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Revenue, after earnings, is one of the most scrutinized figures on the financial statements. For that reason the actual project on revenue recognition led commonly by the IASB and the FASB should retain all our attention. Revenue is a key figure for two main reasons. First, it is the first line of the income statement and therefore will set the tone of the analysis. Second, the growth in revenue will be the first assumption underlying analysts' forecasts. Therefore assessing accurately revenue is necessary to evaluate a firm properly (Dobler, 2007, pp.23).
Various accounting professionals as well as company executives have had conflicting regarding the revenue recognition project. In most cases, revenue can be seen as a product of price times quantity sold over the period reported. Whereas quantity can be easy to determine, the price to use in the equation can be much more complex to find and audit. Aristotle was the first to acknowledge the existence of two values: a trading-value and a utility-value. The utility-value is the amount of consideration (currency units) a person would be willing to pay for a product given the utility he has for it while the trading value is the amount for which this same good would be traded on the market. It is obvious that the two values are intertwined but they can differ on practice.
The revenue recognition project led by the IASB reaches the same conclusion. Two models can be used to account for revenue: a fair value model and a consumer based model. The choice of the model will impact significantly the financial statements especially when accounting for long term contracts and multi elements contracts. While many accounting professionals agrees with the proposals made by FASB and IASB about Revenue Recognition in calculating different profit margins, other professionals are of different opinions. Different range of views emerges as a result of the technicalities of the laid down rules in suiting different nature of business.
Nobes (2006) agrees on the proposal of price inter-dependence. It however needs to be further refined as contracts to be combined together for revenue recognition purposes. Other "none-price" factors such as the nature and inter-relationship between the services and goods supplied should be considered as independent entities. The guidelines should therefore be broadened to accommodate range of factors taken into account when recognizing revenue. Situations requiring a single contract to be segmented will be a rare practice. Regarding the proposal to identify separate performance obligation within a contact on the basis of whether the promised goods or services is distinct, Nobes (2006) suggests that it should be qualified to another entity within the same industry .It would not be practical for such an entity to look at the business practices of entities in a different industry but the vice versa is true (pp.86).
The proposed control model for revenue recognition interprets to important shift from the existing 'risks and rewards". The shift is likely to bring up different reported revenue numbers for entities that have been adopting the percentage-of-completion method in recognition of revenue. The Boards have not defined extensively the "control" model to ensure that results are more consistent as compared to "risks and rewards" model. Revenue should be recognized using an estimated transaction price in situations where transactions entail variable considerations.
To pre-empt earning manipulation, the price estimation must be based on verifiable assumptions based on experience with similar contracts. Probability-weighted measurement approach that is proposed by ED is conceptually consistent with the approach that the IASB is adopting on its ongoing project to revamp IAS 37. The Board should re-consider the position of not making an exception for the allocation of discounts in a contract. Economic of transactions might not be reflected by allocation of discounts on the basis stand-alone selling price (Wüstemann & Kierzek, 2005, pp.106).
There arises concern on the consistency of the asset recognition stated with the revised work definition of an asset developed under the joint IASB_FASB conceptual framework project. The Boards definition does not specify cost recoverability as a condition for an asset to exist. The disclosure requirements are new to emerging businesses and they need to evaluate whether their existing financial reporting system are capable of providing the necessary information for compliance with the proposed disclosures. A license to use as entity's intellectual property (IP) if it is not considered to be an IP sale entails the granting of a "rights to use" asset by the IP owner to the IP user, and ipso facto, amounts to a leasing arrangement. It is thus appropriate to consider the accounting for IP licenses under the scope of the joint lease project. The proposal to align the accounting for gain or loss on the sale of non financial assets with the proposed revenue recognition model if the IASB decides to issue the ED as a new revenue standard to supersede IAS 18 would ensure conceptual consistency with the IFRS.
There exist various challenges as well as ethical issues that surround the implementation of the project. The first choice is the one of the paradigm used in order to measure revenue. Two paradigms are possible: the Asset - Liability and the Revenue - Expense. Under the first paradigm the object measured is the change in net assets of the company. In that case, revenue is recognized when a liability decreases or an asset increases. The balance sheet measures the wealth of the firm and the income statement reflects the changes of this wealth. This paradigm gives a perfect picture of the balance sheet at a given date but does not separate revenue from gain. For that matter, the income statement is more volatile and does not reflect only the wealth directly generated by the firm ongoing operations (Wüstemann & Kierzek, 2006, pp.106).
Under the proposed model, an entity will allocate the transaction price to separate performance obligations within a contract based on the relative stand-alone selling price of each obligation. The stand-alone selling price should represent the price an entity would be willing to sell a good or service on a stand-alone basis at contract inception (i.e., the price an entity would charge in the absence of the bundled arrangement). The best evidence of stand-alone selling price available to the entity is if a good or service is actually sold on a standalone basis. To the extent the entity does not separately sell a good or service, the entity may look to others in the market who sell a similar good or service, or the entity will need to estimate the stand-alone selling price based on other information.
Under the proposed model, an onerous performance obligation will be premeasured in a manner consistent with the trigger that caused the onerous determination. Regardless of whether the Board ultimately selects the cost test or the current price test for purposes of this re-measurement, there may be a considerable number of practice issues if revenue contracts are subject to this evaluation. Under the proposed model, an onerous performance obligation will be premeasured in a manner consistent with the trigger that caused the onerous determination. Regardless of whether the Board ultimately selects the cost test or the current price test for purposes of this re-measurement, there may be a considerable number of practice issues if revenue contracts are subject to this evaluation (Barlev, 2011, p.31).
Then, after having chosen the Asset - Liability paradigm the Boards are facing the second question: When to measure? This question is the hardest one. On the above example different solutions would be possible. The main difficulty is to choose when to allocate the discount given to the customer. The same issue would arise if the company was selling its services above the market price.