Essays on IASB-FASB Project on Revenue Recognition Standard Research Paper

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The paper "IASB-FASB Project on Revenue Recognition Standard" is an outstanding example of a finance and accounting research paper.   The main aim of the IASB-FASB project is to identify ways in which revenue recognition from multiple element arrangements can be done geared towards; removing weaknesses and inconsistencies in existing standards for revenue recognition, provision of a strong framework in order to address revenue recognition practices across industries, entities, capital markets and jurisdictions and reduce the number of requirements to which business entity ca refer to in order to simplify the preparation of financial statements.

On 7th February 2011, IASB and FASB discussed various topics of the ‘ Revenue from contracts with customers’ exposure draft. First, concerning segmenting a contract, the FASB/IASB boards have agreed that an entity can segment a contract only when it is capable of identifying separate performance obligations in the contract. Thus, the proposal to account for one contract as two or more in case the price of particular goods/services within the contract is different from others was dropped. In regard, to the identification of separate performance obligations.

Boards decided that the aim of establishing separate performance obligations is to depict the transfer of goods or services and the profit margin which is attributed to those goods or service. The principle of ‘ distinct goods or services’ was maintained as the basis of identifying separate performance obligation. for combined contracts, the IASB and FASB boards stipulated that business entities are supposed to combine and give an account for single, two or more contracts which are entered into near or at the same time with the same client(s) in case, the contracts were negotiated as a package with similar commercial objective, price of one contract depends on the other, and the goods or services in the contract are related in terms of technology, function or design (Lugo, 2011c). Current Situation Similarities between US GAAP and IFRS on Revenue Recognition Under both IFRS and US GAAP, revenue recognition is based on total execution of the earnings process as well as the realization of assets forms completion of the aforesaid process.

In regard to IFRS, revenue recognition is stipulated in IAS 18 in which it is defined as ‘ the gross inflow of economic benefits (for instance cash, receivables, other assets) arising from ordinary operating activities of an entity’ if those inflows result in increases in equity other than increases relating to contributions from equity participants’ .

Besides, IAS 18 stipulates that fro an item to be recognized as revenue, it must fall within the above definitions as well as meet the following criteria: it is highly probable that future economic benefits related with the revenue item will flow to the entity and it is possible to measure the amount of revenue reliably.

In particular, IAS 18 gives guidance with respect to revenue recognition only to the sale of goods; rendering of services; interest, royalties, and dividends (Ernst & Young LLP, 2010). On the other hand, US GAAP gives guidance on revenue recognition in ‘ ASC 605 Revenue Recognition’ standard. This standard describes revenue as expected or actual cash inflows that will result or that have occurred from major ongoing activities of an entity. From the above definitions, it is clear that in both IFRS and US GAAP, recognition of revenue is not done unless it is either realized (or realizable) and earned.

Besides, in both of these accounting standards, revenue recognition is based on the transfer of risks and also they aim at establishing completion of the earning process. It is also important to note that the criteria for revenue recognition in both standards is similar although not identical in that, IFRS requires reliable measurement as one of its criteria whereas in US GAAP the revenue to be received should be determinable or fixed (Ibid, 2010).

References

Burkholder, S. (2010). Construction sector leads criticism of revenue proposal. Accounting Policy & Practice Report. 6 (23), pp. 819-821.

Bouvier, S. (2010). Revenue roundtable hears concerns about proposed control-based model. Accounting Policy & Practice Report, 6(24), pp. 879-881.

Ernst & Young LLP. (2010). US GAAP vs. IFRS: The basics. Retrieved February 27, 2011 from http://www.ey.com/Publication/vwLUAssets/IFRS_vs_US_GAAP_Basics_March_2010/$FILE/IFRS_vs_US_GAAP_Basics_March_2010.pdf

Lund, M. E. (2010). Proposed accounting standard would change revenue recognition practices for construction contractors. Construction Accounting & Taxation, 20(6), pp. 36-41.

Lugo, D. (2010a). FASB-IASB Full retrospective requirement of revenue standard runs into opposition. Accounting Policy & Practice Report, 6(23), pp. 828-830.

Lugo, D. (2011b). FASB, IASB begin final revenue recognition redeliberations. Accounting Policy & Practice Report, 7(3), pp. 97-98.

Lugo, D. (2011c). Standard setters hammer out plan for revenue recognition redeliberations. Accounting Policy & Practice Report, 7(1), p. 10.

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