Int. Acc. FA LECT 2&3: Revenue recognition part 1 (LEARNING OBJECTIVE:…
Int. Acc. FA LECT 2&3: Revenue recognition part 1
IMPORTANCE OF REVENUE
High risk for error and manipulation (fraud)
for improper revenue recognition are common and lead to significant stock price declines
Revenues are very
in an economy
to understand how revenues should be measured
at what point in time they should be recognized
Performance has two elements: Income and Expenses
an increase in an asset or a decrease in a liability will result in income
(unless the increase is due to equity transactions)
[“Expense” defined the other way around]
Profit measures the concept “performance”
Purchase a machine --> increase in assets
No, because at the same time we have a decrease in assets (cash) or increase in liabilities (accounts payable).
Under IFRS, revenue recognition is dealt with in IFRS 15
Effective from 2018 onward
Streamlines/converges accounting for revenue under IFRS and US GAAP
Risk-reward approach (IAS 18/IAS 11): recognize revenue when significant risks/rewards of ownership have been transferred from seller to buyer (very simply put).
Lack of guidance under IAS 18 to deal with multi-element transactions (services + goods)
Conflicting principles underlying IAS 18 and IAS 11 (construction contracts)
Inconsistent with asset and liability definitions.
Asset-liability approach (IFRS 15): recognize and measure revenue based on changes in assets and liabilities arising from contracts with customers.
Aligns better with the existing definitions of revenue (see Lecture 1): based on increases in assets, settlements of liabilities, or both.
Revenues arise from the normal operations of a
Gains are other items that may or may not arise from normal operations
Income has two related components:
LEARNING OBJECTIVE: FIVE STEPS IN THE REVENUE RECOGNITION PROCESS
Determine the transaction price
Allocate the transaction price to the separate
Identify the separate performance obligations in the contract
Recognize revenue when each performance obligation is satisfied
Identify the contract with the customer