Introduction
Revenue recognition is a common accounting standard that defines and accounts for the exact criteria under which income is recorded and confirmed. Revenue is often documented when a significant incident happens, and the money quantity is clearly measurable to the organization. Revenue is key to any firm profitability, and everything is dependent on the transactions. As a result, authorities understand how attractive it is for businesses to stretch the boundaries of what constitutes income, particularly when not all payment is received when the trade activity is completed. As such, lawyers bill their customers in hours spent and provide the bill after the task is finished. Building project supervisors price clients and companies based on a percentage of implementation of the goals. Whenever the goods are sold, revenue is recorded when the consumer pays for the item, which is relatively uncomplicated. Nevertheless, when a corporation takes much longer to create a new product, revenue accounting can become problematic. As a consequence, there are various instances in which the revenue recognition rules might be violated.
Discussion
The issue of revenue recognition deserves attention and thorough research. The studies on this topic have been made by scholars, and their results are reported in this paper. As such, the purpose of this work is the practical demonstration and theoretical perspectives of revenue recognition, the appraisal and implications of which are provided. Particularly, the paper describes the significant difficulties surrounding revenue recognition, predominantly in the wake of contemporary accounting scandals. Furthermore, the report critically assesses the importance of IFRS 15 in addressing current revenue recognition challenges and argues the usefulness of IASB and FASB measures. Finally, the work focuses on the provisions of IFRS 15 for revenue recognition as well as the standard’s implementation problems in organizations.
Before reviewing the most relevant academic research on the stated topic, it is helpful to provide some background on the issue and connected phenomena. As such, analysts recommend that revenue recognition procedures for one business be uniform for the whole economic sector or industry. When examining financial statement items listed, having a uniform, appropriate accounting criteria helps to guarantee that a conclusion can be drawn about the value of different organizations. Revenue recognition standards should be consistent within a firm throughout time so that past financials may be evaluated and assessed for seasonal fluctuations or discrepancies.
An illustration of accrual accounting, which is a component of financial reporting, is the principle that states that revenues must be reported on the statements of income for a time in which they are realized and generated, not simply when money is collected. Realization of products indicates that the consumer has received services or goods but paying for the products or services is anticipated afterward. Acquired revenue accounts for items and services that were delivered or performed. For the revenue-generating transaction to be included on the earnings within the appropriate accounting term, it must be fully or substantially finished. There should be a fair degree of confidence that the earned income payment will be paid. Finally, the guideline states that revenue and its corresponding expenditures be presented along the same accounting cycle.
More specifically, IFRS 15 Revenue from Contracts with Customers has emerged as a consequence of collaboration between the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) to address many similar revenue recognition concerns. IFRS 15 prescribes what and when an IFRS presenter must recognize revenue, as well as demanding such companies to give more informative, pertinent disclosures to readers of the income statement. The standard specifies a unified, five-step methodology founded on the principles that must be followed in all client contracts.
The existing literature on the topic provides both theoretical information on the subject as well as evidence concerning the implementation and effects of IFRS 15. As such, one of the most extensive studies has been conducted by Napier (2020), who has considered the contributions of the previous authors, referring to the existing measure of “real effects.” The research provides insights into the practical aspects of IFRS 15 realization, while Oncioiu and Tănase (2016) and Grosu and Socoliuc (2016) reflect on the possibilities of the new standard. Next, Haggenmüller (2019) examines potential issues and key hurdles that may develop during IFRS 15 adoption and analyzes the expected impact on firm value and growth. However, the author had conducted research before more data and literature became available, somewhat lowering its value. A piece of more considerable and evidence-based information is presented by Houqe (2018), Usurelu and Dutescu (2018), and Bernoully and Wondabio (2019). Therefore, the effects and impact of IFRS 15 have been analyzed with consideration of several insights from different authors.
