Benavides Alberto IRP

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1 Individual Learning Project Assignment Alberto Benavides Liberty University ACCT 632 – Advanced Financial Accounting Theory Author Note Alberto Benavides I have no known conflict of interest to disclose. Correspondence concerning this article should be addressed to Alberto Benavides

2 Revenue is the one of the biggest purposes that business get underway and it induces them to be victorious. Leaderships of a particular business have the central controls to ensure that financial statements, specifically the income statement, provide beneficial earnings like net income and earnings per share not matter on how they generate their revenue streams. However, recognizing revenue can be convoluted, it can call for a complex understanding of the methods financial statements will have an influence by using the most or least relevant methods attainable. Recognizing revenue is integral aspect of a publicly traded company as it is the most characteristic aspect of its value, which impacts its perception on Wall Street of the valuation of the stock price. Revenue recognition percolates downward to a public company’s investors and other external stakeholders. Furthermore, as noted “properly recognizing revenue for financial reporting is sometimes challenging since performance obligations may extend over multiple reporting cycles. In addition, when customers request changes to job scope (referred to as job change orders), the company must determine if the change order should be reported as a modification to the existing job or if it should be reported a separate performance obligation (Albritton, & Homes, 2020). Evolution of History Revenue recognition is the benefactor of multitude of exertion of the generally accepted accounting principles (GAAP) and the International Financial Reporting Standards (IFRS). Throughout time it has been modified to keep abreast with the present- day complications in today’s accounting atmosphere. As noted, “Uncertainties related to COVID-19 and related market conditions may prompt entities to modify existing contracts with customers or reassess the probability that the contracted consideration will

3 be collected (Levy, 2020)”. Moreover, GAAP revenue-recognition accounting guidelines was set out under Topic 605 of the Accounting Standard Codification, the IFRS has it more circulated through various derivations. It had been that in the early 2000’s that the Financial Accounting Standard Board ( FASB) and the International Accounting Standard Board ( IASB) joined forces to provide modifications to the revenue recognition accounting guidelines. In 2010 the joined boards declared a draft. A following year a draft was declared. In May 2014, the collective enterprise of the FASB and IASB, resulted in the issuance of the regulations of revenue recognition for contracts, Revenue from Contracts with Customers (Topic 606) is a solution to the U.S. GAAP revenue recognition ideology, which covered the ideas that affect the financial reports of companies coming into contracts to sell goods or provide services. As noted, “ IFRS 15 Revenue from Contracts with Customers has significantly changed the philosophy of revenue recognition, not only to provide a fairer representation of corporate revenues, but also to inhibit the use of revenues for ‘earnings management’ purposes (Napier & Stadler, 2020). Unfortunately, the prior GAAP guidance was convoluted and defected, it allowed for mandates on certain concepts and how to recognize revenue for several different types of dealings across industries like Hollywood production, technology creation, franchising and realty. The purpose of the new guidelines aimed to produce uniformity throughout various industries so users of financial statements can reap advantages on a more crystal- clear reporting system which has motivation for more refined comparability and lucidity. The model, constructed on revenue-recognition accounting guidelines has been assembled on a uniform revenue- recognition accounting guideline, that similarity GAAP and IFRS can apply to all contracts that are customer eccentric. The present-day guidelines aid all

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4 businesses and has been put into effect on or after December 2018 for public companies while all the other businesses began December 2019 to authorize more time for adaptation. There are two methods to rationalize it, a “full retrospective method”, for which identical reporting periods with some anomalies for agreed upon contracts or “modified retrospective method”, for revenue reporting for contracts that are open or created by January 1st, 2019. Leasing is an additional major element of revenue recognition and it has been considered separately with ASC 842 and IFRS 16. The present-day revenue recognition guidelines convey the revenue recognition of businesses coming into leases of different types, such as property, plant, equipment and realty, and it will influence public and non- public companies alike, although the present-day accounting guidelines convey added modifications to the to lessee’s accounting than lessor’s accounting. Publicly traded companies can apply for the present-day accounting guidelines in 2019 while non-public in 2020. The Core Guidelines Earned Revenue Organizations that generate income upon the sale of their goods or provide a service. These sort of transactions, complete the buyer’s need so earning generation begins. Nonetheless, the revenue can be recognized when goods have literally been fulfilled and services furnished. Furthermore, if the seller receives remittance prior to, before fulfilling the goods or furnishing the service, the revenue can be postponed until the seller has fulfilled his/her commitments. In revenue recognition, the timetable for specific occurrences and business dealings is an aspect of another procedure.

