Accounting Question

Main Topic: Revenue Recognition

Main Topic: Revenue Recognition

The FASB recently came up with new rules on revenue recognition. As accounting professionals, you have to use your critical thinking skills to decide whether these new rules are good or bad. The following are resources for your research.

1. General introduction and background on the topic on the FASB’s website

2. The Accounting Standards Codification and resources for using it.

3. Other resources that you can use.

This topic will be the basis for your literature review, thesis statement, outline and final paper.

How to organize your paper/outline

How to organize your paper/outline

• Introduce your topic – give a general background on the new revenue recognition rules
• Have your thesis statement – what is your opinion on the new accounting rules?
• What is the new rule proposed by FASB? When is the date? What are the latest updates?
• Why is the FASB doing this?
• How is it different/similar to the old rules
• Which industries are impacted?
• How will the new rules impact the financial statements?
• Who are the people affected (investors, accountants, auditors)? How?
• What are accounting and financial professionals saying about this?
• What is your conclusion on the new rules? Link it to the thesis statement.

Step 1: Upload your literature review here

Submit a 2 – 3 page literature review on revenue recognition rules. Your review should look at several sources:

Financial Accounting Standards Board

– to look for the background on the new rules and the latest updates

Presentation by the FASB

1. The Accounting Standards Codification (username and password below) – to look for the actual rules

The following resources can be used to check for industry voices and public opinion on the new rules.

1. Business Resource Complete database in our library (online data retrieval)
2. Wall Street Journal database in our library
3. Financial Times database in our library
4. Websites for the Big Four – they have good resources

A literature review usually starts with a thesis statement. You are looking for an argumentative thesis where you take a position and then argue for it.

Here, your position would be whether you think that the new rules add value or they don’t. That should be the focus of your literature review. Look for the uses/positives vs. the costs/negatives in your review. Have a general idea of your position, then compile the literature review.

Guidelines for a literature review:

https://content.bridgepointeducation.com/curriculum/file/5aae4fac-4c75-4151-b522-a59ce8336333/1/Lit%20Review%20Guide%20and%20Sample.pdf

https://www.une.edu/sites/default/files/Literature-Review-FOR-WEB-PAGE.pdf

Due date: September 11 (Already done see attached and base your work on it )

Accounting Standards Codification Access Code

Accounting Standards Codification Access Code

These credentials will be effective from September 7, 2022

Login Here:

http://www2.aaahq.org/ascLogin.cfm

Username – AAA52118

Password – QW7yb2B

How to use the codification

How to use the codification

How to use the Codification

Using the FASB Codification

Step 2: Submit your thesis statement here

You need an argumentative thesis statement, where you take a position and then set out the arguments for your position. This should be summarized in the thesis statement. For example:

High school graduates should be required to take a year off to pursue community service projects before entering college in order to increase their maturity and global awareness.

Here, your argument is that high schoolers should take a year off, and the reasons are to increase maturity and awareness.

Your thesis statement should clearly state whether the new rules add value, and then say why you think so in a concise form.

You will then expand in the outline and in the paper.

Resources for an argumentative thesis:

Argumentative Thesis Statements | Writing Skills Lab

Argumentative ThesisAs explained in Research, not all essays will require an explicitly stated thesis, but most argumentative essays will. Instead of implying your thesis or main idea, in an argumentative essay, you’ll most likely be…Excelsior College OWL

Due Date: October 1

Step 3: Upload your outline here

Draft an outline of your paper. You need to have brief descriptions of your proposed introduction, thesis statement the background of the issue, your arguments, and your conclusion. Remember, this is only an outline, not a detailed paper.

Types of outlines

How to create an outline

Components of a good outline

Due date: oct 27

Step 4: Upload your paper here

Please upload your completed paper (3 – 5 pages, 12 font, double spaced).

How to write a strong paper

Due Date: December 5 midnight

( CHATGPT IS NOT ALLOWED )

