Definition of revenue recognition
A Report on Revenue Recognition and its Usefulness to Financial Companies in Australia
Cohen, Hoitash, Krishnamoorthy and Wright (2013) in the journal of The Accounting Review, defined revenue recognition as the principle of accounting which is generally accepted by all accounting principles. Cohen, Hoitash, Krishnamoorthy and Wright (2013), highlighted that GAAP controls a particular condition in recognition and accounting of revenue in any public or private entity in the corporate world. In general, revenue is being recognized only at a critical occasion or event that has occurred and only where the amount of revenue is measured (Burns & Kedia, 2006). Therefore, the report herein addresses various contemporary issues which are relevant and related to revenue recognition to financial companies not only those in Australia but also those in other continents.
The research-based literature articles which were studied in order to write this report include, Issues in Accounting Education Teaching Notes and Journal of Corporate Accounting & Finance. The first journal was authored by (Alford, DiMattia, Hill & Stevens, 2011).while the second journal was authored by Olsen and Weirich (2010). The key reason for selecting the above literature research-based journal is because they report on numerous emerging aspects related to revenue recognition. Some of the reasons why the group take the two articles named above are, the articles discourses the understanding of differences between the new and old standards of revenue recognition implementation, second reason is because of the emerging accounting and operational challenges, and changing in type of accounting software (Forester, 2007).
According to Alford, DiMattia, Hill and Stevens (2011) in the journal of Issues in Accounting Education Teaching Notes, contrasted accounting into two standards. The two standards are old and new that required for the recognition of revenue, based on estimation of completion percentage at a given time on given contract. However, Olsen and Weirich (2010), in Journal of Corporate Accounting & Finance deduced that the new standards of revenue recognition has five phases approach. The approaches include identification of contracts with clients, identification of the performance compulsions in contracts, determining the translation of prices, allocating the transaction prices on the performance responsibilities in contract and, final recognizing the revenue when the entity satisfaction in the performance responsibilities or obligations.
In the two articles the two authors reported on the operational and accounting challenges Alford, DiMattia, Hill and Stevens (2011) stated that the most important operational and accounting variations are likely to occur in the new standards of revenue recognition. These changes include the recognition of revenue at a given time, combining of numerous contracts into one specific conditions, and accounting techniques for variable concerns such as performance bonuses and modification of contracts (Holzmann, 2011). Other changes are contract of price allocation to numerous obligations, capitalizing of costs to acquire contracts and un-installed materials of accountings.
Research-based literature articles
According Olsen and Weirich (2010), the most contemporary contract of accounting software are being designed for justification of revenue recognition on contracts with clients based on the completion percentages standards (Chan, 2008). Hence, it is significant for the accounting software to be evaluated for applicability with the new revenue recognition standards. For evaluation to take place, it requires consultation with the accounting software provider as well as accountant to make sure that company system is customized and tailored for the organizations specific group of contracts to permits a proper adaptation of the new standards of revenue recognitions.
According to Alford, DiMattia, Hill and Stevens (2011) and Olsen and Weirich (2010) in their journal they put more stress on various aspects related to revenue recognition principles and how to solve some of the emerging issues associated with revenue recognition. Hence, some of these finding from the literature-based journals include;
It was found that financial statements presentation and disclosure of revenue recognition have changed. If any company is recently preparing its financial statements under GAAP it will be easy to be accustomed to certain specific financial statements and contract disclosure. While, under the current new standards of revenue recognition, there are broad modifications of presenting financial statements and various modern disclosures as well as the enhancements that come up with these new standards of revenue recognitions (Alford, DiMattia, Hill & Stevens, 2011). Alford, DiMattia, Hill and Stevens (2011) has been strongly supported by Doyle, Ge and McVay (2007) that it is significant for any financial company to act immediately in order to address the possible impact that may be brought by the new standards of revenue recognitions on the company business.
It was also found that a company should employ effective methods of transition and dates. According to Olsen and Weirich (2010), is that public companies, NGOs and financial companies should implement the changes of annual reporting dates or periods to begin after December. Olsen and Weirich (2010) added that all other businesses including private organizations should implement these changes related to annual reporting dates to begin after December of any period. However, Holzmann (2011) stresses that transition guidance will give the options of modifications of retrospective either in full or half. It means that when a private organizations supply the changes in revenues recognition for the next year reporting, the revenue will be required to be adjusted in order to reflect the new standards. These changes should be considered for the next reporting year for the private organizations to reduce the burden of the following annual report.
