Question

FUTURE OF REVENUE RECOGNITION

I. Do the new standards increase comparability across industries and capital

markets?

II. Do the new standards provide better disclosure, so investors and other

users of financial statements better understand the economics behind the

numbers?

III. Possibility of Fraud with new FASB standards

Answer 1

(I): Yes, the new FASB standards do increase comparability across industries and capital markets but in a limited manner. This is because the new standards aim to remove all possible inconsistencies as well as weaknesses in the existing revenue requirements. Comparability will improve across industries and capital markets as the new standards will lead to providing better information to investors and to different external users of financial information. As disclosure requirements are improved so will the comparability also improve. One of the difficulties that the new standards will create is that there will be difficulties with regards to determining trends because the change in revenues will be partly due to change in accounting as well besides being due to change in price and/or volume.

(II): Yes, the new FASB standards do provide better disclosure, so investors and other users of financial statements better understand the economics behind the numbers. This is because the new standard is based on a principles-based approach and there will be extensive qualitative and quantitative disclosures. Companies will also have to improve their disclosures and this will ensure that investors and other users of financial statements better understand the economics behind the numbers.

(III): Possibility of fraud will reduce significantly with the new FASB standards. This is because the decision as to when to recognize revenue is being simplified. Moreover companies will provide meaningful prior-year comparisons and disclosures that explain the accounting treatment of key business transactions. The five steps process of revenue recognition will ensure that possibility of fraud is minimized. The five steps are - determining the presence of a contract governed by the standard, identifying the promised goods or services, determining the transaction price, allocating the transaction price to performance obligation and determining when to recognize revenue.