A Comprehensive Analysis of Revenue Recognition in the Retail Industry

This report provides a comprehensive analysis of revenue recognition within the retail industry. It begins by highlighting the importance of accurate revenue recognition and discusses the crucial aspect of timing, emphasizing when revenue should be recognized based on the delivery of goods or services. The report then explores alternative solutions, including the five-step method developed by the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) to improve financial statements. The analysis includes real-world examples from major retailers like Costco and Walmart, illustrating their revenue recognition practices. The report concludes by summarizing the key takeaways and reinforcing the significance of proper revenue recognition for retail companies, particularly focusing on aligning revenues with the delivery of products or services to ensure accurate financial reporting.

Running head: REVENUE RECOGNITION
Revenue Recognition
Name of the Student
Name of the University
Author’s Note

1REVENUE RECOGNITION
Table of Contents
Introduction......................................................................................................................................2
Importance of Revenue Recognition...............................................................................................2
Timing of Revenue Recognition......................................................................................................3
Alterative Solution of Revenue Recognition...................................................................................4
Conclusion.......................................................................................................................................5
References........................................................................................................................................6

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Introduction
Revenue is considered as one of the vital parts for the business companies as is the
primary source of income for the companies. For this reason, companies put major focus on the
recognition of revenue at the correct time. Thus, it is the requirement of the companies to
determine the specific accounting period in which revenue will be recognized (Yeaton, 2015).
For this report, the retail industry is taken into consideration. The main aim of this report is to
analyze different aspects of revenue recognition in respect to the retail industry.
Importance of Revenue Recognition
Revenue recognition is a crucial accounting practice where the recognition of income is
not done at the time of the collection of payment, but at the time of the income earning. It
implies that the recognition of revenue is done at the time of deal closure, even before the
payment (Tysiac, 2014). Thus, in case, the total amount of annual subscription is $48,000, $4000
will be treated as revenue for each month. The process of revenue recognition can become
complicated in the kind of businesses that involve the exchange of service and payment. For this
reason, the importance of revenue recognition cannot be ignored as the performance of the
companies largely depends on the accurate recognition of their revenues. It needs to be
mentioned that the business organizations are required to align their top-line revenues with
business growth and churn expenses in order to establish the foundation of precise financial-
reporting. At the time of revenue recognition, accountants are required to obtain persuasive
evidence on the fact that sales arrangements have been made (Tysiac, 2014). In this process, they
need to ensure that the vendor has deliver the contract. Thus, from the above discussion, it can be
seen that revenue recognition has major importance in the accounting of the companies.

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Timing of Revenue Recognition
In the process of revenue recognition, accountants all over the world put major emphasis
on the particular time when the revenue will be recognized. This is called the Timing of Revenue
Recognition. It needs to be mention that revenue is recognized when they are earned and there is
sufficient assurance for the payment (Dyson, 2015). In case of the sale of goods, the time of
revenue recognition is the period in which the delivery of the goods will be done to the
customers. In case of the sale of services, companies use to recognize revenue in that particular
period when services are performed. In this context, it is important to mention the fact that the
companies do not record revenue prior to the period of the delivery of goods or the performance
of the services. For example, in case a retail company enters into a new trading agreement with a
buyer to sell good on credit on the basis of 30 days credit time. In this process, the company will
not record revenue before 30 days until they receive the payment (Wagenhofer, 2014).
In this context, the revenue recognition timing of two of the largest retail corporations of
United States can be presented; they are Costco and Wal-Mart. According to the latest annual
report of Costco, the company uses to recognize revenue when the member takes possession of
the products or receives services. The amount of sales includes shipping fees and sales return
(phx.corporate-ir.ne, 2018). At the same time, the latest annual report of Wal-Mart shows that
the company recognizes their revenue at the time of the sales of goods to the customers
(s2.q4cdn.com, 2018). Thus, it can be observed both the large retain companies in US follow the
same process for the recognition of sales. Hence, the above discussion indicates that timing of
revenue recognition is an important aspect for the retail companies.

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Alterative Solution of Revenue Recognition
Over the years, the Financial Accounting Standard Board (FASB) and the International
Accounting Standard Board (IASB) have worked together for the development of new or
alternative revenue recognition criteria that can be used by the companies under US GAAP and
IFRS. The main intention of the development of this alternative revenue recognition criteria is to
improve the financial statements by diminishing the differences between GAAP and IFRS
(nasbp.org, 2018). The alternative method of revenue recognition has five steps and the
following discussion discusses about these steps:
Step 1: In this step, the retail companies are required to met the criteria of a successful contract.
Thus, the contract must have commercial value; there must be identification of promised goods
and services; and the identification of payment terms (nasbp.org, 2018).
Step 2: In this step, the companies are required to identify the separate performance obligations
when they transfer more than one product or service. As per the new standard, the retain entities
are required to consider the performance obligations in the contract (fasb.org, 2018).
Step 3: It is a crucial step as transfer price is determined. In this process, the management of the
retail companies are required to consider certain aspects like value of money, time, non-cash
considerations, variable considerations and others (nasbp.org, 2018).
Step 4: In this step, the management of the retail companies allocate the transactions prices to
each performance obligations. For this reason, the management needs to obtain observable
evidence (fasb.org, 2018).
Step 5: In this step, the retail companies recognizes the revenue after the business entity satisfies
the performance obligations. In this new model, the accounting standards want the management

5REVENUE RECOGNITION
of the companies to make more estimates and judgments for the identification of performance
obligations (nasbp.org, 2018).
Conclusion
The above discussion sheds lights on the importance of revenue recognition for the retail
companies. It can be observed that the companies are required to recognize revenue when they
are earned. Most impotently, it is essential for the companies to consider the perfect timing of
revenue recognition. According to the above discussion, business organizations need to
recognize the revenues at the time of the delivery of products and services. The above discussion
also mentions about the five step alternative method of revenue recognition developed by FASB
and IASB to make financial statements more accurate.

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References
Costco Wholesale Corporation - Investor Relations - Financial Reports. (2018). Phx.corporate-
ir.net. Retrieved 24 March 2018, from http://phx.corporate-ir.net/phoenix.zhtml?
c=83830&p=irol-reportsannual
Yeaton, K. (2015). A new world of revenue recognition: revenue from contracts with
customers. The CPA Journal, 85(7), 50.
Tysiac, K. (2014). Revenue recognition: No time to wait. Journal of Accountancy, 218(1), 40.
McCarthy, M. (2012). Financial statement preparers' revenue decisions: Accuracy in applying
rules-based standards and the IASB-FASB revenue recognition model. Nova
Southeastern University.
Dyson, R. A. (2015). Case studies in the new revenue recognition guidance. The CPA
Journal, 85(3), 22.
Wagenhofer, A. (2014). The role of revenue recognition in performance reporting. Accounting
and Business Research, 44(4), 349-379.
Welcome - IASB and FASB Proposed New Accounting Standard for Revenue Recognition .
(2018). Nasbp.org. Retrieved 24 March 2018, from
http://www.nasbp.org/fasbaccountingst
2017 Annual Report. (2018). S2.q4cdn.com. Retrieved 24 March 2018, from
https://s2.q4cdn.com/056532643/files/doc_financials/2017/Annual/WMT_2017_AR-
(1).pdf

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Revenue Recognition. (2018). Fasb.org. Retrieved 24 March 2018, from
http://www.fasb.org/jsp/FASB/Page/Image