Name : Faisal Masoud Hussein Sous

University ID : 1835648
Division / seat number : 1/46
Meaning of Revenue cognition

Revenue is the gross inflow of cash, receivables or other consideration arising in

the course of the ordinary activities of an enterprise from the sale of goods, from
the rendering of services, and from the use by others of enterprise resources
yielding interest, royalties and dividends. Revenue is measured by the charges
made to customers or clients for goods supplied and services rendered to them
and by the charges and rewards arising from the use of resources by them. In an
agency relationship, the revenue is the amount of commission and not the gross
inflow of cash, receivables or other consideration.

The type of Revenue

Inflows or other enhancements of assets of an entity or settlements of its

liabilities (or a combination of both) from delivering or producing goods,
rendering services, or other activities that constitute the entity’s ongoing major
or central operations. Transaction Price The amount of consideration to which an
entity expects to be entitled in exchange for transferring promised goods or
services to a customer, excluding amounts collected on behalf of third parties

Recognition > Contract Costs > > Incremental Costs of Obtaining a Contract 340-
40-25-1 An entity shall recognize as an asset the incremental costs of obtaining a
contract with a customer if the entity expects to recover those costs. 340-40-25-2
The incremental costs of obtaining a contract are those costs that an entity
incurs to obtain a contract with a customer that it would not have incurred if the
contract had not been obtained (for example, a sales commission). 340-40-25-3
Costs to obtain a contract that would have been incurred regardless of whether
the contract was obtained shall be recognized as an expense when incurred,
unless those costs are explicitly chargeable to the customer regardless of
whether the contract is obtained. 340-40-25-4 As a practical expedient, an entity
may recognize the incremental costs of obtaining a contract as an expense when
incurred if the amortization period of the asset that the entity otherwise would
have recognized is one year or less. 145 > > Costs to Fulfill a Contract 340-40-25-5
An entity shall recognize an asset from the costs incurred to fulfill a contract only
if those costs meet all of the following criteria: a. The costs relate directly to a
contract or to an anticipated contract that the entity can specifically identify (for
example, costs relating to services to be provided under renewal of an existing
contract or costs of designing an asset to be transferred under a specific contract
that has not yet been approved). b. The costs generate or enhance resources of
the entity that will be used in satisfying (or in continuing to satisfy) performance
obligations in the future. c. The costs are expected to be recovered. 340-40-25-6
For costs incurred in fulfilling a contract with a customer that are within the
scope of another Topic (for example, Topic 330 on inventory; paragraphs 340-10-
25-1 through 25-4 on preproduction costs related to longterm supply
arrangements; Subtopic 350-40 on internal-use software; Topic 360 on property,
plant, and equipment; or Subtopic 985-20 on costs of software to be sold, leased,
or otherwise marketed), an entity shall account for those costs in accordance
with those other Topics or Subtopics. 340-40-25-7 Costs that relate directly to a
contract (or a specific anticipated contract) include any of the following: a. Direct
labor (for example, salaries and wages of employees who provide the promised
services directly to the customer) b. Direct materials (for example, supplies used
in providing the promised services to a customer) c. Allocations of costs that
relate directly to the contract or to contract activities (for example, costs of
contract management and supervision, insurance, and depreciation of tools and
equipment used in fulfilling the contract) d. Costs that are explicitly chargeable to
the customer under the contract e. Other costs that are incurred only because an
entity entered into the contract (for example, payments to subcontractors). 340-
40-25-8 An entity shall recognize the following costs as expenses when incurred:
a. General and administrative costs (unless those costs are explicitly chargeable
to the customer under the contract, in which case an entity shall evaluate those
costs in accordance with paragraph 340-40-25-7) b. Costs of wasted materials,
labor, or other resources to fulfill the contract that were not reflected in the price
of the contract 146 c. Costs that relate to satisfied performance obligations (or
partially satisfied performance obligations) in the contract (that is, costs that
relate to past performance) d. Costs for which an entity cannot distinguish
whether the costs relate to unsatisfied performance obligations or to satisfied
performance obligations (or partially satisfied performance obligations).

