Key issues in revenue recognition accounting
Discuss About The Convergence Milestone Journal Accountancy.
The main issues being addressed in the website is the revenue recognition issues. The article talks about the FASB and IASB issuance of the converged standard on revenue recognition in May 2014. That standard provided a detailed, industry-neutral model for recognizing revenue purposed to boost the financial statement comparability crossways companies alongside industries as well as substantially decrease the complexity inherent in the present-day guidance for recognizing revenue (Biondi et al., 2014).
The key issues discussed in the article include key developments in revenue recognition accounting. The article holds that the standard will be applicable to the firm’s contracts with the clienteles with an exemption of the contracts which are under the scope of other standards including leases, financial instruments as insurance. The elements of the arrangements or contracts which are in scope of other standards including leases shall be distinguished and accounted for under such standards (Chandra, Dutta & Marcinko, 2018).
The other issue discussed in the article is that the unit of account for the revenue recognition within the novel standard will be performance obligation (service/good). It is held that the contract could entail one or additional performance obligations. Despite differently defined, the closest analogy in the present-day’s vernacular to a performance obligation could be a deliverable under the multifaceted elements arrangement of revenue guidance.
The performance obligations shall be accounted for distinctly if they are unique. A service or good is unique if the clientele can gain from the service or good either individually or together with the additional resources which readily reachable to the clientele, and the service or good is unique in the setting of the contract (CFOdirect 2017). Performance obligations will otherwise be merged with extra promised service or good until the entity recognizes the bundle of service or good that is unique.
The allocation of the price of the transaction to each distinct performance obligations in the arrangement is done. Such a price will be a reflection of the quantity of consideration to which the company anticipates to be eligible in the exchange for the transferring services or goods, which could entail the estimate of variables considerations to the degree which it is probably not being subject to noteworthy reversals in the future anchored on the experience of the entity with identical arrangements (Holzmann & Munter, 2015). Such a price will exclude the amounts collected on the third parties’ behalf like certain sales taxes.
Impact on different industries
The revenue will be acknowledged where an entity satisfies individual performance obligations by transferring control of the promised service or good to the clientele. Services of goods can transfer at the point in time or over on the basis of the nature of the arrangement. Particular criteria are provided for when the performance obligation is gratified over time.
The incremental costs of acquiring a contract are capitalized where the costs are anticipated to be recovered. Such costs incurred to fulfill the contract are capitalized where the same costs are not covered by additional relevant guidance, directly relate to the contract, shall be utilized to satisfy future performance obligations, as well as are anticipated to be recovered.
The FASB standard as amended remains effective for the public entities for the 1st interim period under the annual reporting durations commencing after December 15, 2017 (nonpublic entities have an extra year). The standard of FASB shall permit the early adoption, but not earlier than the initial effective date for the public entities (reporting periods commencing after December 15, 2016). The standards of IASB is effective as amended for the first interim duration under annual reporting duration commencing on or after 2017, 1 January, with early adoption allowed (Deegan, 2012).
The FASB along with IASB issued various amendments alongside clarifications in 2016 to the novel revenue standard, as a result of issues fronted primarily by the stakeholders as well as discussed by the Transition Resource Group. The amendments were effected to the guidance linked to the principal vis-à-vis agent assessment, recognizing performance obligations, and accounting for intellectual property license alongside additional matters like the definition of finished contracts at transition as well as the addition of novel practical expedients.
An entity is free to apply the novel revenue standard retrospectively, encompassing utilizing some practical expedients. The entity alternatively, can decide to recognize the cumulative impact of applying the novel standard to prevailing contracts in opening balance of the retained earnings on the effective date, with correct disclosures.
In the course of the meeting of Financial Accounting Standards Advisory Council of the FASB, one of the SEC workforce members highlighted that the SEC shall never object when entities that adopt the revenue standards retrospectively solely recast the same years as outlined in their primary financial statements in the 5-year chosen financial data table. This means that the firm which selects such an option need to provide transparent disclosure relating to the basis of presenting as well as the absence of comparability.
