Revenue Recognition Guidance FASB Statement of Financial Accounting Concepts (CON) 5, Recognition and Measurement in Financial Statements of Business Enterprises. As outlined in CON 5 and SEC Staff Accounting Bulletin (SAB) 104,Revenue Recognition, entities should apply the four general principles of revenue recognition, which are listed below, in determining when to recognize revenue from product sales: ● Persuasive evidence of an arrangement exists. ● Delivery has occurred or services have been rendered. ● The seller’s price to the buyer is fixed or determinable. ● Collectability is reasonably assured. ASC 605, Revenue Recognition, provides guidance for specific transaction revenue recognition and several matters related to activities which generate revenues. Some examples include the sale of products, services performed, and the gain or loss on conversions of nonmonetary assets to monetary assets. Revenue is recognized when it is realized or realizable and earned. In addition, the section provides information on (1) how the vendor will provide deliverables to the customer,(2) when to report revenue gross or net of certain amounts paid to others, (3) the accounting of credit given by a vendor to a customer, and (4) the use of the milestone method in arrangements that include research or development deliverables. Currently, GAAP has complex, detailed, and different revenue recognition requirements for specific transactions and industries. As a result, different
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In 2014, Sedki, Sedki, Strickland concluded that GAAP is complicated for people to use. It provides more than two hundred industry specific rules for different firms to recognize revenue. Therefor there is no effective regulation for people to use when they need to
Revenue is the gross inflow of economic benefits during the period arising in the ordinary course of activities. Revenue should be recognized when the future economic benefits that will flow to the entity can be measured reliably. The new standard will significantly change how companies recognize revenue. It creates a whole new codification in a new era of revenue recognition by replacing hundreds of pages of guidance that are specific for each industry to a single comprehensive standard applicable to virtually all industries. The recognition criteria are usually applied separately to each transaction, but sometimes and under specific circumstances, it is necessary to apply the recognition criteria to the separate recognizable parts or of a single transaction in order to reflect the substance of the transaction. In aviation industry, the revenue transaction or events takes a significant period of time in order to complete because of the nature of product delivering against the sum of money. The five‐step revenue recognition process for this transaction are as follows:
There is a five step process to recognize revenue to depict transfers of goods or services to customers in amounts that reflect the consideration to which entity expects to be entitled in exchange for those goods and services: Identify contracts with customer, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price with the performance obligation in the contract and recognize revenue when or as the entity satisfies the performance obligation.
The purpose of this research paper is to summarize research on codification topic 410 based on the information found in different academic databases. The first part of the paper will focus on the FASB Codification database. The second part of the paper will compare and contrast three other databases on the same codification 410 within the RIA Checkpoint databases: AICPA: Auditing and Accounting Guides, SOX Reporter, and GAAP Practice Manual. A summary of benefits and issues with the searches of each database will also be discussed.
The FASB accounting codification is an advanced system that allows certified public accountants and other users to quickly access non-SEC authoritative content, perform relevant research, and submit timely and appropriate feedback. The FASB codification research system is a real-time, online database that allows users to access codification whose primary aim is to simplify the accessibility and structure of all authoritative generally accepted accounting principles, reduce the time and effort invested when researching accounting-related issues, decrease the risk of non-compliance with the generally accepted accounting principles, provide access to all authoritative information from a single place, facilitate the updating of accounting standards, and foster research and convergence efforts for the FASB (Wiley, 2017).
If a transaction is within the scope of specific authoritative literature that provides revenue recognition guidance, that literature should be applied. However, in the absence of authoritative literature addressing a specific arrangement or a specific industry, the staff will consider the existing authoritative accounting standards as well as the broad revenue recognition criteria specified in the FASB's conceptual framework that contain basic guidelines for revenue recognition.