Disclosure

The disclosure requirements in IFRS 15 have increased significantly compared to

the disclosure requirements under the existing IFRS revenue standards. The
purpose of such disclosures is to provide sufficient information to enable users
of financial statements to understand the nature, amount, timing and uncertainty
of revenue and cash flows arising from contracts with customers. The level of
detail required in applying these disclosures will require professional judgment.
Disclosures can be broken down into a few main categories: contracts with
customers, significant judgments in the application IFRS 15, assets recognized
from the costs to obtain or fulfill a contract with a customer, and practical
expedients.
The following are some selected disclosure requirements: Contracts with
Customers For all contracts with customers within the scope of IFRS 15, entities
must disclose: • amount of revenue recognized (which must be disclosed
separately from other revenue sources) • impairment losses recognized on any
receivables or contract assets. If these amounts are already presented in the
Statement of Comprehensive Income, the above additional disclosures are not
required. Significant Judgments in the Application of IFRS 15 Focus should be on
judgments and changes in judgments used to determine: • timing of satisfaction
of performance obligations • transaction price and amounts allocated to
performance obligations. 62 IFRS 15 Revenue from Contracts with Customers — 
Your Questions Answered 1 Assets Recognized from the Costs to Obtain or
Fulfill a Contract with a Customer Disclosures should include the judgments
required to determine the amount of the costs incurred to obtain or fulfil a
contract with a customer, the method used for amortization, the closing balances
of these assets by main category and the amount of amortization and impairment
(if any) recognized during the period. Practical Expedients If any practical
expedients are used, these should be disclosed.

Each of these disclosure requirements is discussed further below. To assist

entities in determining the required disclosures, Appendix A includes an extract
from EY’s IFRS Disclosure Checklist. The standard requires that an entity
consider the level of detail necessary to satisfy the disclosure objective and how
much emphasis to place on each of the various requirements. The level of
aggregation or disaggregation of disclosures requires judgement. Entities are
required to ensure that useful information is not obscured (by either the inclusion
of a large amount of insignificant detail or the aggregation of items that have
substantially different characteristics). An entity does not need to disclose
information in accordance with IFRS 15 if it discloses that information in
accordance with another standard. As explained in the Basis for Conclusions,
many preparers raised concerns that they would need to provide voluminous
disclosures at a cost that may outweigh any potential benefits.432 As
summarised above, the Board clarified the disclosure objective and indicated that
the disclosures described in the standard are not meant to be a checklist of
minimum requirements. That is, entities do not need to include disclosures that
are not relevant or are not material to them. In addition, the Board decided to
require qualitative disclosures instead of tabular reconciliations for certain
disclosures.
the modification of the revenue recognition based on accounting standard

Contract Modifications To have an accounting impact, contract modifications

must first be approved and legally enforceable. Depending on the price, quantity,
and distinct nature of the modified goods or services, an approved contract
modification can result in the following scenarios:

■ A separate contract is created in addition to the existing contract (prospective

accounting required): This scenario applies when additional goods or services
are distinct, and the contract price increases by an amount that reflects the
standalone selling price of additional distinct goods or services. KPMG (2016)
provides an example of a customer who adds a text-messaging package to an
existing cellular phone package and pays the standard price offered to customers
for that additional package.

■ Termination of an existing contract and creation of a new contract (prospective

accounting required): This scenario applies when additional or remaining goods
or services are distinct and the contract price increases by an amount that does
not reflect the standalone selling price of additional distinct goods or services.
Effectively, contract variation is accounted for as termination of the existing
contract and creation of a new contract. KPMG (2016) provides an example of a
customer who receives free premium channel cable service.

■ Modification of existing contract with an amendment to the terms (cumulative

catch-up accounting required): This scenario applies when the additional or
remaining goods or services are not distinct. Effectively, contract variation is
accounted for as part of the original contract and the modification is recognized
as either an increase or reduction in revenue on a cumulative catch-up basis at
the date of modification. KPMG (2016) gives an example of a changing floor plan
for a partially constructed house. Raytheon contract modifications fit into this
category. The Raytheon first quarter 2017 10-Q states that Contracts are often
modified to account for changes in contract specifications and requirements. . . .
Most of our contract modifications are for goods and services that are not
distinct from the existing contract due to the significant integration service
provided in the context of the contract.
■ Likely effects of updated contract modification requirements: As KPMG (2016)
highlights, current US GAAP and IFRS requirements include limited guidance on
contract modification, leading to diversity in accounting practices among
companies. Hence, the update is expected to lead to greater consistency for this
aspect of accounting. Although contract modification may affect few companies
and the updated guidance can appear quite arcane, the effects could be material
for the companies for which it matters. Hence, investors need to be alert to how
revenue-reporting patterns are affected for companies for which such
modifications occur.

