Role Of Revenue Recognition In Performance Reporting For Organizations

Summary

Describe about the role of revenue recognition has been recognizing as a crucial part in performance reporting of the organizations?

The role of revenue recognition has been recognizing as a crucial part in performance reporting of the organizations. The regulations of IASB shows that the companies should make it mandatory for recognizing the correct revenue transactions so that the financial statements are not overstated. The assignment deals in producing a critical review of the journal on the role of revenue recognition in performance reporting (Olsen and Weirich, 2010).

The journal critically attempts to evaluate the importance of inclusion of the different types of revenue and incomes in the financial reports. The major reason for this debate is the internet bubble of 1990 that was a result of the revenue showed in the annual reports of the web-based companies. The journal further discusses about the concepts of revenue recognition and the type of information they provide to the financial statement users (Wagenhofer, 2014). For reviewing the journal, it can be suggested that the main problem, which the author highlights within the journal, is the risks and the types of revenue that should be included to make the financial report as per the standards of the IASB. The journal in its latter part also shows an analysis of the improved revenue recognitions standards of IASB (Coe and Delaney, 2013).

The revenue recognition concept affects all industries particularly the telecommunications, real estate, biotech, consumer retailers and service industries. Jackling, Howieson and Natoli, (2012) opined that revenue are the main source of income for this types of industries thus the non disclosure of the revenue will affect the financial statement of these industries (Wagenhofer, 2014). Although the journal do not state the concerned stakeholders who are interested in the financial statements, however Munter (2002) argued that the government, customers, suppliers, creditors and the employees will be interested about the financial reports. Although the revenue recognition policy will affect all companies adopting IFRS accounting standards, however the author for the convenience of discussion uses US GAAP as examples. The major problem that the author highlighted is that except for simple business transactions it is difficult for the accountants to recognize the types of revenues that should be included in the financial report (www.ey.com, 2015).

The other portion of the article also focuses on the alternative options of revenue recognition, the IFRS norms in relation to revenue recognition, the critical factors that contribute to revenue recognition process and the risks involved in the revenue recognition process. The overall article mainly aims in theoretically evaluating the importance of revenue in the organizations rather than focusing on the practical implications of wrong revenue recognition on the financial performance of the organization (Detzen and Zülch, 2012).

A critical review of the article shows that the author stressed initially on providing the various concepts of revenue recognition and its influence. However, the negative aspect of the article lies in the descriptive evaluation that the author provides in the conceptual part of the article. The other aspect of the article is the difference between the asset liability approach and the revenue expense approach. The positive aspect of the article is the identification of the critical events that gives rise to recognition. The article shows that the financial reporters and the IASB regulators are striving to promote a single revenue recognition principle that would be adopted globally by all organizations. However, Nobes (2006) suggested that the use of a single principle for all individual revenue transactions would not make the organizations successful in recognizing the revenues and producing an effective financial report.

Key points and critique

Moreover, the discussion of conservatism within the journal can also be argued. The article states that organizations should forgo the conservative revenue recognition approach introduced by the Security Exchange Commission (SEC) and should totally adopt the neutral recognition principle introduced by FASB. However, Sy, Tinker and Okcabol (2012) argues that use of conservatism approach helps the organizations to record earnings that are also important financial information for the investors. Mostafa Hasanen and Ali Mohamed Abo Talib (2014) also provides evidence to support the fact that conservatism reduces the manager’s ability to manipulate the financial data in the annual reports (Wagenhofer, 2014).

The article also focuses on describing of the critical events that result in recognition of the revenue. Previously the normal and daily transactions like the sales, fees, royalties, interests were treated as sources of revenues. However, the IASB has formulated the standards for the events that will help the organization and the individual to recognize the revenues that are to be recorded in the financial statement (Nobes, 2012). The new standards consider that for a transaction to be recorded as a revenue transaction the organization should show a valid and acceptable contract between the company and the customer. The general principle stated that when the transfer of goods takes place between two parties then the transaction can be recorded as a recognition of revenue. However the IASB standard added that when the party takes the control of the goods or services only then the transaction may be recorded as a revenue transaction and can be recorded. Bellandi (2012) suggested that this is a good method because at time the good or the services after the transfer of the ownership may be returned back to the supplier. However, in such cases the supplier has already recorded revenue in the financial accounts, which will tend to increase the profit of the business. However if the new policy is followed then the supplier will recorded the revenue after the confirmation of the  ownership control of the buyer on the good or service and there will be no prospects of future return.

In a positive attempt, the article tries to explore the importance of revenue in determination of the size of the business and future forecasts. Phillips (2011) opined that in majority cases it is seen that the organization forecasts the future revenue based on the past revenue data available. Hence it is very important for the financial analyst to record the correct revenue transactions so that the financial performance is not shown in an exaggerated manner. However Altamuro  et al. (2005) contradicted suggesting that the use of the stringent regulations of revenue recognition as guided by the FASB will make decrease the amount of revenue for an organization thereby leading to low forecast rate and reduction in the size of the organization (Cottrell, 2005).

