Presented to: Prof.

Muhammad Amanullah khan

Presented by: Maryam Nisa
CMS # 26538
What is revenue recognition?
• Revenue:
Income results from the ordinary operations and activities of an organization and
include, but are not limited to: sales, fees, interest, dividends, royalties, and rent
(IASB, 2010).
• Revenue Recognition:
Revenue recognition is a generally accepted accounting principle that determines the
specific conditions under which revenue is recognized. Generally revenue is
recognized when a critical event has occurred, and the amount of revenue is
measurable.
Recognition Criteria
• According to FASB
“The fundamental revenue recognition concept is that revenues should not be
recognized by a company until realized or realizable and earned by the company.”
• According to IASB
Under the IASB’s Conceptual Framework revenue is to be recognized “when an
increase in future economic benefits related to an increase in an asset or a decrease of
a liability has arisen that can be measured reliably”(IASB 2001).
Objective of the joint project of IASB and FASB
The objectives of the joint project were as follows:
• Remove inconsistencies and weaknesses in existing revenue requirements.
• Provide a more robust framework for addressing revenue issues.
• Improve comparability of revenue recognition practices across entities, industries,
jurisdictions, and capital markets.
• Provide more useful information to users of financial statements through improved
disclosure requirements.
• Simplify the preparation of financial statements by reducing the number of
requirements to which an entity must refer. (FASB, 2012)
The project began by simultaneously taking two interrelated approaches.

A top down
A bottom up
approach
approach to
focusing on
identify which
conceptual
principles were
guidance for
“working” and,
the recognition
therefore,
and
should be
measurement
retained in the
of revenues.
new standard.
Challenges faced by two boards
• IFRS’s have been issued as general guidance of basic accounting principles, lacking
specific guidance on a transaction level. U.S. GAAP on the other hand consists of
specific rules and transaction level guidance on many issues that IFRSs leave to
interpretation.
• A second major issue lies in the difference between the two boards’ definition of
what gives rise to revenue.
According to IFRS, revenue is to be recognized when future economic benefits are
expected to inflow to the entity that can be measured reliably.
Whereas, under the FASB’s guidance revenue is recognized when cash is realized or
realizable and such revenue has been earned, without regard to the balance sheet
implications of the transaction.
A step towards a unified standard on
revenue recognition
• In December 2008, IASB and FASB issued a discussion paper entitled “Preliminary
views on Revenue Recognition in Contracts with Customers.”
• In the proposed standard the boards are adopting an asset-liability approach.
• In June 2010, a revision of exposure draft is issued. The new document left the basis
of the proposal the same and added implementation guidance and a tentative date
for adoption.
Revenue Recognition: A five step process
• Recognizing revenue under the standard would be a five-step process:
1. Identify the contract with a customer.
2. Identify the separate performance obligations in the contract.
3. Determine the transaction price.
4. Allocate the transaction price.
5. Recognize revenue when a performance obligation is satisfied.
Recommendations
• To accommodate the specific needs of financial statement preparers and users of
various countries and industries, a degree of flexibility should be provided in the
new worldwide standard.
• IASB should establish international subcommittees to develop industry specific
modifications to the overriding standard.
• International subcommittees would be able to address the structure of customer
contract under the new standard to ensure consistent application of the standard.