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History and development of accounting standards
Introduction of accounting standards
Introduction of accounting standards
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Introduction ASC 606 is a new revenue recognition principle that provide standards for recognizing revenue from contracts that provide goods and or services to a consumer. EY identifies the following five steps to apply the new principle: "Identify the contract(s) with a customer, identify the performance obligations in the contract, determine the transaction price, Allocate the transaction price to the performance obligations in the contract, and recognize revenue when (or as) the entity satisfies a performance obligation.("Technical")" Section 451 of the IRC generally requires taxable income to be reported by completing the all-events test and the amount is reasonably determinable ("26"). This can create a variation from the financial statements and the taxable income amount. To further study …show more content…
the tax impact, the Treasury Department released Notice 2017-17 which provided commentary on the changes that were to happen based on the anticipation tax method changes. This was partnered with IRS publication Rev. Proc. 2018-29 that answer the request to automatic new tax method changes that result from ASC 606 ("Rev. Proc. 2018-29"). This memo highlights some of the broader issues like "Why did FASB and IASB decide to change the revenue recognition guidelines?" It also takes a look into what this could mean for technology industries. These industries are especially impacted as ASC 606 looks at contractual agreements, and software and licensing both roll up into this. Supporting Analysis In an effort to standardize accounting practices, FASB and IASB joined forces to attempt to streamline irregularities between the two methods. Topic 606 and IFRS 15 are what resulted from this. In the ASC 606 summary from FASB, the following summary of reasons were given as to why this project was created: clarify revenue requirements, address revenue issues, create a standard across multiple industries and areas, improve readability for users of statements, and simplify requirements ("FASB"). The whole goal can be summarized from this excerpt from FASB ASC 606-10-05-3. "The core principle of Topic 606 is that an entity should recognize revenue to depict the transfer goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services." This was a way to group contractual agreements, with a few exceptions with other standards (like leases), into the five-step process described above in the introduction. This was much needed as recognition of contractual agreements across various industries. ("Financial") Adding to this, ASC 606 provides more insight into expectations of revenue and liabilities a company might face. It requires companies to disclose "sufficient information", both qualitative and quantitative, so that the statements accurately reflect what is to occur. This includes information about disaggregated revenue, changes in obligations, and assets/liabilities that come with creating or ending the agreement ("FASB"). This creates guidelines that are not as industry specific so as to portray the company's standing in a fuller view. How will the ASC 606 affect in the technology industry? Technology companies are becoming larger and more successful in the modern era. With the gradual growth, the revenues generated from technology company increase each year. ASC 606 greatly impacts technology industries. There are mainly three major ways that ASC 606 will make an impact on the technology industry. According to Christopher Li from Xactly, the first change ASC 606 will make an effect on technology industry is with the data volume. In the essay, Li pointed out that the new accounting rule will defiantly increase data volume (Li). This will make it really hard to overlook the commission by a person. So, people will need to use technology to help keep this organized with this influx. The second way that ASC 606 impacts the technology industry is changing their month-end closing process. The data volume increase heavily impacts this, and Li writers highlight that technology companies tend to use about 1.5 resources to maintain their regular month-end close process (Li). The third impact of ASC 606 is considering the value of sales.
This ruling changes standards from focusing on just receivables and more on highlighting how the company as a whole is doing (Li). While those interested in the financial statements may appreciate this change, it can change how the companies value themselves, which may not always be for the best. Conclusions and Insights Looking at all the information presented, ASC 606 is no small change that companies can overlook. The impact to recognition of contractual revenue will greatly impact how a variety of industries report their books. These changes can have a domino effect, and some of these organizations may have to look into changing their tax methods to better match their financial statements. ASC 606 will provide better insight and comparisons across financial statements. It creates standards that can be applied across multiple jurisdictions and industries. Therefore, it will streamline the process and better represent changes in revenues and liabilities that companies are expecting or are aware of. It also attempts to bring policies from the FASB and IASB closer as they both passed similar policy
changes. Looking at technology industries, these changes are definitely going to have an impact on data collected, closing procedures, and receivables. These changes will require infrastructure and recording software changes that could be costly to make. The IRS also is aware of the impact of these changes, and as a result, they are working to create an automated process that will streamline the changes in tax methods for those impacted by the change. Overall, these changes are for the better for maintaining fairness in revenue recognition, and while the transition might be a little rocky, it is a step in the right direction.
