Question

Should the FASB overturn the software revenue recognition portion within ASC 985-605? As part of your explanation, consider whether firms will now have too much flexibility to manipulate revenues.

Answer 1

The financial accounting standards board in conjunction with international accounting standards board issued an update of accounting standards ASU(2014-09) revenue from contracts with customers in May 2014. Although much of the new standard is almost similar to existing guidance but there are number of important changes the new standard shall likely impact more companies reporting under GAAP and IFRS. One effected area is software revenue. As the standard is updated it uses different process to allocate the contract value and related discounts with the contract eliminating the need to establish vendor specific objective evidence it may give a result of more aggressive revenue recognition depending upon the company and contract specific factors. These changes can increase revenue substantially.

1)As per my opinion only some updations are required in the new standard and no need of overturning the revenue recognition portion.

2)If aggressive revenue recognition is followed there will increase in receivables. It also means recognising revenue too soon.

First, receivables growth higher than revenue growth can indicate manipulation and aggressive revenue recognition practices by the management. Revenues are of inferior quality if receivables growth is higher than revenue growth; otherwise, revenues are of good quality. As a result there may lack of quality. So inorder to rectify this a change must be brought soon or else there there will be a chance of aggressive revenue recognition manupilation.