Several pieces of research demonstrate the existing situation before the implementation of the new standard. As such, Marchini et al. (2018) describe persisting issues with revenue recognition in Italy, while Piosik (2021) illustrates the case of Poland and the revenue management problem. Furthermore, there is sufficient evidence from multiple authors about the implementation of IFRS 15 in various businesses. For example, Erguden (2020) did extensive research about the influence of the standard on Turkish tourist companies and Coetsee and Wyk (2020) on the construction industry. Beerbaum and Piechocki (2017) review the issue of related party transactions. Saptono and Khozen’s (2021) research seeks to offer a concise and quantitative analysis of implementing IFRS 15 in Indonesia in connection with income tax and value-added tax concerns that may occur. The technical challenges that arise during the performance of the standard are reviewed by Usurelu et al. (2021) and Nguyen et al. (2021). Thus, the topic of the paper has been researched by multiple scholars from various perspectives, which contributes to its analysis and evaluation.
The key issues related to revenue recognition have been highlighted by several authors and raised concerns about financial analytics for years. The revenue figure is an overall indicator of what a company has accomplished in terms of selling things and delivering services over a certain period. Since revenue is frequently connected with acquisition costs, revenue and profitability are inextricably intertwined. If a company wants to report more significant profitability, one way to do so is to boost reported sales (Napier, 2020). Established standards provided insufficient instruction for enterprises entering modernity. Moreover, there were growing concerns, demonstrated in some instances by accounting scandals, that enterprises could engage in earnings management (Napier, 2020). Namely, they practice identifying revenues that are more than traditional budgeting disciplines would embrace. As cited by Napier (2020, p. 485), by the end of the twentieth century, the cases of revenue management included:
“Delivery of the product to the end user’s site has not occurred. Agreements have not yet been accepted and executed by the customer. The seller has to complete remaining obligations, such as installation or training. The customer unilaterally can terminate or cancel the agreement. ‘Just in time’ arrangements exist, with [free on board] delivery terms, and revenue is recognized prior to arrival at the delivery destination. Upfront fees are recognized immediately upon receipt notwithstanding an agreement to provide services, discounts or products during an ensuing membership period.”
More recent issues have been reported by other authors as well. As a consequence of various accounting fraud, related party transactions emerged as a critical concern (Marchini et al., 2018). Revenue-related party contracts are more highly probable than all the other kinds of financial operations to be used to manipulate earnings. Related party transactions with utmost parents are linked to a reduced likelihood of disclosing small financial records compared to transactions with certain other involved entities (Marchini et al., 2018). Furthermore, according to the Piosik (2021) study, disclosing entities raise arbitrary income when their pre-managed operational earnings are significantly lesser than the analysts’ general agreement expectation for the final quarter. Therefore, the old accounting standards allowed a variety of ways for dishonest or confused financial reporters to misrepresent the revenue.
Fortunately, these issues have been tackled by the improvements in international standards of accounting and, specifically, revenue recognition. The implementation or adjustment of accounting rules, including financial reporting requirements, may result in changes in how businesses conduct their operations, which may address the previously described difficulties. A new standard may change the way accounting numbers are calculated by changing how investments, obligations, profits, and costs are recognized and measured (Napier, 2020). The event of massive changes is described by Napier (2020, p. 476) as follows:
“In May 2014, the International Accounting Standards Board (IASB) published International Financial Reporting Standard 15 Revenue from Contracts with Customers …. At the same time, the Financial Accounting Standards Board (FASB) published Accounting Standards Classification Topic 606 ….”
The measures of IASB and FASB have been effective for several reasons. The guidelines were designed to replace a short and outmoded financial reporting standard as well as separate revenue recognition recommendations (Napier, 2020). As a result, a new income accounting system provides more straightforward advice on accrual accounting for all organizations with customer contracts while reducing the opportunity for profit management (Napier, 2020). Finally, a transitional period time was granted, with IFRS 15 initially being necessary for the financial period starting on or after 1 January 2017(Napier, 2020, p. 476). The published IFRS have dramatically altered the financial reporting and accounting information system, which caused controversy in multiple industries (Nguyen et al., 2021). However, increasing pressure forced the IASB to push the adoption date back to 1 January 2018 (Napier, 2020, p. 476). Therefore, the organizations focused on the most persisting issues, while allowing firms to prepare and adapt for the changes.
