In the modern day, revenue recognition requirements grow complex, disparate, and detailed as the global competitiveness of industries during transactions with customers of reporting organizations. When investors want to assess the performance of a company, they project the prospects by measuring the revenue. There are various changes in the new standards for revenue recognition in the Generally Accepted Accounting Principles, which are an improvement of the International Financial Reporting Standards. Both standards are important in the International Accounting Standards Board that shows a converged guidance in revenue recognition. The new changes improve the relationship of the Boards joint efforts in financial reporting. The requirements include software and real estate factors that affect the similar transactions for the different accounting.
Keywords: Revenue Recognition, GAAP, IFRS, Financial Performance
Revenue Recognition
Introduction
The revenue recognition requirements that include customer and organizational transactions with customers have grown in complexity, disparity, and detail. The evaluation and the implementation of the new standards in recognizing revenue increases the global competitiveness of industries. A way to assess the process is to project the revenue measurements to determine the financial performance of a company.
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The Generally Accepted Accounting Principles and the International Financial Reporting Standards contain the new requirements that include the complex changes for revenue recognition. The International Accounting Standards Board shows the converged guidance in revenue recognition. The new standards have a potential impact on the information systems, financial statements, process, and organizational controls. Companies, however, need to evaluate the impacts of adopting the new standards while at the same time adopting the current measures to increase financial performance.
Discussion
A company needs to understand the changes to the current GAAP based on the FAAB to comply with the revenue recognition from the financial contracts with its customers. The new standards have a retrospective and transitional adoption system to achieve the core principles. The core factor in the new system is the education of the users of the changes that affect the financial statements and the implementation of the new revenue recognition standards. The process involves the identification of the customer contracts, the contractual performance obligations, determination of the price of the transaction and the allotment according to the performance obligations of a customer contract. The last step is revenue recognition as an entity that satisfies the performance obligation.
The current revenue standard requires the removal of weaknesses and inconsistencies in the existing revenue requirements. It also requires the provision of a more robust framework that addresses the existing revenue issues. The new standards require the improvement of the comparability of revenue recognition practices that affect the entities, industries and the jurisdiction of capital markets. The other important factor is the provision of significant information to the users affected by the financial statements. These improvements affect the disclosure requirement sand also simplify the process of preparing the statements through reduction of the number of organizational requirements.
The core principle in the new standards that meet the objectives of the GAAP and the IFRS is revenue recognition. The process is successful if it depicts the transference of promised services and goods to clients (Bohusova et al., 2015). The improvement involves the reflection of the amount considered in the expectations of the entities in the exchange entitlements.
The new standard changes the current state of numerous requirements that recognize revenue. The improvements of the GAAP include the consistency of the core principles regardless of the geography or the type of industry. Furthermore, the status involves the segmentation of the financial reporting in most companies and the lack of disclosure of accounting policies. The companies and the reporting organizations currently give limited accounts of the revenue contracts to customers or other companies. In the new guidance, a set of disclosure procedures for the users is cohesive financial statements, which enable the openness of customer transactions with reporting organization and companies. Each entity is treated separately, but consistent statements are categorized according to the nature of the transaction.
The current standard depicts the lack of distinctions between revenue generating transactions with the promised goods or services to the respective customers. The promises usually have separate obligations in the entity and customer agreements (Srivastava, 2014). The new revenue recognition standard requires that the entities or the reporting companies should distinctively identify each type of good or service in the customer transaction. It is in lieu of whether the services or goods represent the performance obligation or satisfy the revenue recognition.
Another factor that distinguishes the current guideline to the new standards is the multiple arrangements of elements during transactions. The current guideline considers the amount of allotment to the delivered elements as a limited entity to future delivery of goods or services. The new guideline proposes the allotment of the transaction price in a distinctive manner where the relative standalone is a factor. The price is rooted to the performance obligations apart from an instance where the underlying service or good is has a variable amount in case of a discount. In such instances, the price relates to one contractual performance obligation to the customer.
The current standards also require the accounting for a variety of consideration across different types of industries. The new standard, however, considers a new model where there are rebates, bonuses, a right for returns and discounts that entail the variable considerations. The amount of the recognizable revenue will not occur in cases where there is a variable price fluctuation. This new model affects the reporting organizations or any company that features in the transfer of nonfinancial assets to such companies. These companies enter into contracts with customers to either transfer goods or services.
Conclusion
The IASB and the FAAB entered into a convergence where they improved the current revenue recognition standards to meet the modified transactions between the customers and the companies (Sedki et al., 2014). The changes focus on the collectability threshold, effective timing, early applications, nonpublic entry requirements, and the impairment loss reversal. The private, public, and not-for-profit organizations can adopt this new guideline to improve their financial performance when entering into contracts with clients and reporting organizations. However, both the current and the new guidelines are important in achieving organizational success. The companies, therefore, need to evaluate how the new standards will affect the statement of operations, disclosures and the impact on the new financial statements.
References
Bohusova, H., & Nerudova, D. (2015). US GAAP and IFRS convergence in the area of revenue recognition. Economics and Management , (14), 12-19.
Sedki, S. S., Smith, A., & Strickland, A. (2014). Differences and similarities between IFRS and GAAP on inventory, revenue recognition, and consolidated financial statements. Journal of Accounting and Finance , 14 (2), 120.
Srivastava, A. (2014). Selling-price estimates in revenue recognition and the usefulness of financial statements. Review of Accounting Studies , 19 (2), 661-697.
