SAB 101 Summary

Bohusova, H., & Nerudova, D. (2009). US GAAP AND IFRS CONVERGENCE IN THE AREA OF REVENUE RECOGNITION. Economics & Management, 12-19.

As the business environment grows and companies find new ways to expand into their respective - or even new – markets, it is important that reporting standards stay up to date with changes and continue to assist companies in providing their users with useful accounting information. Information is labelled as being useful when it meets the

Because revenue is important to every company and there’re a going concern with issues of the new revenue recognition. The Boards had revised the proposals for public comment before issuing standard in 2008, 2010 and 2011. In 2008, a Discussion Paper was issued by the Boards as their initial proposal on how to identify separate performance obligations on the basis of the timing of transfer of the good/service to the customer only. Internal control of this transaction was also proposed in this paper also. In 2010, the Boards issued an Exposure Draft based on all the feedback received. This is when the core principle was established that entities should recognize revenue to depict the transfer of promised goods or services to a customer in an

Furthermore, the proposed ASU will impact all companies that report their financial statements under US GAAP. Some of the disclosure requirements are already part of the current Securities and Exchange Commission (SEC) disclosure requirements, but some disclosure requirements will reveal new information about reporting entities. PricewaterhouseCoopers (PwC) (Spang and Suplee, 2016) warns that “companies should consider how the additional disclosures may be utilized and interpreted by various stakeholders. In addition, compiling the necessary information, particularly for multinational corporations, may be challenging and may require updates to systems, processes, and controls”. Therefore, the implementation of the new standards on the early stages may require additional financial resources from the business entities.

Due to the highly-detailed rules implemented by FASB in the area of revenue recognition, many transactions that are very similar often are not the same between different industries, resulting in multiple accounting methods for different industries. FASB has explained

According to the new standards, “Users of financial statements must be able to assess the amount, timing, and uncertainty of cash flows arising from

After over a decade of extensive deliberation, the IASB and FASB officially released their joint revenue recognition standard to be applied under both GAAP and IFRS. The FASB and IASB which they have been in collaboration for a converged revenue recognition principle since 2008. The new revenue recognition standard represents a milestone in the convergence process, as it is the first fully integrated joint standard. The purpose of the new revenue recognition principle is to standardize across the board how companies should recognize revenue recorded in financial statements.

recognition requirements in U.S. GAAP are different from those in IFRSs and both are considered in need of improvement. U.S. GAAP comprises broad revenue recognition concepts and numerous industry or transaction-specific requirements that can result in different accounting for economically similar transactions. Although, IFRSs contain less guidance on revenue recognition, its two main standards IAS 18 Revenue and IAS 11 Construction Contracts can be difficult to understand and apply beyond simple transactions. Also, they lack guidance on important topics such as revenue recognition for multiple-element arrangements.

For readers who are unfamiliar with the topics discussed above, The Financial Accounting Standards Board recently issued a new set of standards governing revenue recognition. The new standards will take effect on

Furthering the numerous standard, industry- and transaction-specific standards were outlined to address small issues. As a result to these standards, issues regarding revenue recognition were difficult to address and resolve (FASB, ASU 2014-09).

Yeaton (2015) research titled “A New World of Revenue Recognition” about the discussion of the new revenue recognition standard, jointly issued by FASB and IASB, which is effective after December 15, 2016 for public companies and after December 15, 2017 for private companies and non-profit organizations (p.50). Yeaton identified that the new revenue recognition standard will supersede most, if not all existing revenue standards (p.50). Yeaton summarized the purpose of the GAAP and IFRS converged standards on revenue recognition to provide consistent guidance to replace or remove the transaction and industry or geographic specific guidelines, to simplify or streamline current revenue criterion, and to enhance disclosure statement to demonstrate the nature, timing, amount and uncertainty of cash flow and revenue (p.50). Yeaton implied that the new standard of recognizing revenue will have significant impact on real estate and telecommunications companies, however it will provide variable impact on all companies, and in order to capture, to align and to justify business decision on revenue measurement, it could potentially require substantial changes on its existing process, policies and frameworks (p.50). Yeaton recognized the need of additional or frequent use of judgement and estimation to comply with the new requirements under the new principles of revenue recognition (p.50).

According to KPMG (2016), the main principle of the new AASB 15 is “recognise revenue to depict the transfer of goods and services in amount that reflect consideration to which entity expect to be entitled in exchange for goods and services”. In order to account revenue under AASB 15, every company has to comply with five- step model framework which are:

Extant revenue recognition guidance lacks consistency under U.S. GAAP and IFRS, and fails to address certain types of arrangements. The new guideline reduced inconsistencies, improved comparability, and eliminated gaps. The new standard will significantly affect the current revenue recognition practices of many companies. The new guideline significantly enhanced comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets compare to extant GAAP and IFRS principle. Since the new guidance is principles-based, it can be applied to all contracts with customers regardless of industry-specific or transaction-specific fact patterns. Also, the guidance also reduced the number of requirements to which an entity must consider in recognizing revenue, which resulted in less complexity. The guidance helped better understand the nature, amount, timing, and uncertainty of revenue. All entities, including nonpublic entities (they are not included before), could be applied to the new guideline. Some main points are as follow:

Article analysis for Revenue Recognition Timing and Attributes of Reported Revenue: The Case of Software Industry’s Adoption of SOP 91-1 by Yuan Zhang

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.