Question

A new historic revenue recognition procedure is about to go into affect. 1) Discuss the convergence leading up this event and the nature of accrual basis accounting. 2) Discuss under what conditions revenue recognition occurs, to include a compare/contrast of point of sale versus percentage of completion.

Answer 1

Revenue recognition is the combination of accrual accounting put together with the matching principle.

According to the principle, revenues are recognized when they are realizable, no matter when cash is received.

The new converged standard is a major achievement in efforts to improve financial reporting.

The new revenue guidance was issued as IFRS 15.

It was developed over the years with an objective to provide a more relevant framework for recording financial information and provide improved disclosures.

The convergence spanned out from 2002 to 2016.

2) Revenue can be recognized by an organization when a transfer of goods / services has occurred and reflects the consideration to which the entity expects to be entitled for such transfer.

In a point of sale method, the revenue is recognized when a contract comes into place and the sale of goods/ services is definite.

In a percentage of completion method, an estimated amount of percentage of work completed is determined based on the costs incurred till date and only proportionate revenue is recognized.