The update about revenue recognition is a result of the ongoing convergence between FASB and IASB. Both accounting bodies have different rules and guidelines on how to report revenue. Under each body, there are different standards for various kinds of revenue. The FASB has topic 605 (Revenue Recognition). The IASB has IAS 18 (Revenue) and IAS 11 (Construction Contracts). The result was absence of uniformity in revenue recognition method across industries and geographical locations. The update was created to minimize these differences between FASB and IASB, and provide a general framework for reporting revenue that can be used across different industries and geography. According to FASB and IASB, below are the objective of the update
• Remove …show more content…
The update was announced on May 28, 2014 and can be accessed online on the FASB and IASB website. For FASB, it is topic 606 and IASB is IFRS 15 Revenue from Contracts with Customers. The implementation will be after December 15, 2016 for public companies and after December 15, 2017 for nonpublic companies. This update will affect all public and private entities.
1.1 Why the update on revenue recognition?
One might wonder why the FASB and IASB decide to start their convergence process by addressing the revenue recognition standards. The answer is simply the complexity and difficulties involved in revenue recognition. It is the one area that is prone to error the most. This is not due to stupidity or lack of attentiveness, it is imply the nature of revenues.
To support the claim that revenue recognition is complex, the IASB shared a study done by RevenueRecognition.com, a website that educates the finance professionals on revenue related issues. It conducted a survey of 652 senior finance executives of which 511 were US based and 141 internationally based. The following questions were asked:
• In your business, which process is the most complex to …show more content…
Having inconsistent thresholds for revenue recognition, resulting in different allocations across periods and sometimes bringing along different cost (expense) recognition models, was making comparability more challenging without enhancing the communication aspects of standards. So revenue recognition became an area that needed a reset, and it’s a pretty radical one – sweeping away all the different pieces of industry-specific guidance and replacing them with one
• Remove …show more content…
The update was announced on May 28, 2014 and can be accessed online on the FASB and IASB website. For FASB, it is topic 606 and IASB is IFRS 15 Revenue from Contracts with Customers. The implementation will be after December 15, 2016 for public companies and after December 15, 2017 for nonpublic companies. This update will affect all public and private entities.
1.1 Why the update on revenue recognition?
One might wonder why the FASB and IASB decide to start their convergence process by addressing the revenue recognition standards. The answer is simply the complexity and difficulties involved in revenue recognition. It is the one area that is prone to error the most. This is not due to stupidity or lack of attentiveness, it is imply the nature of revenues.
To support the claim that revenue recognition is complex, the IASB shared a study done by RevenueRecognition.com, a website that educates the finance professionals on revenue related issues. It conducted a survey of 652 senior finance executives of which 511 were US based and 141 internationally based. The following questions were asked:
• In your business, which process is the most complex to …show more content…
Having inconsistent thresholds for revenue recognition, resulting in different allocations across periods and sometimes bringing along different cost (expense) recognition models, was making comparability more challenging without enhancing the communication aspects of standards. So revenue recognition became an area that needed a reset, and it’s a pretty radical one – sweeping away all the different pieces of industry-specific guidance and replacing them with one