Question

The new revenue recognition is likely to have a significant accounting and reporting impact particularly for the manufacturing industry. Use this section to articulate why this assertion might be accurate. Justify your rationale with an accounting example supported with figures.

note: Please provide a reference

Answer 1

The new revenue recognition method significantly impacts the accounting and reporting of financial statements mainly in the area of manufacturing industry.

The reason for the above is:

Long time duration of completion of a project.

Change in the price terms during the period of work.

Sometimes there is possibility that contract may not be compeleted.

During the term of contract it is realsiable that the cost that conpany will incur is more than revenue.

Dis continue of work due to various factors.

The accounting example for new revenue recognition criteria effects .

There are various methods of revenue recognition.Here we considering two methods mainly for comparison

1. Revenue recognition on completion of sale.

2. Revenue recognition on percentage completion of work.

Example:

suppose X company has a 2 years contract with A company.The estimated cost is 50 lakh dollars and agreed contract is for 80 lakh dollars.For the first year 50per of work was completed and incurred 30 lakh dollars .There is no change in any estimated cost.The revenue recognition under two methods is as follows

Percentage completion method

Revenue to be recognised =80 lakh $*30lakh$\50lakh$=$48 lakhs

in sale method :

Here the contract will not put to use until comoletion and cant be sold in parts no revenue is recognised .The total revenue is recognised on completion date.