IFRS 15 has embraced a performance expectation method, in which revenue is recognized as and if a business executes contractual commitments to a client. Entities should thus analyze their deals to determine the performance duties imposed by the contracts (Napier, 2020). Such a review allows companies to change how they construct agreements and, in extraordinary situations, make a significant shift in business operations (Napier, 2020). In other terms, the new income accounting system may have real-world consequences.
The new requirement may force previously unrecognized items to be used in financial statements. For example, a leasing norm may compel some contracts previously held off-balance-sheet to be recognized as income and expenses (Napier, 2020). In some cases, a guideline may rule that certain elements, such as delayed expenditures, should no longer be identified. Recognizing a new item necessitates the measurement of that entity in and of itself (Napier, 2020). However, the new norm may modify the foundation on which specific things previously used in the accounting records are measured.
IFRS 15 includes conditions that limit firms’ ability to regard expenses incurred in contract fulfillment as investments. Moreover, it requires corporations to recognize the extra costs of acquiring a contract as a property if the firm wants to recover the expenses (Napier, 2020). It may be simpler for a corporation to quantify such costs if contract acquisition and fulfillment are handled for a charge by an outside entity rather than domestically. Finally, IFRS 15 has considerably expanded the scope of the disclosure, and firms will need to create or improve their accounting systems to provide the relevant information.
Nevertheless, the examination of the most significant European corporations reveals that, with the exception of a few industries, the influence of the guideline on accounting figures was minor for the majority of enterprises. As corroborated by Bernoully and Wondabio (2019), the most significant impact has been made on the telecommunications industry, while disclosures, on the other side, have typically grown in most sectors. In terms of information implications, there was no indication that businesses would use the opportunity provided by the implementation of IFRS 15 to conduct a thorough examination of their operations (Napier, 2020). Yet, more evidence needs to be reviewed to evaluate the role of IFRS 15 in resolving the existing issues in the revenue recognition process.
The previously mentioned recent issues in the reporting have been assessed by the experts after the implementation of IFRS 15. Concerning related party transactions reporting, which has generated problems in numerous corporations, evidence on the impact of IFRS-15 is conflicting (Beerbaum and Piechocki, 2017). When pre-managed active income is significantly lesser than the final quarter expectation of operating profit, IFRS 15 considerably reduces the growth in concessional revenue (Piosik, 2021). In practice, the favorable benefits of IFRS are connected with enterprises subject to strict enforcement regimes and have significant incentives to comply (Houqe, 2018). Thus, IFRS implementation has effectively decreased informational asymmetries, improved the quality of the information for users, increased transparency and comparison, and positively impacted financial markets.
Finally, the provisions of IFRS 15 implementation can be analyzed and evaluated via the review of multiple empirical studies. According to Napier (2020), IFRS 15 Revenue from Contracts with Customers, in addition to giving a more accurate portrayal of company revenues, has dramatically affected revenue recognition methodology by banning revenues from being used for earnings management objectives. This new standard provides comprehensive recommendations for several types of transactions, including sales with rights of return, upfront payments that are not refundable (and some associated charges), considerations for principal versus agent, consignment agreements, and others (Erguden, 2020). IFRS-15 specifies how this distinction will be created, allocated among the performance obligations, and in which circumstances it will be recognized over time or at a specific period in contracts having more than one execution duty and that is not partitioned.
A contract’s performance obligations must be met in order for revenue to be accrued under the new standard, and some contracts may have numerous income items. As a result, the arrangements with multiple income components not covered by IAS-11 and IAS-18 have been made more transparent by the IFRS-15 Standard (Erguden, 2020). The industries that employ these transactions often and transactions involving the simultaneous sale of two or more products or services will be significantly impacted by this process step.
