Question

Please provide a description of the following topics and their significance to US GAAP for each topic:

- Revenue recognition

- Leases

- Full disclosure (segment reporting and subsequent events)

Answer 1

1)Revenue Recognition:

Revenue Recognition is one of the principles of Generally Accepted Accounting principles (GAAP) which determines when and how to recognise the Revenue. According to the principle of Revenue Recognition, the revenue of a company is reccognised when revenues are realised and earned but not when cash is received. Goods may be sold in 1 month but the cash may be received in another but. In suach a case the revenue is to be recorded in the financial accounts in the month of goods sold but not in the month of Cash received.The Revenue Recognition principle is to be followed by the company consistently for all the financial years so that there can be a comparision between the financial years. According to the Matching principle the earned revenue and costs assosciated with it should be reported in the same accounting period to get the accurate results.

Significance of Revenue Recognition:

If the revenues are not accounted accordingly when it is recognised the results from the financial statements will differ and results into wrong analysis of the financial statements. Suppose a prepaid rent for 12 months is received and you have recognised it as a revenue in the period of cash receipt it shows overvalued income which is not an actual income for that particular period. When prepaid rent is received it is treated as liability in balance sheet and recognised when the rent gets accrued in order to get the fair results of the financila statements.The principle should be followed consistently for a particular industry fo all the financila years and retrospectively which provides us to compare the income statrement for different years and review the financila trends and also compare between the companies across the specific industry.

2)Leases:

Lease is one of the important Accounting Principles of GAAP. Lease contains 2 parties. One is the Lessor and the other is the Lessee. Lessor is the one who sells the asset while Lessee is who utilises the asset for a particular lease period who pays the periodical rentals. Leases are of two types. Operating Lease and Finance Lease.

Operating Lease: Operating Lease is the short term contract between the lessee and the lessor to rent an asset for a short term period may be less than one year. It is just like asset rentals. It i s recorded as an asset rent in the income statement of the lessee and in the books of lessor Interest revenue and depreciation in income statement and Leased asset in balance sheet.

Finance Lease: The long term contract between the lessor and the lesse for a longer period but less than the useful life of an asset to rent an asset. where the ownership of the asset lies with the lessor but have the right to gain the ownership by the lessee at the end of the lease term. It is recorded as lease receivables reduced by book value of leases asset in balance sheet , interest revenue in Income statement in the books of lessor and in the books of lessee leased asset and leased payable , Interest and depreciation in income statement.

Significance of Leases to US GAAP:

Accounting of Lease contract is very much important for both the lessor and lessee to know the true and accurate financial reports. It have an impact on Balnce Sheet, Income Statement and Cash flow statements. For earlier years Net income assets and liabilities and cashflows will be higher in Operating leases when compared to the finance leases.But, Net income, asset and liabilities and cash flows will be higher in finance lease when compared to operating leases in case of later years even though total income and total cashflows remains same in both the leases. In later years Debt to asset ratio, debt to equity ratio, return on assets and return on equity will be higher in finance leases. while Asset turnover ratio, fixed asset turnover ratio, working capital and current ratio will be higher in operating lease.

3)Full disclosure (segment reporting and subsequent events) and its significance to US GAAP:

Full Disclosure is one of the major Accounting Principles, requires that all the information present in the financial statements should be fully disclose the material facts to provide the fair financial statements for the users. This Principle requires various to be made for a particular organisation such as Assets,Inventory, Equity share, creditor claims, Fair values, Taxes, Contingencies and commitments, changes in accounting principles, segment reporting, Subsequent events and so on.

Segment Reporting:

An Organisation may be divided into various entities or operating segments. So in order to get the segment wise analysis of financila statements segment reporting is required.According to the US GAAP public companies must report a segment if it accounts for 10% of total revenues or profits or total assets. If a company is having entities in more than one country it requires to report segmentwise to know the performance of each entity and to take necessary actions accordingly for the uture financial years. It should disclose of much of incomes and expenses of a particular segment has been generated in the consolidated financial statements and also the assets and liabilities that are realted to that particular segment froma consoliadated financial statements.

Subsequent Events:

Subsequent events are those events which occur between the date of preperation of Balance sheet and the date of issuance of financial statements. This principle tells us how to diclose such events.

Subsequent Events are of two types

a)Events that provides the evidence about the existence of conditions at balance sheet date and inherent in the process of financial statements. - Such events should be recognised in the financila statements.

b)Events that dies not have any evidence at the time of balance sheet date but arose after the date. This is a non recognised subsequent event. - Such events should not be recognised in the financial statements.

Disclosure should be made of the date theough which subsequent evens are raised whether date of financial statements issues or available to issue. Non recognised subsequent events must be disclosed to give the fair and true values of the financial statements to the user. In suchh cases the company should disclose the nature of the event , estimate of its financial effect, or the statement if an estimate cannot be made.