Importance of IT systems and processes
The article also appreciated the importance of the issues of revenue recognition raised on the website. First it was explained in this article that the prevailing guidance for recognizing revenue is lacking consistency crossways industries as well as between the IFRS and the US GAAP, and further fails to speak to the particular kinds of arrangements. This novel standard is purposed at decreasing or removing such inconsistencies, thereby enhancing comparability and at the same time removing disparities in the guidance.
The article also appreciated that the new standard shall substantially impact the prevailing revenue recognition practices of several entities, especially such that adhere to industry-specific guidance within the US GAAP. It is anticipated that Aerospace and Defense, Communication, Automotive, Entertainment and Media, Engineering and Construction, Pharmaceuticals and Life Sciences as well as Technology industries to be affected the most.
Based on the existing business model of the entity alongside the practices of recognizing revenue, the novel standard might have a substantial influence on the quantity as well as timing of the revenue recognition that subsequently might influence core performance measures as well as debt covenant ratios, and eventually might impact negotiations of contracts, activities of business alongside budgets.
It is also important as each entity will probably have to take into account alterations to information technology systems, alongside processes as well as internal controls due to the novel decision points alongside boosted disclosure requirements, among additional aspects of this model.
Sally P. Schreiber, J. (2017). Rules proposed for accounting method changes to reflect FASB revenue recognition standards. AICPA, vol 1(Revunue Rocognition ), 1-4. https://www.thetaxadviser.com/news/2017/mar/accounting-method-changes-for-revenue-recognition-standards-201716345.html
In this section, a research is undertaken to obtain a present exposure draft/ proposal for a novel accounting standard that has been opened for public comments. Then the reading is undertaken on a sample of the comments from an array of respondents (Wagenhofer, 2014). Accordingly, four respondents are selected ideally from dissimilar types of organizations for instance, from accounting entities, industry, companies and corporate entities. Subsequently, the discussion is presented based on the following three subheadings:
- A) Major Issues in New Standard Introduction
The key issues are based on the rules proposed by IRS for accounting method alterations to reflect the revenue recognition standards of FASB. The IRS is asking comments on the projected procedures for requesting consent to allow them to make accounting method alterations to reflect the novel revenue recognition standards of the FASB.
This proposal entails the revenue procedure in the notice to govern the alterations in the method of accounting for the recognition of income when the alterations are made for the similar tax year for which the taxpayers adopt the novel financial accounting revenue recognition standards alongside the alterations is made die or directly linked to, the adoption of the novel revenue recognition standards (Lamoreaux & Nilsen, 2010).
In the year 2014, 28 May, FASB alongside the IASB declared novel financial accounting standards for the recognition of revenue (Accounting Standards Update/ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606), is issued by the FASB, alongside IFRS 15, Revenue from Contracts with Customers, and issued by the IASB).
Following the declaration, FASB has revised the novel revenue recognition standards and availed guidance on the implementation of the novel standards in some situations. The novel revenue recognition standards remain effective for the publicly traded companies, some not-for-profit companies, alongside some workers gain plans for the yearly reporting duration commencing after December 15, 2017. For every other entity, they remain effective for the yearly reporting durations commencing after December 15, 2018; taxpayers remained permitted to voluntarily adopts the standards early for the reporting duration commencing after December 15, 2006.
Qualifying similar-year method alterations could entail automatic alterations for which the prevailing guidance, entailing Rev. Procs. 2015-13 alongside 2016-29, already avails automatic alterations procedures (James, 2015). Taxpayers asking consent for the automatic alterations for which the prevailing guidance already avails automatic alteration procedures must utilize the prevailing automatic alteration procedures to make the request. For qualifying similar-year method alterations for which prevailing guidance does not give automatic alteration procedures but that adhere to Section 451 or additional guidance relating to the tax year of the income inclusion, the taxpayer shall be needed to make the alteration within the revenue procedure proposed (Cornell, Fox & Wright, 2015).
