Revenue Recognition Issues Current Issues

¶ … Revenue Recognition Issues

Current Issues and Actions related to Revenue Recognition:

Revenue constitutes the major single entity in financial statements, and issues entailing revenue recognition are among the most vital and intricate which standard setters and accountants encounter. Since no broad norms on revenue recognition exist there is a considerable gap between the broad conceptual guidance in the Financial Accounting Standard Board - FASB Concepts Statements and the exhaustive guidance in the authoritative literature. Major part of the authoritative literature gives industry or transaction-related implementation assistance, and it has been built basically on a temporary basis and issued in several assertions with varying level of authority. Those assertions comprise Accounting Principles Board - APB views, FASB statements, American Institute of Certified Public Accountants - AICPA, Audit and Accounting Guides, AICPA Statements of Position - SOPs, FASB Interpretations, Emerging Issues and Task Force - EIFT Issues, Securities and Exchange Commission - SEF, Staff Accounting Bulletins - SAB, and similar to these.

The SAB 104 Revenue Recognition published in December 2003 states that in case a transaction comes within the ambit of particular authoritative literature on revenue recognition, that guidance must be obeyed in observance. Without such guidance, the revenue recognition norm in Concepts Statement 5 for example that revenue must not be recognized until it is realized or realizable and earned must be observed. but, SAB 104 is more particular, stipulating further requirement for fulfilling those norms and shows the SEC workforce's opinion that the four basic measures in case of revenue recognition in AICPA SOP 97-2, Software Revenue Recognition, ought to be a foundation meant for every basic revenue recognition rules. Those measures are: (i) Convincing proof of an existent system (ii) Delivery occurrence (iii) the fee of the vendor is fixed or can be calculated. (iv) There is likelihood that the revenue is can be collected. (Project Updates - Revenue Recognition)

Working norms for recognition of revenues:

It has been approved by the FASB a preliminary collection of working norms for recognizing revenue. Those norms are (i) the elements norms (ii) the measurement norms. The elements norms necessitate that an alteration in assets or liabilities has happened particularly: 1. There has been an increase in assets which increases equity, lacking a proportionate improvement in liabilities to the customer or an investment by the owners. 2. There has been a decrease in liabilities which makes the equity to go up, lacking a proportionate investment by the owners for example writing-off by the owners of a debt owed to them by the company. (Project Updates - Revenue Recognition)

Definition of Revenues:

As regards the items which must be included or excluded from the description of revenues, a consensus was made that - (i) a reporting body must not recognize revenues for the performance by third parties of its responsibility to work or extend services to customers in case those responsibilities are officially assumed by those third parties. (ii) in case of all other situations, a reporting body must recognize revenues for the performance by third parties of its responsibility to do work. (iii) Production will result in effecting a component of wide-ranging income. (iv) Non-reciprocal transfers received must not be excluded from revenues and must not be shown as a distinct line item in the income statement. (v) a reporting body must at the introductory stages measure its obligations for performance guarantees at their fair values and must recognize revenues as a result of their satisfactory performance or completion of those guarantees. (Project Updates - Revenue Recognition)

Problems related to Revenue Recognition:

Several professionals within the financial community have ventilated their apprehension that market pressures are instigating increasing number of public companies to employ inappropriate earnings management activities. The Division of Corporation Finance set up an Earnings Management Task Force, which focused staff resources on the evaluation of filings where probable inadequate earnings management might be there. A fundamental aim of the evaluation has been to bring out enhanced disclosure in financial statements regarding modifications entailing damages to asset, restructuring charges, procured in-process research and development, and items like these. Disclosures required by the employees has included clarification of the nature and amounts of streamlining liabilities and valuation reserves, the timing and quantity of increases and decreases in these accounts, and the nature and amount of any alterations in calculation. The Task Force even investigated into filings of indicia of management of earnings and other abuses of accounting entailing revenue recognition, unfair assessments of purchased in-process research and development, and adjustment of loss allowances and calculated liabilities. Even, as a part of its practical disclosure program, the Division of Corporate Finance communicating with companies and alerting them before the annual reports, of disclosures which are frequently required to give lucidity to major charges. (Recent Financial and Disclosure Initiatives - Initiative to Address Improper Earnings Management)

In excess of 50% of the frauds in financial reporting among the U.S. public companies involved overstating the revenue. Auditors have all the while focused on probable revenue recognition overstatement in financial statements. Having knowledge regarding the components of Staff Accounting Bulletin 101, Revenue Recognition in Financial Statements - as also the regulatory concerns the SEC dealt with while issuing it. This will help Certified Public Accountants - CPAs select the most suitable revenue recognition practices intended for their companies. A lot of Standard Executive Committee - SEC cases which were settled in federal courts containing supposedly misappropriation gives instances of how not to apply revenue recognition principles, among which some might appear obvious as companies knowingly made misstatements in reporting. In case of lot of companies, SAB 101 might not be a reason for panic, however rather an approach to take a fair and sincere look at their revenue recognition practices. Several companies have intricate business scenarios which might not have simple solutions. (the Right Way to Recognize Revenue - New FASB Guidance)

Earnings management is not a novel thing, but it draws exaggerated media and investor notice in a setting where the market penalizes companies that do not meet their earnings estimates. In case companies' chose dubious accounting practices to meet hopes of shareholders and analysts, in that case they will get the attention of the SEC, which do not have any forbearance for earnings management practices that become deceitful financial reporting. During a speech delivered in June 2000, SEC Commissioner Isaac Hunt reported that "financial scam constituted roughly one-fifth of the cases brought by the division of enforcement," and roughly one-third of these actions were due to incorrect income recognition. (the Right Way to Recognize Revenue - New FASB Guidance) Hunt stated "the Commission is mounting its sanctions against people who commit deception on behalf of the companies." (the Right Way to Recognize Revenue - New FASB Guidance)

The SEC has even broadened its sanctions to take in not just senior officials but others within the hierarchy who intentionally are a party in the fraud. FASB set-up the EITF way back in the year 1984 to aid in finding out problems affecting financial reporting and carrying out of authoritative declarations. It accused the Task Force with helping with the guidance such that every publicly traded companies dealt in like transactions in an identical manner. In an ideal circumstance, the EITF would recognize emerging variety in practice or dubious application of GAAP before the SEC had to take action. While EITF reaches an agreement, it becomes GAAP and is regarded as mandatory necessity and the board will not take further action. (the Right Way to Recognize Revenue - New FASB Guidance)

My thoughts and Opinions:

The business reporting model of the future should have to be online, real-time disclosure of business information and its performance measurement based. In the present era of business reporting, even though a concrete foundation from which to begin is incomplete because of rising marketplace demands for more pertinent, latest information. Users in this modern era want instantaneous data in formats permit rapid access and analysis to assist in the better decision. At present there are five basic constituents a company requires to possess so as to provide dependable online, real-time reporting. These are (i) Dependable systems (ii) Usual methods of disseminating information. (iii) Corporate accountability, inclusive of management integrity and concrete enterprise risk management. (iv) Comprehensible disclosures and information. Providing real-time reporting evidently capitalizes the conventional audit functions which the CPA is providing to safeguard investors and other stake holders. (the Business Reporting Model of the Future)