Financial Statements Regarding A Company 's Performance And Prospects

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Final Exam Question 4 According to FASB webpage, revenue is a crucial number to users of financial statements in assessing a company’s performance and prospects. However, revenue recognition requirements in U.S. GAAP differ from those in IFRS, and both sets of requirements are considered to be in need of improvements. Accordingly, the FASB and the IASB initiated a joint project to clarify the principles for recognizing revenue and to develop a common revenue standard for U.S. GAAP and IFRS that would 1) remove inconsistencies and weaknesses in existing revenue recognition standards and practices; 2) provide a more robust framework for addressing revenue recognition issues; 3) improve comparability of revenue recognition practices across…show more content…
The current model for revenue recognition focuses on the income statement. In many respects, if the proposed model is adopted, the new model focuses on control and when goods and services are transferred to the customer. It appears that the revenue recognition project has the potential to affect virtually every company’s day-to-day accounting as well as the way business relationships and contracts with customers are structured. Specifically, for long-term construction contracts, revenue recognition is dependent on customer control of the asset as it is developed or manufactured. Continuous revenue recognition, such as percentage of completion, would only occur if this control is present. Otherwise, revenue recognition would be similar to current completed-contract methods. For customer loyalty programs, benefits to customers are performance obligations because the benefits, often points, are a material right that the customer would not receive without engaging in the purchase transaction. Thus, revenue would be deferred until the obligations are satisfied. For product warranties, the amount deferred would then be based on an allocation of revenue instead of costs. However, under the current model, revenue is recognized and estimated costs to fulfill the warranty obligation
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