Question

Explain the current environment regarding revenue recognition.

Short answer

“Revenue from Contracts with Customers” is the new standard of revenue recognition. Now it applies to a wide range of transactions and industries.

Step-by-step solution

Improvement of GAAP and IFRS

The FASB and IASBbelieved that the new standard “Revenue from Contracts with Customers”will improve the GAAP and IFRS by

(a)Providing a more robust framework for addressing revenue recognition issues.

(b)Improving the comparability ofrevenue recognition practices across entities, industries, jurisdictions, and capital markets.

(c)Simplifying thepreparation of financial statements by reducing the number of requirements to which companies must refer.

(d)Requiring enhanced disclosures to help financial statement users better understand the amount, timing, and uncertainty of revenue that is recognized.

As a result, comparability and consistency in reporting revenue should be enhanced.

Asset-liability approach

The new standard adopts anasset-liability approach. It recognizes and measures revenue based on changes in assets and liabilities. Focusing on it brings more discipline to the measurement of revenue.

Companies analyze contracts with customers because contracts initiate revenue transactions. Contracts indicate the terms of the transaction, provide the measurement of the consideration, and specify the promises that each party must meet.

Recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the company’s consideration, or expects to receive, in exchange for these goods or services.