The proposed revenue procedure needs the taxpayer to file the Form 3115 which is the change application in the method of accounting, checking the line 1 (b) box as well as inscribed “Rev. Proc. 2017-XX” (utilizing the amount of revenue procedure at the point of issuance) trailed by the provision of Code applicable as well as regulation or the applicable guidance, along with the transitory account of the technique alteration (Schmutte & Duncan, 2016).
Multifaceted requests might be made on the single form. Taxpayers with single or more distinct as well as unique trade (s) or businesses which meet a trivial business exception highlighted in section 5.02 (2) of the revenue procedure proposed shall be permitted to adopt the method alteration on the cutoff footing for individual such distinct and separate trade or business. The taxpayer will have to make Section 481 adjustments for the year of alteration for each other distinct and separate trades/business which do not meet the exception of small business.
With regards to the notice, the IRS request comments on each aspect of proposed revenue procedure as well as on the particular method alteration issues which it had particularly identified in Notice 2015-40. The IRS further endure seeking comments on the particular issues identified in Notice 2015-40 relating to the conformity between the novel standard as well as the Code and the Regulation (Chan, 2008). The comments are due by 2017, 24 July.
- b) A Consensus/ Disagreement between the Commenting Parties
These letters chosen for this (exposure draft) were derived from numerous organizations comprising ACCA, AAT, Eumedion, and Accounting and Financial Reporting Daimler Group (FAG).
(i) Rients Abma (Executive Director) on behalf of EUMEDION Corporate Governance Forum
It reinforced the enclosure Exposure Draft’s suggestion to deliver precedence to integrate the importance of providing the info essential inside the reporting of financial info objective for assessing the management of stewardship of the assets of an association. They coincided with the proposal saying that it is as meaningful to issue valuable info to inspect stewardships as to deliver info for the assessing the panorama for pending cash-flows to a company.
The group supposed in the stewardship meaning as a separate principal goalmouth might defend its roles whereby standards construction would be fluctuating for both specified objectives henceforth the reason for supplementary necessities of extra pertinent info as presently desirable to evaluate the panorama for coming cash-flows for effective stewardship management (Schipper, Schrand, Shevlin & Wilks, 2009). They believed that the proposed change should have entailed extra direction on the considering stewardship while altering the contemporary standard as well as mounting new-fangled ones alongside interpretation.
The organization engrossed in emphasizing the subjects that the IASB exposed in the course of ED grounding. The group held an interpretation that model of business or happenings required to play an important role during the proposal somewhat simply being delimited to a measurement unit, disclosure, account, and presentation (Hasan, 2016). The group proposed that personal model of business should be eligible to fluctuating practices in accounting. The group recommended that new-fangled standards and important amendments required to resolve the issue of whether amendment/ standard guaranteed valuable info for each model of business in scope. The organization has undertaken issue with the liabilities alongside assets definition.
The organization concurred with the asset definition as correct yet disagreed that those rights have the satisfactory perspective to produce economic welfares in the circumstance of chastely isolated conditions where such welfares will stream down to the organization (James, 2016). In their interpretation, Daimler believed that exclusively situations that prefer economic material desirable for painstaking throughout assessing of whether such item fits the asset definition.
The group further contested the projected standard for recognition signifying that it might lead to far obligations and the asset to be recognized in the financial statement. The group believed in the nonconforming opinion that such standard never essentially advance significance or authentic representation yet headed for expensively with no improvement of info practicality (Whittington, 2015). The group held that adopting such a method might damagingly impact the preparers in the course of the accounting policies development for conditions whereby no additional principles are applicable (Sally, 2017).
The organization reinforced description of P&L statement by IASB with hesitation requesting for a detailed explanation of the statement of the all-inclusive revenue to prefer a common OCI comprehension, therefore, expounding what revenue and expenditures to be involved in OCI. The group buttressed the conjectures that recognize expenditures and revenue in P&L as well as the reprocessing of every expenditure and revenue acknowledged in OCI to the P&L as occasioned in the ED (Singh, 2015). Nonetheless, the group held the nonconforming opinion that discrepancies amid current standards besides ED might upshot from such presuppositions and admonished the Board to spring guidance on circumstances whereby such assumptions might be refuted to progress understandability alongside a reduction in complexity. They approved that the IASB remained in the correct direction but with the reservation for supplementary investigation deprived of hassled implementation of the modifications as delineated in Exposure Draft (Wagenhofer, 2016).
