Good Example Of Research Paper On Simplifying The Accounting For Revenue Recognition By FASB

Type of paper: Research Paper

Topic: Revenue, Taxes, Contract, Company, Recognition, Standard, Business, Accounting

Pages: 3

Words: 825

Published: 2020/11/21

New WowEssays Premium Database!

Find the biggest directory of over
1 million paper examples!

This Paper was prepared for_________ taught by___________

Background
The elaboration of a new standard simplifying revenue recognition was one of the highest priorities of the joint IASB-FASB convergence project. The purpose of the project was defined as eliminating range of differences between International Financial Reporting Standards (IFRS) and US Generally Accepted Accounting Principles (US GAAP).
The project was initiated in 2002 on the basis of the IASB and the FASB Norwalk Agreement and has evolved over time (FASB, 2014). It is an important initiative for the US where for a decade SEC has been closely reviewing the possibility of IFRS adoption to enhance the attractiveness of the US financial market for international investors. The initial aim to reach the convergence by the end of 2011 was not met, as the process of reconciling the differences appeared more difficult, given the US tendency for detailed and prescriptive rules and the IASB’s principles-based approach (Fuller, 2012). The commitment to continue the work over the project was still reaffirmed both by G20 leaders in Cannes Summit Final Declaration (2011), and the boards (FASB, 2014).
Both the IASB and the FASB have repeatedly confirmed the intention to achieve convergence, jointly working over different accounting topics. The new FASB\IASB joint guidance on revenue recognition is probably one of the most prominent examples of this mutual commitment. As a result of the joint project, the IASB issued IFRS 15, Revenue from Contracts with Customers, on 28 May 2014, and the FASB came with Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (IASB, 2015; FASB, 2014).

Importance of new revenue recognition guidance

Having been a result of more than 10 years’ work over divergent standards, the new guidance has significantly contributed to the resolution of inconsistencies in both IFRS and US GAAP. As US GAAP abounds in sector-specific and industry-specific rules, the revenue recognition practices among industries often lacked similarity; as a result, financial statements comparability might have been affected. ASU 2014-09 allowed setting one standard for revenue recognition for different industries and segments. Followed by a requirement of comprehensive footnote disclosures for both private and public companies, it significantly improved comparability of financical statements across diferent sectors.

Scope of standard

The basic step essential to elaborate a new guidance was a precise definition of a customer contract and the criteria to be met before the application of the revenue recognition model to 
that contract (Holt, 2014). The concept of contract was based on US definition of an agreement creating enforceable rights and obligations between the parties. Subsequently, the guidance defined 5 steps to determine when the revenue from such a contract can be recognized, or so called “5-step model” (Holt, 2014). Identification of the contract meeting precisely the abovementioned definition, with the possibility of classifying several agreements as a single contract with the customer, is a first step. Identification of the company performance obligations under the contract is a second step. The key factor in identifying a separate performance obligation is the distinctiveness of goods or services, or their bundle (Holt, 2014), with the distinctiveness being determined by the benefits to the customer and possibility of goods\services identification separately from other contract parts.
Third step is the determination of a transaction price as the amount the company will be entitled to in exchange for goods or services transfer. This step accounts for some factors the company should consider in the price determination (significant financing components of the agreement, contigencies or price variables). The next step requires the allocation of the transaction price to the separate performance obligations made at the inception of the contract on the basis of the relative standalone selling prices of goods or services. The last but not least, the company must recognize revenue when performance obligations are satisfied and the customer obtains control over the corresponding goods or services.

Next steps and implications for practice

The guidance requires from the companies to estimate the impact of different items such as discounts, incentives, warranties, contigencies and variable considerations. So the timing of revenue recognition may change for some point-in-time transactions and some companies will have to record revenue earlier or to make a more careful analysis (Holt, 2014). The new requirements to provide both qualitative and quantitative disclosures on the nature, amount, timing and uncertainty of revenue and cash flows will underpin the standard providing the stakeholders with clear and transparent information about the company’s contracts with customers.
The standard is scheduled to enter into force for reporting periods beginning after December 15, 2016, for U.S. public companies. It will also be mandatory for annual reporting periods starting from January 1, 2017, for companies that use IFRS. To tackle the issues which were expected to emerge during the implementation stage, the FASB and the IASB formed the Joint Transition Resource Group in mid-2014. The members of the group included users from different industry sectors, accountants and auditors whose task was to inform the IASB and the FASB on potential implementation issues (FASB 2014). By present, the Group has faced more than 40 issues related to the standard itself, part of them requiring revision to implementation guidance (e.g. the nature of the entity’s promise in granting a license of intellectual property or identifying performance obligations) (Tysiac, 2015). Despite disagreements on some issues between the IASB and the FASB, the boards have agreed about clarifications and revisions to be implemented in the nearest future. The FASB is also planning to postpone the effective date of the standard to enable US companies to adjust their business processes and informational systems to implement the standard.

