Question

The revenue recognition model promises to provide a coherent and consistent revenue recognition framework for all companies to follow. Do you agree? Explain. (hint: you may wish to discuss the advantages and disadvantages of the model)

Answer 1

Yes, the revenue recognition model promises to provide a coherent and consistent revenue recognition framework for all companies to follow because it clearly specifies a 5 step process by which revenue is recognized in the financial statements in respect of contracts entered into with the customers. Such 5 steps are shown below-

1) Identification of contract with the customer

2) Identification of individual performance obligations within the contract

3) Determination of the transaction price

4) Allocation of the transaction price to the performance obligations

5) Recognition of revenue on fulfilment of performance obligations

Advantages of revenue recognition model-

1)This revenue recognition model has given more robust, relevant, comprehensive and informative disclosures for the users of financial statements, which ultimately helps in enhancing the understandability of the financial statements.

2) It facilitates better transparency in recognising revenue in financial statements, which has ultimately resulted in better financial reporting of the affairs of a reporting entity.

3) It has also increased comparability of the financial statements because after this new revenue recognition standard, every entity is following the same standard for recognising revenue in its books, thus, resulting in global uniformity, consistency and comparability.

4) This revenue recognition standard also helps to avoid financial volatility for a business entity, as it contains specific provisions, which are applicable to the situations of uncertainty in respect of future revenue recognition.