Accounting Theory and Revenue Recognition: Current Issues and Analysis

This report offers a comprehensive overview of revenue recognition, a critical aspect of accounting. It begins with an executive summary and introduces the core concepts, including cash-based and accrual accounting methods. The report delves into the international complexities of revenue recognition, highlighting the challenges of standardizing practices across different countries and the roles of FASB and IASB. It outlines a five-step process for simplifying revenue recognition and discusses potential accounting and reporting changes, such as multiple element arrangements, estimated selling prices, variable consideration, and the time value of money. The report also covers the timing of revenue recognition and specific considerations for construction-type contracts and software arrangements. Finally, the report concludes by emphasizing the importance of accurate revenue recognition for financial transparency and decision-making, referencing key academic sources.

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Accounting theory and
current issues

Revenue recognition
Executive Summary
One of the most important pillars of the accounting sector is the revenue recognition
worldwide. Two broad categories are present in which the revenue gained by the company
can be divided to be presented in the financial reports. Cash-based accounting and accrual-
based accounting are the two categories. In the case of cash-based accounting, it can be seen
that the records of the cash gained are to be maintained only, no matter when or from which
source the revenue has been gathered. In the case of accrual accounting, it is necessary to
make the records as soon as the revenue seems to be present no matter what time in the future
it will be gathered. The present report will shed light on the concept of revenue recognition
and the same will be dealt in an intensive manner.
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Revenue recognition
Introduction
Revenue recognition is dealt with very intelligently and with very different processes all over
the world in different countries and this makes the international market comparison difficult.
Different processes of handling the task can cause the financial unbalancing of the company
which makes it tough for the investors around the world to compare different companies in
the same sector (Laux, 2014).
It was thought that a fair value based assessment can be put up for everybody but this was
later called off as it didn’t seem possible to maintain one rule for all the countries. The main
aim of such a plan was that to differentiate between the assets and liabilities created by the
company and this difference would then be put up in the records and will be used to
determine the final accounts (Laux, 2014). This rule was basically made to cover the
differences between international companies as the main priority but has now been a part of
the customer's satisfaction department as it gives a clear view of the financial statements of
the company.
FASB and the IASB had decided that set up an equal marking of the rules for all over the
world would be an impossible task and so from 2006 onwards it decided that the differences
and the comparison stuff will only be collected for the study purpose and it can be possible in
the future that all the cultural differences will be handled easily and maybe a common rule
can be set up.
The cultural differences and the process of working over a long time have been the main
cause of not able to set up a common ruling project and the different types of transactions
taking place in different countries are the main cause of the delay in conclusion of the project
getting up (Needles & Powers, 2013). This is the reason why the gathering of data for the
purpose of study has been taken up by the FASB to set up a common link between all and to
finalize the problem of revenue recognition (Deegan, 2011)
Simplifying revenue recognition
There are five broad parts that a company irrespective of their country and the stream of work
should follow to solve the problem of revenue recognition. The deals and the portfolios took
up the company should be paid attention to. Then all the types of working and the
management included in the deals should be recorded (Leo, 2011). Then an evaluation
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Revenue recognition
process should be done to calculate the total worth and the transactions in the project which
would then be divided and set up on different o the working and management which were
previously recorded (Merchant, 2012). Finally when all the steps are followed then the
revenue should be categorized as per the working processes.
It can be seen that the first step in the rule book will be similar and easy for most of the
companies but the hardship will arise in the second stage when they will have to categorize
the stuff which is a test of the kind of workings and the services offered by the company. Step
three is also simple enough but can have the problem of records being made. Step four can
also be challenging because the categorization of the transactions has to be done cleverly. If
all the above steps are followed with utter attention then step five only requires the above
processes to be compiled and the identification of the revenue which can be an easy task but
will act as a massively difficult one if there is some flaw in the following of step four.
Potential Significant Accounting and Reporting Changes
The above processes can be applied to all the companies but there can be some accounting
and reporting changes that must be followed before the final conclusion can be drawn. These
are as follows:
Multiple element arrangements – It was mentioned above that the second step which
requires the company to assess all the terms and calculation of the contract can be very
difficult and may take precision to do so. If the companies enter a cracking deal with the
customers then it must be seen that the terms of the contract are a one-way track or will
benefit both the sides. If a two-way track is followed then all the terms must have