Literature Review on Revenue Recognition Rules: The New FASB Rule
Bassam Aldhabi
University of St. Thomas
Issues in Fin & Acct.
9/10/2023
Critical Literature Analysis: The New FASB Rule
Introduction
In the realm of reporting accurately determining and presenting revenue has always been a complex
undertaking. International Financial Reporting Standards (IFRS) and Generally Accepted Accounting
Principles (GAAP) serve as guidelines, for generating these reports (FASB, 2021). However there existed
variations in these regulations leading to difficulties in comprehension and analysis (FASB, 2021).
Consequently the Financial Accounting Standards Board (FASB) and the International Accounting
Standards Board (IASB) joined forces to establish a consistent system. In 2014 the FASB proposed a
regulation aimed at enhancing reporting by revising how businesses report their income. Industries such
as software and real estate which historically faced complexities in reporting greatly benefited from these
updated requirements (FASB, n.d.). The implementation of the FABS rule has positively impacted
reporting, by simplifying it compared to the previous GAAP and IFRS guidelines.
What is the New Rule Proposed by FASB? When is the Date? What are the Latest
Updates?
Stakeholders and investors rely heavily on revenue as an indicator of a companys performance and future
prospects. Revenue recognition was previously handled differently under GAAP and IFRS. Many experts
have expressed the need, for revisions in both sets of rules (FASB, n.d.). Consequently significant
progress has been made to enhance reporting since the announcement of principles by the IASB and
FASB on May 28 2014 for recognizing revenue in customer contracts (FASB, n.d.). However the existing
requirements for revenue recognition under ASC 605 GAAP and IFRS can be complex. Vary significantly
across industries (FASB, 2021). To simplify accounting and enable reporting for similar transactions
across industries the new guideline ASC 606 has been introduced.
Why is the FASB doing this?
The primary objective of the guidance is to achieve key goals related to reporting revenue from customer
contracts in financial statements. One of these goals is to provide users of statements with relevant
information. As Murphy (2015) explains, this involves disclosing details about the type, amount, timing
and unpredictability of income derived from arrangements. The guideline addresses issues, with current
revenue reporting standards in order to accomplish these objectives (Murphy, 2015). The new framework
enhances the reliability and strength of the system by addressing inconsistencies and weaknesses.
Moreover the guidance introduces disclosure requirements to enhance the credibility of statements (PwC,
2022). This update also ensures that users have access, to relevant information regarding income from
client contracts, which is crucial for making informed decisions (PwC, 2023). Additionally these
guidelines aim to simplify the process of financial statement creation for businesses (PwC, 2022).
Consequently the new rule by FASB reduces the number of references organizations need to consider
streamlining reporting procedures and improving efficiency.
Differences and Similarities Between FASB New Rule and Old Rules
When it comes to comparing FASBs rule (ASC 606) with regulations such as GAAP and IFRS there are
both similarities and differences. Like the guidelines this new rule provides accurate approaches to
financial reporting for organizations. However there are distinctions well. Previously businesses had the
option to choose between completed contract approach or percentage of completion technique when
accounting for long term contracts. The latter was preferred when accurate predictions were available
(AICPA 2018). With ASC 606 in place now there are two perspectives, on handling long term contracts.
First businesses must identify the tasks or outputs outlined in a contract. Assign them a monetary value
(Ernest & Young 2021). Secondly they need to determine when the consumer truly starts utilizing the
service or product. The timing of revenue, expenses and profits recognized for long term contracts could
be significantly affected by these changes. Additionally throughout the duration of the contract the
contractor must ascertain who has control, over the products and services mentioned in the agreement as
per ASC 606 (Ernest & Young 2021). Specifically they should break down the contract into its parts and
allocate a price for each transaction based on observed or estimated standalone sales prices (Ernest &
Young 2021). According to FASB guidelines (AICPA, 2018) revenue is recognized over time as opposed
to when control’s transferred if the client retains control throughout. The amount of revenue recognized in
relation to costs may vary depending on which performance obligation is being fulfilled due to
differences in profit margins, across requirements (AICPA, 2018). Consequently it’s not always
appropriate to use the percentage of completion method recommended previously when determining
when revenue should be recognized for the contract.
Industrial Impact
The new regulation is expected to have a ranging impact, on organizations involved in financial reporting,
goods and services as well as contracts involving non financial assets. It specifically requires recognizing
revenue for performance commitments that’re yet to be fulfilled, like software updates. This change is
likely to affect industries such as software and biotechnology. Unlike the rules that require proof for
future deliveries the new standard allows for estimates when final sale prices are yet to be determined.
These changes will influence how profits are recorded in terms of amount, timing and accuracy. It’s
important to note that these rules apply unless there are regulations governing agreements like insurance
policies or leases. In essence the new standards aim to ensure consistency and transparency in reporting
for all parties involved in transactions.
Impact on Financial Statements