Conclusion

Being designed to promote comparability across US jurisdictions and industries and to reduce inconsistencies in the current standard, new guidance on revenue recognition was a major step to ehnance the transparency of companies’ revenues for investors. Being rather principle than rule-based, ASU 2014-09 was constructed to combine the best principles embodied in US GAAP and IFRS and provided a clear 5-step module of revenue recognition. Still, due to the years of divergence and different accounting practices, some challenges have been arising during the implementation stage, and those will be addressed by the Joint Transition Resource Group whose work will further contribute to the resolution of these issues.

References:

1. Financial Accounting Standards Board (FASB) (2014). Retrieved from: http://www.fasb.org/
2. Fuller, J. (2012).Convergence RIP. Accounting and Business, 9, 34.
3. International Accounting Standards Board (IASB).IFRS Foundation (2015). Retrieved from: http://www.ifrs.org/
4. Holt, G. (2014). Step change. Accounting and Business, 9, 49-51.
5. Tysiac, K. (2015). FASB, IASB to propose clarifying revenue recognition guidance. Journal of Accountancy.Retrieved from: http://www.journalofaccountancy.com/news/2015/feb/revenue-recognition-clarifications-201511839.html

Cite this page
Choose cite format:
  • APA
  • MLA
  • Harvard
  • Vancouver
  • Chicago
  • ASA
  • IEEE
  • AMA
WePapers. (2020, November, 21) Good Example Of Research Paper On Simplifying The Accounting For Revenue Recognition By FASB. Retrieved September 25, 2021, from https://www.wepapers.com/samples/good-example-of-research-paper-on-simplifying-the-accounting-for-revenue-recognition-by-fasb/
"Good Example Of Research Paper On Simplifying The Accounting For Revenue Recognition By FASB." WePapers, 21 Nov. 2020, https://www.wepapers.com/samples/good-example-of-research-paper-on-simplifying-the-accounting-for-revenue-recognition-by-fasb/. Accessed 25 September 2021.
WePapers. 2020. Good Example Of Research Paper On Simplifying The Accounting For Revenue Recognition By FASB., viewed September 25 2021, <https://www.wepapers.com/samples/good-example-of-research-paper-on-simplifying-the-accounting-for-revenue-recognition-by-fasb/>
WePapers. Good Example Of Research Paper On Simplifying The Accounting For Revenue Recognition By FASB. [Internet]. November 2020. [Accessed September 25, 2021]. Available from: https://www.wepapers.com/samples/good-example-of-research-paper-on-simplifying-the-accounting-for-revenue-recognition-by-fasb/
"Good Example Of Research Paper On Simplifying The Accounting For Revenue Recognition By FASB." WePapers, Nov 21, 2020. Accessed September 25, 2021. https://www.wepapers.com/samples/good-example-of-research-paper-on-simplifying-the-accounting-for-revenue-recognition-by-fasb/
WePapers. 2020. "Good Example Of Research Paper On Simplifying The Accounting For Revenue Recognition By FASB." Free Essay Examples - WePapers.com. Retrieved September 25, 2021. (https://www.wepapers.com/samples/good-example-of-research-paper-on-simplifying-the-accounting-for-revenue-recognition-by-fasb/).
"Good Example Of Research Paper On Simplifying The Accounting For Revenue Recognition By FASB," Free Essay Examples - WePapers.com, 21-Nov-2020. [Online]. Available: https://www.wepapers.com/samples/good-example-of-research-paper-on-simplifying-the-accounting-for-revenue-recognition-by-fasb/. [Accessed: 25-Sep-2021].
Good Example Of Research Paper On Simplifying The Accounting For Revenue Recognition By FASB. Free Essay Examples - WePapers.com. https://www.wepapers.com/samples/good-example-of-research-paper-on-simplifying-the-accounting-for-revenue-recognition-by-fasb/. Published Nov 21, 2020. Accessed September 25, 2021.
Copy

Share with friends using:

Please remember that this paper is open-access and other students can use it too.

If you need an original paper created exclusively for you, hire one of our brilliant writers!

GET UNIQUE PAPER
Related Premium Essays
Contact us
Chat now