step. A good or service can be recognized

The introduction of the AASB 15 alters the existing accounting framework in regards to revenue recognition in contractual transactions. The new accounting standards require revenue to be recognised at the value that best represents the value that an entity would be entitled to, after it satisfying its contractual obligations. A 5-step model has been introduced to streamline the revenue reporting process.

AASB 15 has improved about those disadvantages in AASB 111 & AASB 118 by improving comprehensive and framework of recognition, measurement and accurate revenue information on final finical statement. Especially, AASB 15 improves the comparability of revenue from contracts with customers, second, reduces the need for interpretive guidance to be developed on a case-by-case basis to address emerging revenue recognition issues. Finally, provides more useful information through improved disclosure requirements.

Revenue recognition is one of the major areas that a convergence of Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS) unleashes its fiery wrath on US domestic and global businesses. GAAP are the accounting principles that United States domestic companies currently use. GAAP was made and is regulated by the Federal Accounting Standards Board, known as FASB, established in 1973. This is a discussion of GAAP and IFRS, and how GAAP regulations for revenue recognition compare to the principals of revenue recognition established by IFRS standard IAS 18. IFRS was established by the International Accounting Standards Board (IASB) to develop quality and transparent global accounting standards. The United States began working with the IASB and has been on course to update GAAP to recognize the same accounting principles and standards as IFRS since 2002, after signing the “Norwalk Agreement.” The merger was originally scheduled for commencement in 2009 but was postponed a couple of times, and it is now set to take effect December fifteenth of next year for US public businesses. Revenue recognition is an accounting principal that determines when income from selling goods, rendering of services, contracts resulting in interest, dividends or royalties can be measurable and will be recorded as revenue. Revenue is the amount of money a business brings in during its

Income measurement is typically described as a two-step process consisting of revenue recognition followed by matching of expenses to the recognized revenue. The criteria which guides the recognition of revenue clearly plays a critical role in determining the outcome of the accounting process, and it is not surprising recognition criteria are the focus of continuing debate (Antle & Demski, 1989).

Timing of revenue recognition is a crucial part in revenue recognition. According to US GAAP, revenue should be recognized when it is realized/realizable and earned (FASB, 1984, Para. 83).

This assignment features the recognition and measurement of revenue depending on the source of revenue in accordance with the provisions of International Accounting Standards (IAS) 18 Revenue.

The proposed standards mentioned above would affect the current practices in several ways. When adopted, the proposed standard will replace IAS 18 Revenue, IAS 11 Construction Contracts and related Interpretations. In US GAAP, it would replace the guidance on revenue recognition in Topic 605 of the FASB Accounting Standards Codification. The following section will explain some of the differences between the current US GAAP standard and the proposed model.