According to Talley et al. (2023) this capability enables a understanding of a companys revenue
generating activities. The authors also mention that the new rule will simplify the comparison of
performance, among businesses for readers of financial statements. The objective of the revised
guidelines on revenue recognition from contracts with customers (Trainer, 2019) is to enhance reporting
by providing clearer more consistent and more informative insights into a companys revenue related
operations. These guidelines aim to eliminate inconsistencies improve comparability refine disclosure
requirements and streamline the preparation of statements.
Effect on Different People
Auditors and accountants should consider that following the implementation of the FASB revenue
recognition rule it may only become clear at a date what exact amount of revenue can be expected from
customers. Variable considerations like adjustments for product returns could arise (FASB, 2022). For
instance manufacturers in the semiconductor industry face a risk of product returns due to obsolescence
since they rely on distributors, for selling their goods (FASB, 2020).
Investors who have a stake, in these businesses should closely monitor how efficiently cash is converted
and the accuracy of managements future revenue estimates. This is because there may be uncertainties in
pricing and product returns in the coming periods.
The Opinion of Accounting and Financial Professionals
professionals and institutions have shared their opinions on the new FASB rule. For instance Deloittes
recent publication by Talley et al. (2023) suggests that businesses will need to make changes to their
current revenue management approaches to comply with the FASB/IASB principles. Talley et al. (2023)
emphasize the importance of a coordinated company effort to facilitate this transition. If companies fail to
recognize the significance of these rules delay their implementation or don’t allocate resources they might
face additional challenges as stated by Talley et al. (2023). Therefore it is crucial for businesses to create a
plan for revising their revenue recognition process from the up perspective. Furthermore Trainer (2019) in
a piece advises investors to remain vigilant about companies that experience changes in their income
statements due, to new regulations.
According to Trainer (2019) the implementation of the regulation has had an impact, on software
businesses that have been studied so far even though there is limited data available due to various
disclosure procedures. It is expected that after a year the distorting effect of the rule will decrease, which
is news for investors (Trainer, 2019). Therefore while experts believe that the Financial Accounting
Standards Boards (FASB) new rule could improve reporting for companies they advise investors to
monitor how the regulation will be applied to individual businesses.
Conclusion
In conclusion the implementation of the FASB rule by GAAP and IFRS has had an impact on financial
reporting by simplifying older financial regulations. This marks a milestone in accounting history with
regards to revenue recognition. By providing a transparent framework for recognizing revenue in
customer contracts it aims to address the challenges and uncertainties that previously existed between
GAAP and IFRS. The new regulation introduces changes by requiring businesses to establish
performance requirements and appropriately allocate transaction fees. While it streamlines revenue
recognition and adds value in aspects it also brings complexities for long term contracts, which may have
significant implications, on cash inflow and outflow timings. According to the law there is a requirement
to distribute money for performance commitments and allow for estimated selling prices. This has an
impact, on industries such as software and biotech. However it’s important to note that the effects of these
changes may vary across industries highlighting the need for research. While the new FASB revenue
recognition regulation is expected to enhance reporting its specific impact can differ from one business to
another. Therefore investors should remain vigilant. Consider how these changes may affect their
investments.
References
AICPA (2018). New revenue recognition accounting standard—Learning and implementation
plan.
https://us.aicpa.org/content/dam/aicpa/interestareas/frc/accountingfinancialreporting/reve
nuerecognition/downloadabledocuments/2014-09_liplan.pdf
Ernest & Young (2021). To the Point – FASB issues guidance on accounting for revenue contracts
acquired in a business combination. https://assets.ey.com/content/dam/ey-sites/eycom/en_us/topics/assurance/accountinglink/ey-ttp14208-211us-11-012021.pdf?download
FASB (n.d). Revenue recognition. https://www.fasb.org/revrec#section-4
FASB (2020). Accounting standards update no. 2014-09, revenue from contracts with customers
(Topic 606). https://www.fasb.org/document/blob?fileName=FIF_ASU_201409_Revenue_from_Contracts_with_Customers_(Rev_6-3-20).pdf
FASB (2021). Topic 606 revenue from contracts with customers opportunities for research.
https://www.fasb.org/Page/ShowPdf?path=Academic_Webinar_Revenue.pdf&title=Acad
emics%20Webinar%20-%20Revenue%20-%20Slide%20Deck
FASB (2022). Post-implementation review of topic 606, revenue from contracts with customers.
https://fasb.org/document/blob?fileName=REVPIR%20BMHO20220921.pdf
Murphy, M. (2015). FASB updates revenue recognition rules to reflect delay. The Wall Street
Journal. https://www.wsj.com/articles/BL-CFOB-8868
PwC. (2023). 3.2 ASC 606 five-step model.
https://viewpoint.pwc.com/dt/us/en/pwc/accounting_guides/healthcare/health_care_guide/chapter_3_revenue/3_2_asc_606.html
Talley, J., Knachel, E., & Anderson, B. (2023). The new revenue recognition accounting
standard. Deloitte. https://www2.deloitte.com/us/en/pages/technology-media-andtelecommunications/articles/new-accounting-guidance.html
Trainer, D. (2019). How companies implemented the new revenue recognition standard. Forbes.
https://www.forbes.com/sites/greatspeculations/2019/10/10/how-companiesimplemented-the-new-revenue-recognition-standard/?sh=472729cc920e
.