Issues with Revenue Recognition Within the Software Industry

Coverage of revenue recognition in intermediate accounting courses is typically limited to learning and applying the criteria for revenue recognition outlined in the Financial Accounting

The nature of an organisation determines the different financial statements required to be completed annually. This report will analyse three contrasting types of entities, in addition to the differences in the annual reports produced.

Given the above standard, one can begin to make a case for choosing either the gross method or the net method of revenue recognition.

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Revenue recognition is a difficult matter in accounting. The company’s results differ depending of the method used to recognized earnings. This is a complex situation since business activities are broad and intricate. Therefore, policies and regulations are imperative to reduce manipulation of financial statements.

This paper will demonstrate my understanding of financial accounting and why generally accepted accounting principles (GAAP) are important. I will discuss how financial statements are used in the marketplace. I will describe each financial statement and tell what it reveals about the business. I will explain how the statements are linked and show examples. I will explain the notes to the financial statements. I will also explain why ratios are used and why they are important.

Revenue is the gross inflow of economic benefits (cash, receivables, other assets) arising from the ordinary operating activities of an entity (such as sales of goods, sales of services, interest, royalties, and dividends). [IAS 18.7]. Revenue recognition, as defined in the IASB Framework, means incorporating an item that meets the definition of revenue in the income statement when it is probable that any future economic benefit associated with the item of revenue will flow to the entity, and the amount of revenue can be measured with reliability.

Before the IFRS 15 was issued, revenue recognition requirements under the US GAAP and the IFRS were different and required improvement. They conflicted with each other and resulted in different accounting for transactions that were similar. IFRS’s previous revenue recognition standards were difficult to understand and apply as well.

Diversification of revenue recognition practices have arisen due to AASB 118 and 111 providing insufficient guidance, consequently repeatedly leading to different accounting arrangements for similar transaction, such as a multiple line elements. Accordingly, the limited guidance provided, fosters a sense of uncertainty among prepares of financial statements and difficultly in application of standards to complex transactions. Thus, consultation was undertaken internationally/domestically by the IASB and the AASB to rectify inconsistences/weaknesses with standards. Accordingly AASB 15 was issued intending to facilitate a single recognition framework for all contracts with

Product: The company has offered the market diver This has enabled many clients to have a

A major problem in the determination or measurement of Income is related to the point at which the revenue is recognized. It is possible to recognize the revenue at different points in the production/selling levels. Example:

A similar study by Accenture/Economist Intelligence Unit reported a significant gap between potential and actual practice.3 These indications of a slowing pace of management accounting change may be due to a range of factors. In some cases, new management accounting tools aren’t adapted to organizational strategy or structure and can’t be used. And in some cases, innovation has failed due to implementation-related factors. However, the main problems aren’t technical or structural; they lie in the need for a better management of the management accounting process itself.

Under the new model they were also trying to provide more accurate Financial Statements, so CA changed its method of reporting revenues. In the past they would record revenue at the time of the contract, no matter how long the contract all the revenue would be booked in that quarter. Under the new plan the revenues would be recognized ratably over the life of the contract. The risk with presenting a new way of accounting is it is difficult to compare the past and the future. Also with such huge differences in revenue it raises suspension if things were done right in the past. One of the biggest discrepancies was that in 2000, before the change, CA reported a profit of $696 million; now after the change in 2001 the company reported a loss of $591 million. CA’s reasoning for the change was that it related to the change in reporting the license-fees revenues. But this reasoning was still not acceptable with some shareholders and it raised suspicion.

The case of Alston Manufacturing illustrates how damaging it can be to a company when information presented does not remain true to the conceptual framework of accounting. This paper will discuss all of the various owners, their key decisions, and how those decisions affected others. Before we discuss this in further detail, it is important to explain the difference between managerial accounting and financial accounting, as both will be used explain information relevant to Alston.

By proposing the changes, IASB seeks to remove discrepancies and weaknesses in previous revenue recognition standards by providing concise principles for revenue recognition in a more robust framework. This increases the accuracy of the numbers reflected in financial statements, which give the users a better evaluation of the company’s performance and prospects. IASB also seeks to improve comparability between industries, companies, jurisdictions and capital markets by providing a single revenue recognition model those companies can seek guidance from. Improved comparability allows users of financial statements to compare