(iii) Response of ATT
The AAT response was conscripted by the AAT as they responded to the great ED. AAT provided the response to upsurge the worth to and emphasized essentials that were desirable to be considered. ATT mostly stressed on the functioning features ED and availed the opinion on the feasibilities of applying the delineated measures (Brown et al., 2012). AAT reinforced the amendment to the proposal based on numerous motives fastened on numerous units of Exposure Draft like some critical areas stayed untouched, the absence of preciseness on direction and outdatedness in some aspects of the current practice.
The association further reinforced the amendment emphasizing the prominence role standard in the procedure of establishing standards by aiding the FASB to cultivate standards attached to reliable notions (Hasan, 2016). The association additionally reinforced alteration indicating that it offered the indispensable guide for the financial statements preparation not spoken to by IFRS in terms of conditions, transactions or event alongside where the standards of accounting offer an alternative for a policy of accounting like IAS16 Property, Plant, alongside Equipment. The association further buttressed since the ED assisted the preparers and users to comprehend besides standards interpretation (Komninos & Cameron, 2017).
(iv) ACCA by Fangwei Lin
The organization exclusively concentrated on portions of Exposure Draft because they had never completed appraisal of the complete text. He concentrated on the basics of financial statements principally revenue besides spending to necessitate quantities created by dealings along with other occasions like modifications in carrying a value of obligations alongside possessions. He approved the expenditures as well as revenue definition by modifications in them but held in reserve that those meanings designated the comprehensive ideas to comprehend expenditure and revenue where there is lack of a variance between irregular and ordinary business.
He preferred the wide-ranging usage of operating concept together with comprehensive concept besides recommended that the qualitative characteristics of valuable info like comparability besides relevance will advance where one differentiates irregular and standard operations to describe expenditure and revenue. For example, Daimler ACCA voiced additional investigation by ISAB into republics bearing in mind to obey IFRS to comprehend the material circumstances beforehand evolving IFRS.
The public interest theories axiom that economic markets stay tremendously delicate with propensities of incompetent processes and prefer the apprehensions of individuals since they disregard society’s prominence (Rutledge, Karim & Kim, 2016). Administration interventions are, therefore, valuable to safeguard operative direction besides profitable markets monitoring. This assumption unsurpassable enlightens each of the comments letters because of reporters of financial info solitary wish to reserve info by functioning inadequately to avail flawed public info to allow them to gain the community’s expense (Bloom & Kamm, 2014).
Each of the above comment is supportive of the necessity to offer valuable info as well as propose that the Exposure Draft is a step in the correct course. ACCA together with Daimler has highlighted the need for additional study to guarantee well-organized IFRS which permit effectual economic market maneuver for society instead of a single entity. The theory of regulatory capture axioms that the regulator is subjugated by the businesses it is tasked with regulating. Nevertheless, I failed to identify any letter being anchored on such an axiom (Yen, Hirst & Hopkins, 2007).
Lastly, the theory of private interest indicates that people who are betrothed in the administration are enticed to comparable inspiration than ones in the private contexts henceforth inspired by the slender individual interest idea, prosperity, authority, as well as celebrity (Whittington, 2008). The 4 letters have never ascribed to such a supposition henceforth can solitary be elucidated by the public interest assumptions (Peters, 2018).
References
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Bloom, R., & Kamm, J. (2014). Revenue recognition: how we got here and where it will take us. Financial Executive, 30(3), 48-53.
CFOdirect. (2017). Key developments in accounting for revenue recognition. PWC, Vol 1(Revenue Recognition), 1-4.