The SAB 104 is a revised of Revenue Recognition of the SAB 101. There are five steps to achieve the core principle of SAB 104. First, identify the contract with a customer, identify the seller’s obligations. SAB 104 didn’t provide specific guidance on persuasive forms of evidence, but it could be written contract, sale receipt, or other forms of written or electronic evidence. Second, identify the performance obligations (promises) in the contract. Third, determine the transaction price. Fourth, allocate the transaction price to the performance obligations in the contract. Lastly, recognize revenue when (or as) the reporting organization satisfies a performance obligation. Entity should facilitate assessment of whether the obligation undertaken by the seller has been completed. There are two models on the revenue recognition base on delivery. The completed performance (immediate recognition) in which a single point in time when the seller performs obligation and buyer receives benefit. The Proportional performance (recognition over performance period) is when the seller performs and customer receives value over time. Examples of SAB 104 Revenue Recognition Delivery are advertising revenue or subscription for annual membership where cash is collected upfront. SAB 104 doesn’t have specific guidelines for Revenue recognition’s determination of collectability as long as whether the revenue is realizable. For examples, payment history, credit checks, early cancellation provisions. If collectability is not reasonably assured, revenue received from the transaction should not be recognized upon receipt of cash. Although in the old principal (SAB No.101) doesn’t have to be followed by steps like the new principal (SAB No. 104), but they are very
Based on the information outlined above, the revenue recognition accounting would follow that for Multiple-Element Arrangements as outlined in ASC 605-25. The accounting units of system and PCS will be accounting for separately, because the criteria of ASC 605-25-5-a are met: “The delivered item or items have value to the customer on a standalone basis. The item or items have value on a standalone basis if any vendor sells them separately or the customer could resell the delivered item(s) on a standalone basis. In the context of a customer's ability to resell the delivered item(s), this criterion does not require the existence of an observable market for the deliverable(s).” As outlined in the case, both the customer support system and the post-contract customer support have standalone relative selling prices of $12,000 and $2,000, and could be purchased separately. Therefore, it is appropriate to use Vendor-Specific Objective Evidence to determine the amount of revenue to recognize for the system ASC 605-25-30 and the breakout for PCS, but PCS will also be subject to nonrefundable up-front fee stipulations for revenue recognition. According to ASC 605-10-S99 SEC Materials and the SEC’s codification of Staff
Revenue recognition issues are the subjects of headlines in our daily newspapers, primarily because major corporations have recognized revenues that did not meet its revenue recognition rule. For businesses that use cash basis accounting, revenue recognition is a simple process; a sale equals revenue, but not for companies that use accrual basis accounting. The more complex the business, the more specialized the industry, the more difficult the decision becomes for that business as to when to recognize earnings. Revenue recognition is one of the areas where managers can exercise their accounting discretion to achieve certain objectives. By looking at
Change is on the horizon and many companies are scrambling trying to figure out how the New Revenue Recognition Standard will impact the way that they conduct business. The prospect of bracing for a game-changing revenue recognition standard at a larger global firm is a daunting task. GE Technical Controller Russell Hodge, CPA, commented about this stating, “I’ll admit to it being a little bit overwhelming to us. We have $150 billion of revenue and so many diverse, different business models. It’s a tough question. It’s a tough thing to think about.” (http://journalofaccountancy.com/Issues/2014/Mar/revenue-recognition-20149444.htm) With experienced well-known firms such as GE being concerned, it shows that even the most experienced companies are concerned with how the new standards will fundamentally change the way that they conduct business. The main purpose of this essay is to explore how the new revenue recognition standard will effect different industries when it comes to fruition in 2017. The secondary purpose of this essay is to discuss ways that these different companies can mitigate risk by effectively preparing for these changes by using preventative controls.
SAB 104 lays down the following conditions that should all be fulfilled to enable revenue recognition in cases on non-delivery of goods: (1) The risks of ownership need to have been transferred to the purchasers, (2) The customers have made commitments, preferably written, to procure the goods, (3) The purchasers call for the ‘bill and hold’ transactions, (4) The buyers should be
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).
GAAP is exceptionally useful because it attempts to regulate and normalize accounting definitions, assumptions, and methods. Because of generally accepted accounting principles one is able to presuppose that there is uniformity from year to year in the methods that are used to prepare a
Revenue from the provision of goods and all services is only recognized when the amounts to be recognized are fixed or determinable, and collectability is reasonably assured (Elliot B., Elliot J., 2007)