REVENUE RECOGNITION PROCESS

The Revenue Recognition Process

The Revenue Recognition Process

IAS 18 and IAS 11 are basic guidelines that effect the various instrumental tools for accounting treatments. Based on revenue determination of a given enterprise, the rules ensure that process of understanding the standard revenue of a certain company is the successfully achieved. The IAS 18 rule is mostly prevalent with accounting concerning enterprise performance particularly by shading light on the sale of goods, rendering of services and royalties among others, while IAS 11 helps the construction companies to develop knowledge useful for countering deficiencies witnessed in the accounting process of its construction contracts. The combination of IAS 18 and IAS 11leads to comprehensive accounting treatment process involving measurement, recognition, disclosure and initial measurement of the process of revenues for various business entities. The paper discusses the essential accounting principles by recommending on the suitable treatment which various businesses entities can effect for better understanding of its revenue.

Accounting measurement of revenue is determined through fair values of receivable or received cash equivalents. IAS 18 operating under various states of pars, gives clear guidelines under which effective fair value is reached. For instance, the par 10 of IAS18 takes into account the amount of any given trade discount of the business and the volumes rebates the entity can allow (Tinkelman, 2015). Additionally, activities involving the exchange for dissimilar goods or services, such is regarded as the business transaction worth revenue generating under the IAS 18.9 rule, unlike in the exchange of goods or services of similar natures and values. For instance when the supplier of milk swaps the commodity with the oil inventory in various locations to fulfill the demand on the timely basis in a given location

Another similar case is when the cash inflow of the enterprise is deferred; the fair value of the consideration receivable will always be less than the nominal level of cash and its equivalent that is received by the business. For such case, the accounting measurement anomalies will effectively occur when the seller is providing interest-free credit to the buyers or is conducting the business bellow the market rate of interest. As such, effective measurement will be reached upon the interest being imputed is operating at the market rates. Therefore, measurement of revenues also gives an avenue for the definition of the difference between the fair value and nominal amount of consideration in during the process accounting measurement as recognized in the par 29 and 30 and in accordance with IAS 39 rule.

Under the IASB, recognition of revenue involves incorporating of the items that meets the definition revenue as the gross flow of the economic benefits in a given business into the income statement as long as it meets various thresholds. Certainly, it should be possible that the future economic benefits of the business should be able to flow to the business with its revenues amount to be measured in the possible reliability. Under the guideline of IAS, 18, the element of revenue recognition is basically attached on the understanding of the volumes of sales achieve by the enterprise. The revenue recognition par IAS 18.14 state that effective recognitions takes place under the element of sales of goods especially when the seller has transferred to the buyer significant risks and rewards of the ownership besides, when the amount of revenue can be measured successfully among other requirements under the element of sales.

Since recognition of revenue also covers services rendered by the enterprise, revenues arising from such services should be met during the recognition process. As such, references to such services should effected right at the stage of completion of the transaction at the balance sheet date as per the IAS 18.20. Some of the rules that determines if the rendered service can be recognized are that the amount of revenues being recognized which should be in measurable scale, the state of completion of the work balance sheet date should be the one that can be reliably measured and finally that the costs incurred in during the transaction process should be able to be reliably measured during the process of recognition. Otherwise, if the above stated criterions are not met, IAS 18.26 will not recognize all revenues arising from services, only to the extent of the expenses recognized that are recoverable.

The process of successful recognition cannot take place not unless the elements of Interest, royalties, and dividends are cleared in the process of revenue measurement. The royalties and dividends are probable therefore, the economic benefits should be realized in the enterprise with the amount of revenue to be measured during recognition being in figures worth to relied at IAS 18.29-30 states that revenue can be recognized in many ways. The interest section under the recognition rule can be determined through the effective interest method stipulated in IAS 39 royalties (El-Tawy & Abdel-Kader, 2013). Basing on accruals basis in accordance with the substance of the relevant of agreement dividends and when the shareholders right to obtain the payment is established. Indeed, the process of revenues recognition takes various forms that involve critical looking at the process of activities which directly contributes to revenues realization. For this case, activities such as sales, services rendered by the enterprise and the Interest, royalties, and dividends accrued by the enterprise are considered to ensure that they meet given standard before the process or recognition is affected.

Accounting disclosure usually forms the additional information on the business financial statement containing activities that have direct impact on the financial position of the business. It should be remembered that while some information concerning the business may be kept as company secretes, effective accounting call for the process of disclosure of enterprises financial information especially when one is planning to conduct effective accounting process. As disclosure rule, availability of variety of financial information will make the determination of the financial position of the industry an easy process as the user will navigate successfully through the entire process to promote the understand of the extend of risks arising from the way the enterprises manages its risks (Song, 2015). Sometimes, the process can be a full disclosure where the enterprise information is fully disclosed to the user during the accounting process. Not all the financial information of the enterprise is needed for the process of disclosure. Therefore, major information regarding sales of goods, rendering of services, interests and dividends and the royalties among other are the vital one for the purpose of disclosure.

