Revenue Recognition
Monday February 7, 2005
Using different revenue recognition methods, unscrupulous managements can smooth earnings and deceive investors. This article introduces five methods and the influence each has on the financial statements of the issuing company. Read more...
Fw: Ben Moss 05.02.2008 11:37 am
NORWALK, CONN. — Responding to an increasingly piecemeal jumble of standards relating to revenue recognition, the Financial Accounting Standards Board has taken on a broad-reaching project that aims to clarify the accounting behind one of the most crucial numbers in financial statements.
“This is a big project,” said L. Todd Johnson, IASB senior project manager. “Revenue is a big number. Everybody’s got revenue, and it’s usually the biggest number in financial statements. It’s also the single largest category in causes for reasons of restatements. Revenue measures and revenue growth are important things to analysts. It’s an important number that cuts across industries.” This article was written nearly two years ago and it might be useful for the understanding of the actual article:
Strenghts
IAS 18.13 provides guidance on identifying the transaction (or components thereof) or transactions to which the revenue recognition criteria should be applied
IAS 18 provides that in order for revenue arising from the completion of a given transaction to be recognized, the costs associated with that transaction must be capable of reliable measurement
IAS 18 includes an Appendix of examples which provides guidance on applying the requirements of IAS 18 to determine the timing of revenue recognition in a number of commercial situations
IAS 18 allows revenue recognition based on the percentage-of-completion method allowing manufacturing companies to recognize revenue from products still in production
Weaknesses
IAS 18 only requires disclosure of the amount of each significant category of revenue recognized during the reporting period.
The guidance for distinguishing when an entity is acting as an agent and should recognise commission revenue rather than revenue from providing goods
Consignment sales allow for revenue to be recognized at a later stage- when the goods are resold by the consignee- therefore giving business incentive to delay recognition
IAS 18 does not recognize generation of revenue when there is an exchange or swap of goods or services of similar nature.
Fictitious sales are not necessary detected by the standard
Control issues when dealing with web-based companies’ transactions.
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