Question

Explain the Revenue Recognition Principle and provide a concise presentation of the most recent approaches regarding its content and application. (word limit, 500 words).

Answer 1

Answer Revenue recognition is a generally accepted accounting principle (GAAP) that identifies the specific conditions in which revenue is recognized and deterrnines how to account for it. Typically, revenue is recognized when a critical event has occurred, and the dollar amount is casily mcasurable to the company. Revenue recognition is a generally accepted accounting principle (GAAP) that stipulates how and wheri revenue is to be recogriized. The revenue recognition principle using accrual accounting requires that revenues are recognized wheri realized arid earried-not when cash is received. The reveriue recognition standard, ASC 606, provides a uniform framework for recognizing rcvcnuc from contracts with customers. Understanding Revenue Recognition Revenue is at the heart of all business performance. Everything hinges on the sale. As such, regulators know how tempting it is for companics to push thc limits on what qualifics as revenuc, especially when not all revenue is collected when the work is complete. The revenue recognition principle of ASC 606 requires that revenue is recognized when the delivery of promised goods or services matches the amount expected by the company in exchange for the goods or services. The revenue recognition principle, a feature of accrual accounting, requires that revenues are recognized on the income statement in the period when realized and earned-not necessarily when cash is received. Realizable means that goods or services have been received by thc customer, but payment for the good or service is cxpccted later. Earncd rcvcnuc accounts for goods or services that have been provided or performed, respectively. The revenue generating activity must be fully or essentially complete for it to be included in revenue during the respective accounting period. Also, there must be a reasonable level of certainty that earned revenue payment will be received. Lastly, according to the matching principle, the revenue and its associated costs must be reported in the same accounting period. Special Considerations On May 28, 2014, the Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) jointly issued Accounting Standards Codification (ASC) 606, regarding revenue from contracts with customers. ASC 606 provides a uniform framework for recognizing revenue from contracts with customers. The old guidance was industry-specific, which created a system of fragmented policies. The updated revenue recognition standard is industry-neutral and, therefore, more transparent. It allows for improved comparability of financial statements with standardized revenue recognition practices across multiple industries. There are five steps needed to satisfy the updated rcvcnuc recognition principle: 1. Identify the contract with the customer. 2. Identify the contractual performance obligations. 3. Determine the amount of consideration/price for the transaction. 4. Allocate the determined amount of consideration/price to the contractual obligations. 5. Recognize revenue where the performing party satisſies the performance obligation.