Regarding tangible consequences, the implementation of IFRS 15 has occasionally resulted in high development costs for new computer software that tracks transactions and determines whether contractual commitments to consumers have been met. Some businesses would include IFRS 15 in writing new contracts while leaving the old ones alone. Additionally, some companies have decided to alter their business practices to align them more closely with the standards of IFRS 15 (Erguden, 2020). This has been a problem, especially for sectors where contracts frequently include complicated provisions that include products and services. IFRS 15 has undoubtedly had an impact. However, for most businesses, these effects seem marginal rather than requiring a significant reorganization of fundamental activities (Erguden, 2020). Several unanswered concerns, particularly concerning IAS 18 and IAS 11 standards, were addressed regarding revenue recognition under IFRS 15. To accurately identify the payment, this entire criterion must be thoroughly digested.
IFRS 15 primarily targets some businesses that had trouble complying with earlier IFRS revenue recognition criteria because of a lack of or vague advice that forced them to employ non-IFRS standards. However, due to its complexity, IFRS 15 impacts businesses with straightforward business models, and its implementation may be unexpectedly time-consuming, labor-intensive, and challenging without producing significant changes (Haggenmüller, 2019). Although there is no evidence that the performance of IFRS 15 may have been involved in profits management or manipulation, the standard still needs professional judgment and interpretation, which is prone to incorrect or divergent accounting for transactions (Haggenmüller, 2019). IFRS 15 could be necessary on the surface, but it is likely to be a confusing amalgam of many other existing standards that does little to advance the profession. Therefore, from a practical standpoint, the IASB’s specified aims for IFRS 15 are, at the very least, debatable.
There are several challenges and concerns regarding the implementation of IFRS 15 that have not been highlighted before. The findings of Saptono and Khozen (2021) emphasize the importance of entities considering taxes difficulties that may occur as a result of revenue recognition advancements. Unconformity among accounts and taxes encourages the firm to clarify these disparities by recording them as soon as possible. Taxpayers must emphasize the compliance costs associated with the adoption of IFRS 15, which are the compliance expenses in the realization of taxation. One of the primary concerns of standard-setting bodies is to ensure that the characteristics of accounting performance measures are capable of avoiding or, at the very least, preventing improper incremental improvements (Usurelu and Dutescu, 2018). These are eventually required when income attributes are changed through earning management, discretionary accruals, or provisional traditionalism.
Some appropriate critiques of the process of IFRS 15 implementation is present in other works. According to Grosu and Socoliuc (2016), IFRS 15 is substantially more complicated than the norms it replaces, and its development is justifiable because previous regulations were unable to represent the complexity of current corporate operations. At the same time, because IFRS 15 supersedes prior accounting principles and their corresponding interpretations, the new regulations are presented in a single document.
IFRS 15 is an excellent instrument for preventing financial volatility since it has rules that apply to circumstances of uncertainty concerning recognizing future income. Usurelu et al. (2021) identify holes and enhance the knowledge of how to guarantee proper adoption and implementation and overcome company inertia. The findings address a gap in accounting research by investigating the impact of new accounting rules obligatory adoption from the standpoint of the actual kind of reporting entity dichotomy. According to one article, IFRS 15 offers an acceptable framework for recognizing the revenue of building projects. On the other hand, the execution of the guidelines relies on an adequate understanding of the roles and obligations under building works, which may cause ambiguities in reality (Coetsee and Wyk, 2020). Significant estimating uncertainties and judgments should be reported.
Conclusion
To conclude, companies, when deciding how to behave for their values produced by any means, assume revenue to be an essential component in measuring the company’s performance for internal and external users utilizing financial reports. The new accounting model introduced by the IFRS-15 standard, which arose as a result of these factors, has substantially improved the dependability and applicability of revenue information in financial statements and footnotes. Moreover, it has reduced the opportunities of earning management, which enhances the transparency of competition between firms in various industries, although some issues of implementation remain.
Reference List
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