Disclosure process of financial information is categorized under rule IFRS 13:63 in two main levels, the disclosure of the information concerning significant financial requirement and the information for the nature and the extent of risks from the financial instruments. Information concerning the enterprises financial instruments must include financial information concerning the business financial assets which will have been measured at the scale of fair value such that the profit and the enterprise loss of the business are separately indicated. Still, such information should be held to the process maturity enterprise financial instrument with also information about loans and the receivables. With more rules operating under the enterprise financial statement, the process of information disclosure on the financial statement of the enterprise accounting must have all the required information.

The other form of disclosure on the entity’s financial position has to be on documents such as balance sheet among others. Such information which may also carry special disclosure of the financial assets and the liabilities are organized to be measured at fair value through profit and loses. Therefore, it should include the disclosure of information about credit risk, market risk and the alteration in fair and value related to the risk and the process and g the method of measurement stipulated under rule IFRS 7.9-11. Disclosure of income related information should be such that the all the total interest and interest expense for that financial instrument that is not measured at fair value, to be indicated through the computation to determine the entity’s profit and loss as per rule IFRS 7.20(b).

The second category of disclosure is about the nature and extent of exposure to risks arising from financial instruments is in many forms. The qualitative disclosure, quantitative disclosure, the credit risk, the liquid risk and the market risk among other forms of risks. Basing on the two main risks of qualitative and quantitative, the disclosure of the quantities risks should give information about the how the business is exposed to risks based on the information provided internally to the key enterprise management personnel. The information disclosed should include, the summary of quantitative data to each risk at the reporting date and the disclosure about various forms of risks such as credit risk and market risks among other forms of risk. Precisely, the qualitative disclosure provides information about the exposure of each type of risk to the financial statement, the risk that changes from period to period and finally, the management objectives and the process of management of various hazards.

Though the financial assets of the business may have been well recognized with balancing established as per the date when the calculation was achieved, there is still need for more serious and evaluation activities to establish its fair value and therefore, the process of subsequent measurement ensures that there is availability of fair value attachment on the entities balance sheet (Brown, Preiato & Tarca, 2014). The initial recognition activities can at times effect its measures at the transaction price at the present value of the future payment of the entity discounted at the market rate of the interest for the common debt instrument. The last recognition process might have applied to all instruments considered as the financing assets. For instance, when payments were deferred beyond the normal business terms, therefore, the said initial recognition can be measured at each and every balance sheet through the process of subsequent measurement.

The subsequent measurement process is ever the same at all stages since the current instruments are ever measured at the scale of discounted cash or through the consideration of the need to be received as all the non-current instruments are also measured at the amortized cost using the effective interest techniques. It should be noted that the transaction cost at this given stage of subsequent measurement are meant to stay the same since they are allowed to be ducted anymore the other important factor which is very essential in the process of subsequent measurement is impairment. Essentially, it means that the recoverable amount of an asset is ever lower than its balance sheet value. Therefore, an occurrence of such on the financial statement makes the loss of impairment to be directly recognized immediately in fact in its full capacity as the loss on the income statement.

The IAS 11 rule under construction defines construction contract as one specifically negotiated for the construction of an asset or a combination of more assets. The typical examples include the negotiation for the construction of the highway, the bridge or even an oil rigs(Christian & Lüdenbach, 2013). Therefore, IAS 11 helps will develop of the accounting process to facilitate effective project undertaking to ensure the contractor working on the project on behalf of the client does it without counting for any loss that may be realized due to anomalies that may occur in the process of loss and asset calculation in the process of project establishment. Since contracting process required typical accounting undertaking to other enterprises, the IAS 11 helps to avoid deficiencies that may occur in the process of accounting for the contracting process. The accounting treatment used for such cases touches on areas such as the reliable and non-reliable contract outcomes

In conclusion, the accounting treatments under IAS 18 and the IAS 11 are the very effective in determining the enterprise financial position. Measurement accounting provides the fair value scale for the financial statement; recognition ensures that there is understanding of the source of the entity’s revenue through the process of recognition of the sales, service rendered and the enterprises interests and the dividends. Still, the disclosure calls for the open up of the key financial information for accounting process while the subsequent measurement establishes the failure values of the financial statement. Indeed, the four accounting treatments are essential in determining the financial position of an entity.

References

Tinkelman, D. P. (2015). Introductory Accounting: A Measurement Approach for Managers. New York: Routledge.

El-Tawy, N., & Abdel-Kader, M. (2013). Accounting recognition of information as an asset. Journal of Information Science, 39(3), 333-345.

Song, L. (2015). Accounting disclosure, stock price synchronicity and stock crash risk: An emerging-market perspective. International Journal of Accounting & Information Management, 23(4), 349-363.

Brown, P., Preiato, J., & Tarca, A. (2014). Measuring country differences in enforcement of accounting standards: An audit and enforcement proxy. Journal of Business Finance & Accounting, 41(1-2), 1-52.

Christian, D., & Lüdenbach, N. (2013). IFRS essentials. New York: John Wiley & Sons.