One of the significant roles of the Securities and Exchange Commission (SEC) is to set parameters to be followed by entities as they are recognizing and declaring revenue. With the growth of technology and communication, business models keep changing as new products, services and methods of payment keep coming up or evolving. The SEC has set up rules through which entities ought to recognize revenue. Due to the dynamism of the today’s business environment, these rules may have shortcomings in their applications.
New business models, especially those that are internet-based, are distinctly different from the traditional models. The advertising model, for instance, provides users or visitors of a website with services at no cost. The business will subsequently try to get as many visitors as possible to its website so that it can charge the companies advertising on the platform. More visitors translate to more money for the platform and a bigger audience for the advertising firm. The regulations on revenue recognition may be conflicting on exactly when delivery of the service has occurred. Such companies include Yahoo and Google whose revenue primarily comes from advertisements on their platforms
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Given that contracts entered into by software companies may span long periods of time, the companies select to recognize the revenue upon its receipt in installments in contrast to other models which may wait till completion of the contract before revenue recognition. Companies often gauge the collectability according to the credit rating of the entity they are entering into a contract with. If a customer is creditworthy, collectability is more certain while if collectability is under question; revenue recognition may be deferred until all payments are received. One of the criteria upon which the SEC judge revenue recognition is whether collectability is reasonably assured. Reasonability is an innately subjective and relative term in the business world. The North Kingdom, which is a web design company, branch in the US may be responsible for the website management of several companies for several years, depending on the collectability of revenue from each company, the revenue recognized every year may be different.
