Company accounting ' Revenue recognition and UITF 40. By Nichola Ross Martin

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Revenue recognition has always been a hot topic for company accountants; most investors regard growth in revenue as a key performance indicator. Conversely the opposite has applied in the accounts of the self-employed and partnerships ' revenue growth generally leads to a higher tax bill, and as such these type of entities find it generally desirable to minimise profits by not recognising revenue if it is legally possible.

Companies are required to follow the accounting requirements of SSAP 9 ' Stocks and long term work in progress and additionally to look to FRS 5 which deals with "Reporting the Substance of Transactions", when they review their on-going revenue contracts at the year end. Historically, SSAP 9 and FRS 5 have not ensured that all companies have been consistent in their appro...

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18th Jun 2008 09:59

IAS18 prons cons
How hard can it be to recognize revenue? As the rules struggle to keep pace with evolving technologies and advanced business models, technology companies are under pressure to ensure compliance and transparency. Who can help us and get the actual solution ? I have added the following which could really get us back to fundamental issues with IAS 18 and the actual application of the same.

Fw: Ben Moss 05.02.2008 11:37 am

NORWALK, CONN. -- Responding to an increasingly piecemeal jumble of standards relating to revenue recognition, the Financial Accounting Standards Board has taken on a broad-reaching project that aims to clarify the accounting behind one of the most crucial numbers in financial statements.

"This is a big project," said L. Todd Johnson, IASB senior project manager. "Revenue is a big number. Everybody's got revenue, and it's usually the biggest number in financial statements. It's also the single largest category in causes for reasons of restatements. Revenue measures and revenue growth are important things to analysts. It's an important number that cuts across industries." This article was written nearly two years ago and it might be useful for the understanding of the actual article:

Strenghts

IAS 18.13 provides guidance on identifying the transaction (or components thereof) or transactions to which the revenue recognition criteria should be applied
IAS 18 provides that in order for revenue arising from the completion of a given transaction to be recognized, the costs associated with that transaction must be capable of reliable measurement
IAS 18 includes an Appendix of examples which provides guidance on applying the requirements of IAS 18 to determine the timing of revenue recognition in a number of commercial situations
IAS 18 allows revenue recognition based on the percentage-of-completion method allowing manufacturing companies to recognize revenue from products still in production
The standard promotes comparability among the financial reports of Australian entities.


Weaknesses

IAS 18 only requires disclosure of the amount of each significant category of revenue recognized during the reporting period.
The guidance for distinguishing when an entity is acting as an agent and should recognise commission revenue rather than revenue from providing goods
Consignment sales allow for revenue to be recognized at a later stage- when the goods are resold by the consignee- therefore giving business incentive to delay recognition
IAS 18 does not recognize generation of revenue when there is an exchange or swap of goods or services of similar nature.
Fictitious sales are not necessary detected by the standard
Control issues when dealing with web-based companies’ transactions.

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By Taxi
26th Sep 2006 12:36

Yes Trevor, it is all something of a mystery to me also.
THe primary factor (I think) is the desire to try and persuade all entities to report turnover in the same way. The problem with big companies is that they want to show as much as possible, the problem with the smallest entities is that they want to pay as little tax as possible and so not recognise revenue.

I personally always thought that there was something wrong whereby one business would accrue a charge for the cost of another, and that other would not then include a revenue accrual in its own books equal to that charge.

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