The article shows the relevant points in the context that revenue recognition is an important aspect in financial performance analysis. Some of the factors mentioned within the article are convincing however, there are issues in some of the other viewpoints. The author however seemed unbiased in presentation of the article inputs and purely focused on the arguments and comments of other academic journals (Shamrock, 2012). The importance of revenue recognition in the performance evaluation of companies successfully establishes the main theme of the article (Wagenhofer, 2014). However, the author cannot successfully relate the importance to the industry scenarios. The article is thus not relevant in providing real and global prospects of the importance of revenue recognition. The article shows the alternative concepts of revenue recognition as well and further provides the difference between the revenue-asset approach and the asset-liability approach. However, Ram and Newberry (2013) commented that except for theoretical and conceptual difference there is no practical difference between the two approaches. Since the article is not able to provide significant practical examples in the context of the difference between the two approaches hence it can be relatively, concluded that the adoption of either of the two approaches is feasible. The FASB standard suggests that the revenue expense approach is followed by the organizations adopting FASB norms (Caylor, 2010). On the contrary, the asset liability approach deals with recognition of revenue as soon as the revenue arises. In this case, the contract can be partly completed or totally completed.

Conclusion

Thus a critical evaluation of the alternative approaches shows that since a single approach that is the revenue asset based approach is followed hence the suggestion about two alternative approaches are irrelevant in this context and the presentation of difference between the two concepts is also irrelevant (Barker and McGeachin, 2012).

Reference list

Altamuro, J., Beatty, A. L., and Weber, J. (2005). The effects of accelerated revenue recognition on earnings management and earnings informativeness: Evidence from SEC Staff Accounting Bulletin No. 101. The Accounting Review,80(2), 373-401.

Barker, R. and McGeachin, A. (2012). The Recognition and Measurement of Liabilities in IFRS. SSRN Journal.

Bellandi, F. (2012). The handbook to IFRS transition and to IFRS U.S. GAAP dual reporting. Chichester, West Sussex: John Wiley.

Caylor, R., 2010. Strategic revenue recognition to achieve earnings benchmarks. Journal of Accounting and Public Policy, 29 (1), 82–95

Coe, M. and Delaney, J. (2013). Trabeck prepares for IFRS: An IFRS case study. Journal of Accounting Education, 31(1), pp.53-67.

Cottrell, S. (2005) Critical thinking skills. Basingstoke: Palgrave Macmillan

Detzen, D. and Zülch, H. (2012). Executive compensation and goodwill recognition under IFRS: Evidence from European mergers. Journal of International Accounting, Auditing and Taxation, 21(2), pp.106-126.

Jackling, B., Howieson, B. and Natoli, R. (2012). Some Implications of IFRS Adoption for Accounting Education. Australian Accounting Review, 22(4), pp.331-340.

Mostafa Hasanen, S. and Ali Mohamed Abo Talib, D. (2014). A proposed model to address convergence determinants, IFRS & FASB: measurement & disclosure of revenue recognition “the case of Egypt”. International Journal of Academic Research, 6(3), pp.269-285.

Munter, P. (2002). Revenue recognition and restructuring continue to receive FASB attention. J. Corp. Acct. Fin., 14(1), pp.77-80.

Nobes, C. (2012). On the Definitions of Income and Revenue in IFRS. Accounting in Europe, 9(1), pp.85-94.

Nobes, C. W. (2006). Revenue recognition and EU endorsement of IFRS.Accounting in Europe, 3(1), 81-89.

Olsen, L., and  Weirich, T. R. (2010). New revenueâ€Ârecognition model. Journal of Corporate Accounting & Finance, 22(1), 55-61.

Phillips, R. (2011). Efficient frontiers in revenue management. Journal of Revenue and Pricing Management, 11(4), pp.371-385.

Ram, R. and Newberry, S. (2013). IFRS FOR SMEs : THE IASB’S DUE PROCESS. Australian Accounting Review, 23(1), pp.3-17.

Shamrock, S. (2012). IFRS and US GAAP. Hoboken: John Wiley & Sons.

Sy, A., Tinker, T. and Okcabol, F. (2012). IFRS and the FASB: a marriage not made in heaven.AJESD, 1(4), p.329.

Wagenhofer, A. (2014) The Role of Revenue Recognition in Performance Reporting, Accounting and Business Research, 44:4, 349-379.

www.ey.com, (2015). Applying IFRS in Telecommunications. [online] Available at: https://www.ey.com/Publication/vwLUAssets/Telecommunications_The_revised_revenue_recognition_proposal/$FILE/Applying%20IFRS%20Revised%20revenue%20recognition%20proposal_telecoms.pdf [Accessed 3 Mar. 2015].