5 Realizable Revenue Revenue is realized when the seller has been presented with compensation as cash or there is satisfactory acumen to comprehend, he/she will be rewarded. The compensation should be identical to the volume of earnings that will be recorded by the seller. Recognizing revenue is really to document it. Only after realizing revenue, documentation will begin, when a buyer welcomes in the products or services, the seller is able to impose the receipt of the consideration. FASB ASC 606 and IFRS 15 The present-day accounting guidelines express that: “ Recognize revenue in a manner that depicts the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services” (FASB, 2014). Strictly speaking, revenue is recognized when the seller fulfills goods and services for the swapping of compensation, which is corresponding to the revenue amount. This proposition is linear with that of business dealings between two parties. As noted, “in revenue recognition, the contract is first recognized by the customer in her five stages: 1) Identify contracts with customers 2) Identify performance obligations 3) Determine the transaction price 4) Allocate the transaction price to performance obligations 5) Recognizes revenue when (when) the entity has completed a performance obligation (Willyatro & Soehaditama, 2023).

6 Stage 1: Identify the contract. As noted, comparable to contract law, “a contract is an agreement between parties, creating mutual obligations that are enforceable by law (Legal Information Institute, 2023)”. It should be written or oral and it is binding. A contract is lawfully good when the offer made by one party, it has been accepted by the other. The contract is when there something of value is exchanged for something else of value. Moreover, parties need to be legally comprehensible to understanding the terms and conditions of the agreement and should not be able to repeal it without having to pay a penalty. Thus, a contract is enforceable. Business will register the guidance to one contract with one customer or multiple contracts with one customer or even one contract for the sale of multiple goods. Contracts that are part of a collection and are interdependent because have been embarked around the same time, should be united . Stage 2: Identify the separate performance obligations that are contained in the contract. This step’s main intention is to establish that the well-defined goods and services have been assured by the seller to the customer. An example of an obligation is the video camera installation and upkeep. According to ASU 2014-09 (FASB, 2014) an obligation is well-defined if it is able to be well-defined if the customer can aid from one of them without the requirement of the other and if the customer can acquire one without impacting the other. Delivering a product and providing a warranty for that product are two well-defined performance functions or obligations. On the other hand, if a performance obligation is not unique from one another, it would be attached until it can become unique. A car and its muffler are two obligations that are not unique as one cannot work without the other. These promises can be seen as straight forward initially; however, it is a piece of work that mandates critical thinking, by and large if it requires the measurement of revenue recognition.

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7 Stage 3: Determine the transaction price. The transaction price is quantified by the consideration the seller obtains for the transfer of goods and services to the prospective buyer. The price is not inclusive of extra fees and is only representative of what the business should receive and is planned on receiving regardless of the final outcome. This number will be realized as revenue . As you could see, this step might not seem as complex as some of the other acts. Considerations can be variable or fixed. As a matter of fact, joined to the transaction price are a diversification of variables that direct the final transaction price, therefore it might be required, to make an estimate of what the expected price will be or the “most likely amount to be received” as explained in ASU 2014-09 (FASB, 2014). There is a diverse quantity of variables such as rebates, credits, discounts, refunds, contingencies, royalties and other items. Stage 4: Allocate the transaction price to the separate performance obligations. This next step, the company draws price estimate for each item or service in the contract. This is rather straight forward when there is one performance obligation and one transaction. However, performance obligations that haven’t materialized more than once, prices will be indicated at separate incidences and estimated when hard to disseminated . Changes can occur over the contract life so that the agreement price is altered as needed. Once a performance has been fulfilled, income can be recognized or decreased in the time it was occurred, dependent on the alteration. Stage 5: Recognize revenue when the entity has completed the autonomous performance obligation. In this last and final step, revenue recognition is the repercussion of the transfer of ownership between the seller and the customer as the performance obligation is being executed or satisfied. This transfer is also called the “transfer of control”. The transfer of control may be immediately fulfilled or through an extended

8 time frame. It is fulfilled through time when the customer is obtaining the aid of the performance as the obligation is being performed such as snow cleaning services which are repeating over the wintertime. The business is augmenting a benefit over which the customer has control for example services being performed by new home fabrication businesses such as building a townhome one land which is presently owned by the customer. An asset with no other use is being fabricated and the business has an enforceable unerring right to be compensated. An example of the second example is given with personalized products or services that can only be useful to the ordering customer. For the recognition of revenue through time, progression will be calculated as the performance is accomplished. The output method with units produced and the input method, with costs and machine hours used, are the courses of action to compute progression. Complications Public traded companies that have thus far been through the execution phase, privately held companies are expected to adapt by December 31, 2019. Across various industries, some will be influenced in dissimilar ways and two similar businesses in identical industries such as production of goods may have dissimilar concerns based on the types of contacts that each one had agreed came up with their clients. The industry of the fabrication of goods brings about a multitude of concerns under the adaption from U.S. GAAP to the present-day accounting guidelines in relation to product controls. Because of the nature of the industry, manufacturers normally recognize revenue at a point in time as distinct goods are produced and control is passed on to the customer often at the time of sale. However, prior to, the seller would transfer

