ACCT 531 Financial Reporting I

Fall 2016

Tuesday/Thursday 13:30-2:45

Yi Tzu Tan

Introduction:

Revenue is one of the significant measures used by investors to know and analyze a

companys performance and finance. There are two different guidance of revenue recognition

in GAAP and IFRS, and many believe that both need to be improved. Under GAAP, there are

more processes and requirements for certain transactions and industries as doing revenue

recognition. Even though the economic transactions are similar, the accounting methods are
applied differently from industry to industry. On May 28, 2014, the Financial Accounting

Standards Board and the International Accounting Standards Board jointly released an

Accounting Standards Update (ASU) which has to be followed as recognizing revenue in

contracts with customers.

Purpose:

The FASB lists five purposed of the new guidance. Firstly, it is to decrease

inconsistencies and weaknesses in existing revenue requirements because there are different

requirements under different guidance. To provide a firmer framework for addressing revenue

issues is one of the reasons. As we know, GAAP and IFRS are two main accounting

disciplines. To improve the comparability of revenue recognition practices across individuals,

companies, industries, and the markets, The Board put a lot of effort into it. What is more, it

is always important to provide more reliable and relevant information to users of financial

statements via improved disclosure requirements. Finally, to reduce the cost of the

preparation of financial statements by sizing down the number of requirements which are

mandatory is why it is in need of modifications.

Impact:

As I mentioned before, the guidance was applied differently from industry to industry.

The requirements under GAAP are more complicated, especially, for specific transactions and

industries. To provide trusty and reliable financial reporting, accountants should spend time

understanding the new changes and apply it correctly. There are five new steps of revenue

recognition process. Because the new standard removes the specific guidance which is

currently under GAAP for transactions and industries, for accountants, the first step is to

identify the contract and then understand the obligations of the contract. Under ASU 2014-09,

accountants should be aware of that it generally allows to recognize revenue ahead with

variable consideration which is likely to occur before it preforms. Thus, accountants should
have a good sense of judgment to classify variable considerations. By using standalone

selling price to allocate the transaction in the contract, if the price is unknown, ASU 2014-09

allows it to be estimated after discussing any proper methods to employ. The new guidance

rules that revenue is recognized when the control of the asset or the service is transferred to

the customer. However, under GAAP, revenue is recognized when the risks and the

ownership are transferred.

Without a doubt, the new standard has an influence on the way that accountants do every

day-to-day accounting and even the way contracts and business are conducted with

customers. To let the entities have sufficient time to be more complete, The Board decided to

put off the effective date of the new guidance by one year. The annual reporting period of

public business entities, certain entities which are not for profit making begins after

December 15, 2017. For certain employee benefit plans, the amendment is also effective after

December 15, 2017. Interim reporting periods within annual reporting periods starts after

December 15, 2019. There is a different effective date of an annual reporting period

beginning after December 15, 2016 with the different reporting period of interim reporting

periods.

Conclusion:

There is no doubt that entities need accountants professional judgement to clearly

define when and how to value the performance in the contacts. Since the FASB and the IASB

issued the new guidance, accountants should be aware of the different effective of date to

apply and the improvements. To provide relevant information, it is important for internal

users to make a decision to make the entity better and important for external users to invest.
Reference:

G. (Ed.). (2016, January 6). Evaluating the Impact of ASU 2014-09. Retrieved October 23,

2016, from http://www.njcpa.org/stay-informed/topics/article/2016/01/06/evaluating-the-

impact-of-asu-2014-09

Update 2015-14Revenue from Contracts with Customers ... (2015, August). Retrieved

October 23, 2016, from http://www.fasb.org/jsp/FASB/Document_C/DocumentPage?

cid=1176166272502&acceptedDisclaimer=true

New Revenue Recognition Learning and - AICPA. (2016). Retrieved October 23, 2016, from

https://www.aicpa.org/InterestAreas/FRC/AccountingFinancialReporting/RevenueRecognitio

n/DownloadableDocuments/2014-09_LIPlan.pdf