Revenue figures are attracting many investors' attention as it has become a conventional way of measuring business performance. While comparing another aspect of financial reporting, revenue recognition has significantly been tied to financial statements, prone to error. The risk of erroneous revenue reporting is high considering fraud and figure manipulation by businesses, regardless of accounting rule. The new revenue recognition standard approach has to integrate the asset-liability framework to identify revenue distribution in terms of goods/services transferred to customers to reflect what the company receives or anticipate to receive. When there is satisfaction in performance obligation, it makes the revenue recognition process viable.
In recognizing revenue is the presentation and disclosure, which utilizes the asset-liability approach, the company determines its performance obligations. The term contract asset or liability may not be directly integrated into the balance sheet, given that contact liability is performance obligated more descriptive terms are employed, such as accrued service revenue, unaccrued sales revenue. For contract assets, unconditional and conditional rights in the financial statement must be differentiated through correct account documentation. Following contract modification, the changed contract terms companies determine whether the new contract and performance obligations will affect the business financial overview.
Delegate your assignment to our experts and they will do the rest.
Consequently, there is a five-step that facilitates the revenue recognition process. The first distinguishing the present contract the business has with the customers gives the company the mandate to receive customer consideration and become obligated to present them with good/services arising the asset-liab9ility transfer. The second step is to identify an independent performance obligation that promises to offer goods/services. The third step is to determine the transaction price consisting of the business's amount to receive after providing sales. Fourthly, allocate the transaction price to Independent performance obligations based on good/services relative fair values on a solitary basis. The fifth step is distinguishing revenue after each performance obligation's satisfaction, which only occurs after the goods/services have been transferred to the customer.
Reference
Rutledge, R. W., Karim, K. E., & Kim, T. (2016). The FASB's and IASB's New Revenue Recognition Standard: What Will Be the Effects on Earnings Quality, Deferred Taxes, Management Compensation, and Industry‐Specific Reporting?. Journal of Corporate Accounting & Finance , 27 (6), 43-48.