Chan, J. L. (2008). International public sector accounting standards: conceptual and institutional issues. The Harmonization of Government, 21, 1-15.
Chandra, U., Dutta, S. K., & Marcinko, D. (2018). Revenue Recognition at TSA Inc.-A Roller Coaster Ride. Issues in Accounting Education.
Cornell, R. M., Fox, L., & Wright, C. J. (2015). Revenue Recognition And Control In The Oil And Gas Industry: The End Of The Entitlements Method?. Petroleum Accounting and Financial Management Journal, 34(1), 21.
Deegan, C. (2012). Australian financial accounting. McGraw-Hill Education Australia.
Hasan, M. M. (2016). Comparisons between SEC’s SAB 101 and 104 Revenue Recognition Rules with the New Converged Revenue Recognition Standard Effective for Periods Beginning after December 15, 2017.
Holzmann, O. J., & Munter, P. (2015). Challenges in Achieving Convergence Between US GAAP and IFRS—The Case of the Revenue Recognition Standard. Journal of Corporate Accounting & Finance, 26(6), 101-106.
James, M. L. (2015, July). Revenue Recognition At Ingelheim Sustainability Consultants. In Allied Academies International Conference. International Academy for Case Studies. Proceedings (Vol. 22, No. 2, p. 6). Jordan Whitney Enterprises, Inc.
James, M. L. (2016). Revenue recognition at Ingelheim Sustainability Consultants-A case exploring the effect of the new converged standard. Journal of the International Academy for Case Studies, 22(2), 76.
Komninos, J., & Cameron, R.B. (2017). Impacts Of Revenue Recognition Changes In The Construction Industry.
Lamoreaux, M. G., & Nilsen, K. (2010). Convergence milestone. Journal of Accountancy, 210(2), 26.
Macve, R. H. (2015). Fair value vs conservatism? Aspects of the history of accounting, auditing, business and finance from ancient Mesopotamia to modern China. The British Accounting Review, 47(2), 124-141.
Peters, S. J. (2018). Revenue Recognition: Top Ten Questions Investors Should Ask About the Adoption of the New Standard. Codes, Standards, and Position Papers, 2018(1), 1-20.
Rutledge, R. W., Karim, K. E., & Kim, T. (2016). The FASB’s and IASB’s New Revenue Recognition Standard: What Will Be the Effects on Earnings Quality, Deferred Taxes, Management Compensation, and on Industry?Specific Reporting?. Journal of Corporate Accounting & Finance, 27(6), 43-48.
Sally P. Schreiber, J. (2017). Rules proposed for accounting method changes to reflect FASB revenue recognition standards. AICPA, vol 1(Revunue Rocognition ), 1-4.
Schipper, K. A., Schrand, C. M., Shevlin, T., & Wilks, T. J. (2009). Reconsidering revenue recognition. Accounting Horizons, 23(1), 55-68.
Schmutte, J., & Duncan, J. R. (2016). The New Revenue Recognition Standard: An Illustration of the Implications for’Ordinary’Companies. The CPA Journal, 86(1), 14.
Singh, S. (2015). Assessing the concerns of the telecommunications industry regarding revenue recognition(Doctoral dissertation, University of Johannesburg).
Wagenhofer, A. (2014). The role of revenue recognition in performance reporting. Accounting and Business Research, 44(4), 349-379.
Wagenhofer, A. (2016). Exploiting regulatory changes for research in management accounting. Management Accounting Research, 31, 112-117.
Whittington, G. (2008). Fair value and the IASB/FASB conceptual framework project: an alternative view. Abacus, 44(2), 139-168.
Whittington, G. (2015). Fair value and IFRS. The Routledge Companion to Financial Accounting Theory, 217-235.
Yeaton, K. (2015). A new world of revenue recognition: revenue from contracts with customers. The CPA Journal, 85(7), 50.
Yen, A. C., Hirst, D. E., & Hopkins, P. E. (2007). A content analysis of the comprehensive income exposure draft comment letters. Research in Accounting Regulation, 19, 53-79.
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