Question

Because each industry typically has a different method for recognizing income, revenue recognition is one of the most difficult tasks for accountants, as it involves a number of ethical dilemmas related to income reporting. To provide an industry-wide approach, Accounting Standards Update No. 2014-09 and other related updates were implemented to clarify revenue recognition rules. The American Institute of Certified Public Accountants (AICPA) announced that these updates would replace U.S. GAAP’s current industry-specific revenue recognition practices with a principle-based approach, potentially affecting both day-to-day business accounting and the execution of business contracts with customers.^{1 (Links to an external site.)}What are the requirements of the AICPA and the International Federation of Accountants (IFAC) for professional accountants in regards to new accounting rules and methods of accounting for different transactions, including revenue recognition.

Answer 1

For every Accountants he/she have to follow some set of principles laid by the Top Regulators for regulation of Accountants and here we have AICPA & IFAC where they have defined some Code of Conduct for Accountants they have to follow 6 mentioned principles:

(1) Responsibilities- Accountants have a responsibility to use professional and moral judgement in all their activities.

(2) Serve the Public Interest- Accountants must act in a way that serves the public interest.

(3) Integrity- Accountants must perform all work with a high sense of integrity which is an important character trait in this profession. It is a way of determining what is right and just.

(4) Objectivity and Independence- Accountants have to remain objective and cannot get to close to a client. They must also remain independent of their clients with no conflicts of interest.

(5) Due Care- Due care requires a member to plan and supervise adequately any professional activity for which he or she is responsible.

(6) Scope and Nature of Services- Accountants in public practice should observe the Principles of the Code of Professional Conduct in determining the scope and nature of services to be provided.

Revenue and expense recognition timing is critical to transparent financial presentation. GAAP governs recognition for publicly traded companies. Even though GAAP is required only for public companies, to display their financial position most accurately, private companies should manage their financial accounting using its rules. Two principles governed by GAAP are the revenue recognition principle and the matching principle. Both the revenue recognition principle and the matching principle give specific direction on revenue and expense reporting.

The revenue recognition principle, which states that companies must recognize revenue in the period in which it is earned, instructs companies to recognize revenue when a four-step process is completed. This may not necessarily be when cash is collected. Revenue can be recognized when all of the following criteria have been met:

• There is credible evidence that an arrangement exists.
• Goods have been delivered or services have been performed.
• The selling price or fee to the buyer is fixed or can be reasonably determined.
• There is reasonable assurance that the amount owed to the seller is collectible.