9 ownership to the customer as a title once the products fabricated were loaded on the truck and in transit to delivery. At that point sales revenue would also be recognized. With the present-day framework, control is transferred when products have passed on to the customer destination. However, this is in direct discord with shipping terms like Freight on Board” (FOB). However, under GAAP, personalized products could not be realized until the product was fabricated and the transfer of ownership has occurred. ASU 2014- 09 permits for premature and unfinished recognition as long as the products in in current fabrication. The lone condition for recognizing over an extended timeline is when the product being personalized cannot have a stand in use and cannot be offered for sale to other customers. Moreover, fabricators will find disagreements in having to conk out the prices associated with a parcel that includes products and services as under GAAP a service item may have been implicit in the purchase of a product. As noted, “the application of percentage completed method was affected by the risk of error in estimating project completion (Mustiko & Putra, 2022)”. Home building businesses also are being questioned since they use completion rates for the identification of works being done rather than recognition when the customer gains administration of the home. Identical complexities are shared out with consulting companies, as they would could transfer when their concluding report has been created, hence, behind schedule with that of U.S. GAAP. The correct and claim recognition throughout a timeline dissimilar of registering percentage of completion that way home building and consulting businesses will have to adjust to issues with the modification. Modifications within business should usually cause turbulence without constraints to the size of the business or the size of the modifications to the revenue-recognition framework, hence it should impact all companies, uniquely, those predisposed to

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10 industry-specific directives. Public companies are contrived but are able to register for SAB 74, which will permit them to produce disclosure in the footnotes of their financial statements, their uneasiness regarding their results and the influence of the financial statements since the installations of the present-day accounting guidelines. Deception of Financial Statements Over the past few years, shareholders and stakeholders, faith in the financial markets has declined. This is partly due to companies carried fraudulent and erroneous activities on their financial statements. Financial Services Fraud (FSF) can be viewed as measure taken to deceive or by modifying the deception of the particulars on the financial statements in order to misguide stakeholders about the performance and financial health of an organization. Revenue recognition engages in a vital role in deception and fraudulent activities as the atmosphere of businesses, at various levels, is held through press to affect the prowess of a company to be displayed in the utmost manner. Moreover, company management is mandated report earnings before the period endings, to stave off opposition. Consequently, potential occasions that specific methods are performed for additional income, showing financial well-being. Several may view press to have to reveal the company is financial fit, other may be strained by external influences. However, the widespread regards of stakeholders is to always insist on better improved financial statements and profits. Consequently, there could be compelling subjective attributes that financial statements are mandates to be financially functional to assist stakeholders. Reliability and relevance are core attributes. Relevant information is timely and must possess a

11 certain value. Timeliness requires having data available when it is needed and before it is deprived of its capacity to impact decision-making. If relevant data is delivered after the incidence have transpired it is deprived of its value and becomes useless. However, reliability is recognized at various levels. Data is roughly reliable dependent on the variation of the accounting computation is truly factual represented. Verifiability should be guaranteed by detecting compatibility between the numbers and what is spoken for. However, correspondence is irrelevant if the data is unnecessary for the purpose. Moreover, reliable information is also neutral, meaning bias free as it is rationed by various users with dissimilar concerts and can’t be rationed by a certain faction. Strategy The modifications that the present-day accounting guidelines that will encompass will not only affect the construction of financial statements but it will create sweeping burdens across companies. The revenue recognition guidelines will not only affect business dealings with buyers and leases but also other business dealings such as: management contracts and compensation contracts. By being the present-day accounting guideline, principle-based rather than rule-based, it mandates a vast amount of analysis and high -quality acumen when making choices on how revenue will be recognized and when. But first and foremost, there will be an astute alliance between business professionals, given the demand for individuals with comprehension of contracts and contract terms and conditions, as well as high-quality acumen of comprehension of revenue recognition course of actions.