a practical case for the revenue recognition from actual life

Recognition of revenue requires that revenue is measurable and that at the time
of sale or the rendering of the service it would not be unreasonable to expect
ultimate collection. 9.2 Where the ability to assess the ultimate collection with
reasonable certainty is lacking at the time of raising any claim, e.g., for escalation
of price, export incentives, interest etc., revenue recognition is postponed to the
extent of uncertainty involved. In such cases, it may be appropriate to recognise
revenue only when it is reasonably certain that the ultimate collection will be
made. Where there is no uncertainty as to ultimate collection, revenue is
recognised at the time of sale or rendering of service even though payments are
made by instalments. 9.3 When the uncertainty relating to collectability arises
subsequent to the time of sale or the rendering of the service, it is more
appropriate to make a separate provision to reflect the uncertainty rather than to
adjust the amount of revenue originally recorded. 9.4 An essential criterion for
the recognition of revenue is that the consideration receivable for the sale of
goods, the rendering of services or from the use by others of enterprise
resources is reasonably determinable. When such consideration is not
determinable within reasonable limits, the recognition of revenue is postponed.
9.5 When recognition of revenue is postponed due to the effect of uncertainties, it
is considered as revenue of the period in which it is properly recognized.

Companies across the globe are intensively re-architecting their revenue

recognition processes and policies as a result of the new ASC 606 guidance.
Companies who sell their software by subscription (Software-as-a-Service or
Saas) need to be particularly careful to ensure they are revising their policies
appropriately for the new guidance. Below are a few scenarios and case studies
that can help clarify some important considerations unique to SaaS companies.
Consider potential standard elements in SaaS arrangements: subscriptions
services, implementation services, setup fees, service-level agreements,
consulting services, and fixed- and volume-based fees. The expected accounting
treatment for ASC 606 appears straightforward: ratable recognition for
subscription elements and as-delivered recognition for nonrecurring elements.
However, there are several subtle changes to the SaaS revenue recognition
model that require consideration.

Conclusion

The joint statement issued by the IASB and the FASB relating to revenue
recognition was a significant step forward in the overall work of the two boards.
The various stakeholders both in the United States and internationally will
continue to influence the standard and work toward successful implementation.
The convergence effort is one step closer to realization as the result of this work
between the two boards and will determine the 32 success of future projects. The
potential benefits of a converged standard including increased capital flows
between the international community and the United States could greatly benefit
businesses. Even though the new standards will implement a principles based
approach, the debate involving the academic and professional communities
regarding the best method for reporting financial information will continue for a
long time. The new standard will be implemented by corporate entities in the next
few years, replacing existing methods of U.S. GAAP revenue recognition. This
implementation effort will provide many practical difficulties that will require
significant effort and resources to overcome. The new standard will have an
immediate impact upon U.S. companies that will need to review internal systems,
educate essential personnel, and learn how to recognize revenue in this new
environment. The users of financial statements will be affected by this change in
the accounting standards as well and will require a similar level of reeducation in
order to properly conduct analysis. The aggregate impact upon individual
business entities and the financial reporting process have yet to be determined
but will absolutely affect all stakeholders in the near future. The research for this
paper sought to understand how the new revenue recognition principle with
regards to customer contracts would affect companies in the near-term. Research
was conducted using existing academic literature related to the history of
accounting standard setting, the convergence effort related to IFRS and U.S.
GAAP, and the changes that will be implemented for revenue recognition in the
United States. Additionally, professional journals and commentaries provided a
useful perspective regarding how corporate entities plan to address the issues
that will arise. The new 33 standards were examined to provide an overview of the
new requirements and how the new standards will vary from previous accounting
standards. Further research should explore the development and discussion that
took place over the course of a decade and eventually led to the joint statement
issued by the two boards. Additionally, the impact that this collaborative effort
will have upon future converged accounting standards should be researched. The
reception, difficulties, and successes will have a significant impact upon future
efforts and the speed at which such efforts will be accomplished.

Reference

Accounting Standard (AS) 9 Revenue Recognition

https://www.mca.gov.in/Ministry/notification/pdf/AS_9.pdf

Revenue from Contracts with Customers (Topic 606) An Amendment of the FASB
Accounting Standards Codification®2014

IFRS 15 Revenue from Contracts with Customers YOUR QUESTIONS ANSWERED

March 1, 2015/IN COLLABORATION WITH:deloitte

REVENUE RECOGNITION CHANGES Key Judgments and Implementation

Progress 2017

THE CONTEMPORARY ISSUES ON NEW REVENUE RECOGNITION

STANDARD2018/Nafiul Aziz, Niaz Mohammad