Operational and accounting challenges
From the findings, financial companies in Australia can use the information for improvement of various areas related to revenue recognition within companies. Some of these useful information include deployment of effective techniques of the transition and dates by the companies. Also, financial companies in Australia will find this report useful because it explore various concepts of financial statements presentations and revenues disclosure.
The purpose of research-based literature articles were to provide current information on emerging issues that are relevant to the chosen topic. Hence, they provides significant and relevant data on revenue recognition which is the main area of concern of this report (Caylor, 2010): (Olsen & Weirich, 2010). Other purpose of the two articles include providing descriptive information on what organization should do to improve their revenue recognitions, it summarizes the topic as well as giving the critic of the same topic.
Some of the primary research questions that the two journal articles explore from the topic are:
- What are the new standards of accounting for revenue recognition?
- Which software are being used in revenues recognition?
- What are the key aspects in revenue recognition?
- How to explore revenue recognition in local businesses or companies?
The similarities of the articles include the finding when the expense principle can happen in a company and the need of companies to matching items. The first similarities states that at a certain time the company bookkeeper can log a new transaction as an expense in books (Holzmann, 2011). From the two articles it was found that they discourage mistakes being done by company’s bookkeepers. Hence, the bookkeepers are encourage to only record expenses when goods have been received or only when service have been performed. Second similarities, is emphasis on the principle of matching of revenue recognition. Two journals articles clearly indicated that it is good to match each and every item of revenue to an item of an expense (Horton, Macve & Serafeim, 2011).
The differences in the finding of the two articles is that the first explore more challenges facing the revenue recognition such as challenges related with deliverability of multiples goods and services (Chan, 2008). While, the second articles only focuses on the new standards of revenue recognition and how financial companies can use the new standards set by various GAAP bodies.
In relation to the first journal two implications of Australian accounts may include determining of the price of transaction successful and recognizing of revenue on each performance. While, second article implications are help accounts in receiving upfront fees and combining of the goods and services into one accounting for the companies.
Accounting regulator implication include challenges they undergo to enforce new standards of GAAP and high cost incurred in enforcing this new standards. Whereas, the second articles also suggested the same implications (Nobes, 2006). Implications of external user from the first article include easy allocations of their transactions and quick identification of contract with the companies. Second articles also suggested the same implication on external users.
Conclusion
In summary, the report highlighted various aspects connected with revenue recognitions. It begins with reasons why the group select the two journal articles, then to findings of the report and the usefulness of the report findings to financial companies in Australia. Finally, it precipitate on purpose and research questions, similarities and differences, and implications of the revenue recognition to various stakeholders.
References
Alford, R. M., DiMattia, T. M., Hill, N. T., & Stevens, K. T. (2011). A series of revenue recognition research cases using the codification. Issues in Accounting Education Teaching Notes, 26(3), 64-76.
Burns, N., & Kedia, S. (2006). The impact of performance-based compensation on misreporting. Journal of financial economics, 79(1), 35-67.
Caylor, M. L. (2010). Premeditated revenue recognition to accomplish earnings benchmarks. Journal of Accounting and Public Policy, 29(1), 82-95.
Chan, J. L. (2008). International public sector accounting standards: conceptual and institutional issues. The Harmonization of Government, 21, 1-15.
Cohen, J. R., Hoitash, U., Krishnamoorthy, G., & Wright, A. M. (2013). The effect of audit committee industry expertise on monitoring the financial reporting process. The Accounting Review, 89(1), 243-273.
Dobler, M. (2008). Rethinking revenue recognition? The case of construction contracts under International Financial Reporting Standards. International Journal of Revenue Management, 2(1), 1-22.
Doyle, J., Ge, W., & McVay, S. (2007). Determinants of weaknesses in internal control over financial reporting. Journal of accounting and Economics, 44(1-2), 193-223.
Forester, C. L. (2007). Does More Conservative Revenue Recognition Improve the In formativeness of Earnings? (Doctoral dissertation, University of Iowa).
Holzmann, O. J. (2011). Revenue recognition convergence: The contract?based model. Journal of Corporate Accounting & Finance, 22(6), 87-92.
Horton, J., Macve, R., & Serafeim, G. (2011). ‘Deprival value’vs. ‘Fair value’measurement for contract liabilities: how to resolve the ‘revenue recognition’conundrum?. Accounting and business research, 41(5), 491-514.
Nobes, C. W. (2006). Revenue recognition and EU endorsement of IFRS. Accounting in Europe, 3(1), 81-89.
Olsen, L., & Weirich, T. R. (2010). New revenue?recognition model. Journal of Corporate Accounting & Finance, 22(1), 55-61.
Order an Essay Now & Get These Features For Free:
Turnitin Report
Formatting
Title Page
Citation
Outline