12 Lastly, in the future, business will undergo the big transition and in order to accomplish it, businesses need to plan and emerge a track to make it as coherent as possible. Accounting and auditing professionals should continue to grow and mature while moving past the prior guidelines and should be prepared to keep under observation the processes and guidelines. Companies of more considerable size will be mandated for a more thorough timetable and scrutiny than companies of less size. It is crucial to be acquainted with viable distinctions between the FASB guidance and IFRS specifically for those companies that are guided by both but division could be may be negligible. Formerly agreed upon contracts serve as the framework to certify how the present-day guidelines will impact the revenue recognition guidelines at the present time being embraced. The identical contracts will be explored to pinpoint viable multiple performance functions or to quantify prices that were negotiated upon. Warranty clauses also need to be pinpointed and prices will need to be quantified and further negotiated as well. Moreover, newly agreed upon contracts will be entered into, it will be more straight forward to execute the modifications pinpointed in the previously entered in ones. Contracts generated subsequently will bolster the load to impact revenue recognition so it is vital for businesses to know the ramifications and have a permissible group of individuals should be at its fore when contracts are organically agreed upon while containing the relevant languages held in the contracts. That is perhaps why it’s vital to have individual team members team with a multitude of expertise to assist in the process. Moreover, this expertise should include knowledge in corporate taxation, legal, financial affairs, information technology (IT), among others. In work with a person who inspects financial records or an auditor will warrant completeness and accuracy of documenting every medication that becomes materialized. IT modifications to the structure should be

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13 examined. Team member training will also play a vital part along with teaching the audit committee, board of directors and investors of possible changes occurring in the future. One biblical verse that supports the idea where God knows the challenges that we believers face and will continue to support us even though the changing landscape accounting regulations and boards is from the Book of Corinthians 1 10:13. As noted, “No temptation has seized you that isn’t common for people. But God is faithful. He won’t allow you to be tempted beyond your abilities. Instead, with the temptation, God will also supply a way out so that you will be able to endure it (Corinthians, 54). Conclusion In culmination, the accounting and lawful sectors of the business habitat are about to have to adhere to an adaption that will put a name to while manifesting its advantage while also present obstacles for time ahead. It is captivating to observe that the present-day accounting guidelines has matched the competition and will support in polishing up the affinity of financial statements between all fabrications. This will probably have its trials and tribulations that can be learned from as most new guidelines tend to have. Every business will be individual and each pact with customers will be distinctive, which will usher in boundless fears while adhering the present-day revenue recognition guidelines.

14 References AICPA. (2017, September). New Revenue Recognition Accounting Standard—Learning and Implementation Plan (Publication). Retrieved from https://www.aicpa.org/interestareas/frc/accountingfinancialreporting/revenuerecog nition/downloadabledocuments/2014-09_liplan.pdf Albritton, B. R. & Holmes, A. F. (2020). Blue Gilia Construction, Inc.: A Revenue Recognition Case Study. The Accounting Educators Journal Volume XXX Pages 45-66 Corinthians (54). 50 Most Popular Bible Verses and Significant Scriptures. Retrieved from https://www.womansday.com/life/g30768153/popular-bible-verses/ Legal Information Institute, (2023). Contract. Retrieved from: https://www.law.cornell.edu/wex/contract Levy, H. B. (2020). Financial Reporting and Auditing Implications of the COVID-19 Pandemic. The CPA Journal. May 20th Issue. Mustiko A.A. , Putra, Y.H. (2022). Impact of Revenue Recognition (PSAK 72) one the Financial Performance of Real Estate . JESKaPe: Jurnal Ekonomi Syariah, Akuntansi Dan Perbankan, 6(1), 30–48. https://doi.org/10.52490/jeskape.v6i1.308

15 Napier, C. J. & Stadler, C. (2020, June). The real effects of a new accounting standard: the case of IFRS 15 Revenue from Contracts with Customers. Accounting and Business Research. Volume 50 No. 5, Pages 474-503, https://doi.org/10.1080/00014788.2020.1770933 Update No. 2014-09-Revenue from Contracts with Customers (Topic 606) Section A- Summary and Amendments That Create Revenue from Contracts with Customers (Topic 606) and Other Assets and Deferred Costs-Contracts with Customers (Subtopic 340-40). (n.d.). Retrieved from https://www.fasb.org/jsp/FASB/Document_C/DocumentPage? cid=1176164076069&acceptedDisclaimer=true Willaytro, R. W. & Soehaditama, J. P. (2023). The Effect of Application of Revenue Recognition Based on Psak 72 on The Financial Performance of Infrastructure Companies Listed on The Idx in 2019 And 2020. Formosa Journal of Multidisciplinary Research (FJMR). Vol. 2 No. 4

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