different worth and this must be recorded (Laux, 2014). For example, when the company
sells goods that have been under the protection of warranty then it will have to be seen
that which part of the item is holding that term with itself and also the delivery
generations and the transactions have to be thoroughly paid attention to. All the data must
be collected in order to process the warranty (Madura & Fox, 2011).
Estimated selling price – It is also necessary to access the price of such goods that are
sold as accessories and not separately along with the extra additional services given. The
real transactions and the value paid by the customers should be recorded or it can be done
in the way in which the production side is recorded first and then the marginal profit is
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Revenue recognition
paid attention to (Davies & Crawford, 2012). If there are such cases in which the selling
price of a set of products is not known then the company can apply the process of
comparison of a total transaction with the other similar goods and determine the expected
revenue generated (Parrino et. al, 2012).
Variable consideration – there are some contracts which have a specific area of paying
attention to which are the key to cracking such deals. Such deals are the ones which
require the calculation of transaction beforehand as the time thing adds hardships to the
work. The calculations can be made by reading and considering the terms an the gathered
data from the deal which may vary as the information changes (Gowthrope, 2011).
Variable consideration can be the selected process if the two mentioned points are
satisfied:
 Performance obligations of similar nature have been noted by the entity.
 The experience of entity is certain of the consideration amount to which the entity will
be entitled.
Time value of money – If a contract taken up by the company is of a long-term then the
future price of the transactions should be evaluated beforehand. The rates of the discount
offered under competition with different companies are a matter of secondary level which
also requires transparency (Kieso et. al, 2010).
The timing of revenue recognition – The rule system which has been set up may help some
companies with the ease of revenue recognition than before and also sees that all the
transaction are dealt with correctly. Companies owing to the services may calculate it after
the expiration of the services (Bekaert & Hodrock, 2012).
Construction-type contracts – Accounting related in such matter can be attributed on a long
term basis and have some specification that have been applied over quite a long time. It can
be seen that the new provision says that all the key points of the contract are to be supervised
in different situations and from different angle which was not done in the past. Cost
capitalization rules have also been changed which will now put different costs under different
categories. Also the revenue made up by the company can be gathered in details with the
ratio of the amount of resources used to the amount of resources that was expected to be used
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Revenue recognition
or the hard-work that the company has spend with the hard-work that was expected to be put
on by the company. In most of the cases it can be seen that the method of cost in which the
cost applied is compared to the applied cost expectation takes place to measure the
percentage completion of the project which is also referred to as the “cost-to-cost” procedure.
Construction-type contract costs – When it comes to capitalization, contract costs are not
considered (for instance they are assumed to be as inventory or direct fulfillment costs) and
must be settled.
New criteria for accounting for software arrangements – This category faces many problems
as the specifications of the vendor in some cases does not meet with the manufactured
product and so the undelivered items are to be stored separately which have to return and will
require a different recording system (Choi & Meek, 2011).
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Revenue recognition
Conclusion
As per the study it is reflected that the companies who have the records in the right place with
perfect calculations will be able to realize the revenue faster and can also meet their targets
and achieve their goal faster. In today’s world, the maintenance of transparency is very
important as it will give a fair and clear status to the financial statements of the company and
will also help the users of the statements to understand the processes related to the revenue
recognition topic and take the decisions as soon as possible.
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Revenue recognition
References
Bekaert, G., & Hodrock, R. (2012). International financial management (2nd ed). Prentice Hall
Choi, R.D. & Meek, G.K. (2011). International accounting. Pearson .
Davies, T. and Crawford, I. (2012). Financial accounting. Harlow, England: Pearson.
Deegan, C. M. (2011). In Financial accounting theory. North Ryde, N.S.W: McGraw-Hill
Gowthrope, C. (2011). Business accounting and finance for non specialists (3rd ed.). South
Western
Kieso, D., Weygandt, J., Warfield, T; Young, N., & Wiecek, I. (2010). Intermediate
accounting. Toronto: John Wiley & Sons Canada.
Laux, B. (2014). Discussion of The role of revenue recognition in performance reporting.
Accounting and Business Research. [online]. 44(4), 380-382. Available from:
https://doi.org/10.1080/00014788.2014.897867
Leo, K. J. (2011). Company Accounting. Boston:McGraw Hill
Madura, R., & Fox, J. (2011). International financial management (2nd ed.). South Western
Merchant, K. A. (2012). Making Management Accounting Research More Useful. Pacific
Accounting Review, 24(3), 1-34. doi: https://doi.org/10.1108/01140581211283904
Needles, B.E., & Powers, M. (2013). Principles of Financial Accounting. Financial
Accounting Series: Cengage Learning.
Parrino, R, Kidwell, D., & Bates, T. (2012). Fundamentals of corporate finance. Hoboken,
NJ: Wiley
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