Suitable Revenue Recognition Policy in Finance

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FINANCE

Finance
3. CPA Australia believes that ‘a suitable revenue recognition policy’ requires the appropriate
application of ‘the timing of recognition’, therefore ‘reflecting the substance of underlying
transactions’. This belief of CPA Australia is in line with the ASIC.
A ‘suitable revenue recognition’ policy is that by way of which revenue was arising from
transactions can be accurately and fairly determined and that too at the correct time. This is
why ‘the timing of recognition’ is being given so much importance. If revenue arising from
transactions are recognised pre-maturely, the essence of the underlying transactions (if any) is
not reflected. And if the revenue from a particular transaction is recognised after the
‘appropriate time’, the essence of the entire transaction can get lost. This can lead to disparity
between accounting policies followed for preparation of financial statements of companies
which can, in turn, lead to investors getting mislead (Hamilton, Hyland & Dodd, 2011).
Hence, to prevent such situations, the Australian Securities and Investments Commission
(ASIC) on 7 November 2014 announced its areas of focus for 31 December 2014 financial
reports of listed entities. The ASIC announced that the directors and auditors should ensure
that the company’s revenue recognition policies are such that the revenue is recognised in
such a way that the substance of underlying transactions is appropriately and adequately
taken into account. The ASIC had mentioned the below-mentioned points that should be kept
in mind by the directors and auditors while framing their entity’s ‘suitable revenue
recognition policy.’
Revenue can be earned either from the sale of goods or provision of services. The entity
should recognise the revenue relating to services only after the said services have been
performed. When the income relates to the sale of goods, the income should be accepted just
after the title of products that is the control of the said goods has been passed to the buyer.
And when the revenue is arising out of both the sale of products and the provision of related
services, care should be taken to ensure that the revenue is appropriately allocated to the
goods component and the service component and recognised accordingly (Carcello, 2012).
Also, the ‘suitable revenue recognition policy’ should take care that the assets of the
organisation are appropriately classified as financial or non-financial assets. A non-financial
asset is an asset which commands value by itself that is, it possesses amount in its self. Land,
gold, oil, etc., are examples of non-financial assets. These possess value in themselves.
Financial assets, on the other hand, are assets which have value based on one/more