Financial Statements Regarding A Company 's Performance And Prospects

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).

Based on these guidelines, revenue should not be recognized until it is realized or realizable and

Purpose of research. The purpose of research is to analyze and compare the revenue recognition under FASB and IFRS provisions. The research is built on other studies that focus on the revenue recognition model and converged standards. The value of this study cannot be overemphasized since the revenue is an essential metric of financial statements that provides a comprehensive knowledge to users of financial information. The revenue recognition framework is under the development and scrutiny since 2002.

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

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.

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

From the beginning, the process of releasing the new SAB 101 that regulate Revenue Recognition was controversial. Revenue recognition differs between Generally Accepted Accounting Principles (GAAP) which is the method the United State (US) is using and International Financial Reporting Standards (IFRS) which is the method the rest of the world is using. Under GAAP, it is detailed and has specific requirements for revenue recognition transaction base on individual industries. Therefore, different industries use different accounting method for similar revenue recognition transactions which can be difficult to compare financial statements between different industries. The reason is revenue is one of the most important measures presents to the investors in order to assess a company’s performance and prospects. On May 28, 2014, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) issued new guidance on revenue recognition to improve and establish more

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).

Industry experts considered IAS 18 Revenue to be inadequate for complex accounting transaction applications and ASC605 contained various industry-specific main and sub requirements that did not achieve the goal of consistent revenue recognition outcomes. (McConnell, 2014). The IASB and FASB boards have issued 2 separate standards for revenue recognition and the contents exhibit several differences (See Exhibit 1: Appendix). To understand the usefulness of the IFRS15 standard a regulatory framework, the study of the differences between IFRS and US GAAP as well as the motivation behind the decisions made in standard setting is crucial. Key difference which could potentially affect the usefulness outcome is the prohibition of unrealized impairment loss reversals under ASU606. The updated revenue recognition standard by definition describes that a contract asset or contract liability arises in the event that either party to said contract performs (Ernst & Young, 2014) .Subsequent to initial recognition, impairment tests should be performed in accordance to IFRS9 or IAS39 on all contract assets and impairment losses needs to be presented in profit and loss. In effect, allowing for reversal of impairment losses would increase the value of contract assets up to the amount not greater than the

Revenue recognition has been viewed routinely as one of the most difficult finance and accounting processes to get right. It represents one of the highest risks of material error on financial statements, and it is one of the leading causes of restatements. Before May 2014, revenue recognition guidance in U.S.GAAP comprised broad revenue recognition concepts together with numerous revenue requirements for particular industries or transactions, which sometimes result in different accounting for economically similar transactions. In May 2014, FASB issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers, to replace the existing rules and modifies the method that the majority of U.S. companies used when to

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).

The issues raised by Isoft elucidate the importance of recording an accurate picture of its earnings. The joint project of the FASB and the IASB is trying to converge the two sets of standards and offer a single revenue recognition model that can be applied consistently to various transactions – which would address these issues of lack of guidance.

We are all familiar with the basic revenue recognition rule: revenue should generally be recognized when it is realized or realizable and when it is earned. Although seemingly simple, that rule can be difficult to apply, particularly in rapidly evolving high-tech industries. Revenue recognition within the software industry has been a complex and controversial issue since the inception of that industry during the latter part of the twentieth century. The FASB addressed that issue at length in Statement of Position 97-2 (pre-codification GAAP), which was released in October 1997. A more general discussion of revenue recognition can be found in the SEC’s Staff Accounting Bulletin No. 101 that was issued in December 1999.

Revenue recognition is the accounting principle that deals with the time and method to place income on the books once the earnings process is complete. The United States Generally Accepted Accounting Principles (U.S. GAAP) is a rule based system that accountants must adhere to when performing accounting tasks. The U.S. GAAP revenue recognition rules allows for exceptions to certain transactions and requires companies to also follow regulations promulgated by the Securities and Exchange Commission. Conversely, the International Financial Reporting Standards (IFRS) is a principle based system that advocates for certain accounting principles that should be applied to all contracts and industries. The IFRS standards are created by the International Accounting Standards Board. In general, the U.S. GAAP accounting framework provides numerous rules on the issue of revenue recognition. Moreover, the U.S. GAAP rules are broken into categories based on the particular industry involved. Some of the industries that have specific U.S. GAAP rules are software and real estate. The IFRS system creates principles that should be applied to all industries without exception. The U.S. GAAP revenue recognition rules focus on realized or realizable revenue and whether it is earned. Conversely, IFRS revenue recognition principles focus on the whether there are potential economic benefits from a transaction and, if so,

Financial statements are the core component of financial reporting and contain sections or elements outlined in FASB SFAC Concept No. 6. In order for data or information to be contained within the financial statements it must go through a formal process of recognition. An element that is included in the financial statements will be qualitative and quantitative and must meet the formal definition of either an asset or liability. A change in equity must meet the definition of a revenue, expense, gain, or loss to be recognized as a component of comprehensive income. (Concepts Statement No.4, p.26) The element must also contain aspects of relevance and reliability, as covered in Concept No. 2, in addition to measurability. Measurability states that an element must be counted or identified as a monetary unit, in most cases a specific currency. Once the currency has been established, measurability must account for specific attributes to be included in the asset and liabilities sections of the financial statements.