The changes in IFRS will affect some slight modifications to significant amendments of principles. It can affect different areas of financial statements and information. For example, extensive disclosure requirements, financial statements and how specific elements will be recognize and measured. Those elements are financial instrument and employee benefit (IFRS, 2012).
Financial Accounting Standards Board. (1985). Statement of Financial Accounting Standards No. 86. Norwalk. Retrieved April 7, 2014, from http://www.fasb.org/cs/BlobServer?blobkey=id&blobnocache=true&blobwhere=1175820922177&blobheader=application%2Fpdf&blobheadername2=Content-Length&blobheadername1=Content-Disposition&blobheadervalue2=189998&blobheadervalue1=filename%3Dfas86.pdf&blobcol=url
3. Which of the following is not normally a condition that must be met for revenue to be recognized
Proper revenue recognition is important in because it has a direct impact on quarterly income statements, incentive calculations, investor confidence, and perception of an organizations financial health. The scandals at Enron and WorldCom illustrate how important properly recognize revenue is to the financial integrity of a company and how abuse can be extremely dangerous. (Labaton, 2006) To maintain consistency across organizations, the Securities and Exchange Commission (SEC) relies on the standards published by the Financial Accounting Standards Board (FASB) to establish the guidelines for revenue recognition. (FASB, 2011)
Plunkett, Linda M., and Robert W. Rouse. "Revenue Recognition and the Bausch and Lomb Case." CPA Journal Sept. 1998: n. pag. CPA Journal. Web. 16 May 2014.
In the world of international finance there are two major accounting systems; GAAP, which stands for Generally Accepted Accounting Principles, and IFRS, which stands for International Financial Reporting Standards. The United States prefers GAAP while the European market, as well as many other countries, prefers IFRS. By 2015 the Securities Exchange Commission is anticipating a total transfer to IFRS in the United States. Though the differences between GAAP and IFRS are few, they could affect accuracy of financial reporting throughout the world. It is important to understand the differences and similarities between both GAAP and IFRS if one is to globalize ones market (Logue).
The Financial Accounting Standards Board of the United States and the International Accounting Standards Board started the procedure with the selection of the Norwalk Agreement of with the aggressive objective of actualizing a solitary arrangement of universally acknowledged bookkeeping standards by 2015. The IASB and the FASB came into the joining venture on revenue recognition from vastly different beginning stages. The two bodies came into the venture with two primary criteria for revenue recognition; be that as it may, this is the place the likenesses stop. IASB's standards and framework gave that revenue would be perceived when 1) it is likely that any future monetary advantage related with the thing will stream to or from the venture and 2) the thing's expense or esteem can be estimated with unwavering quality. These two
Generally, revenue is recognized when it is probable and reasonably estimable. While this definition of revenue exists under both methods of accounting, the current revenue requirements in IFRS can be quite difficult to apply to multipart transactions. Because IAS 18 provides very limited guidance on topics like multi-elements arrangements and software recognition revenue, some companies have developed their IFRS accounting policies by referring to parts
Differences remain between U.S. GAAP and IFRS when it comes to revenue recognition. U.S. GAAP gives detailed rules covering 200 different pronouncements about how revenue should be recognized while IFRS offers two standards, IAS 18 and IAS 11; these deal with revenue and construction contracts. There is a current proposal for a new revenue recognition standard for both IFRS and U.S. GAAP (Doupnik & Perera, 2014). This standard seeks a main direction and corrects inconstancies between the two different views. This proposal would bring a unity to both entities and more progress toward
... to the topic or accounting policy options in full IFRS that were dropped from the IFRS for SMEs, or it relates to the principles of recognition and measurement in full IFRS that have stayed changed by simplifications in the IFRS for SMEs and they are not considered to be suitable based on the needs of consumers or cost-benefit concerns. For example, some disclosure in full IFRS are more relevant to investment decisions in the public capital markets from transactions and other events and conditions faced by the typical SMEs.
To best serve the needs of SMEs, the BRP’s final recommendation to the FAF Board of Trustees is GAAP with exceptions and modifications under the direction of a new and separate private company standards board (BRP, 2011, p. 2). The new board with the oversight of the FAF would work closely with the FASB and a have final rule over exceptions and modifications to current U.S. GAAP (BRP, 2011, p. 2). Although the FAF did agree the best way to accommodate SMEs is exceptions and modifications to current U.S. GAAP, the Trustees did not agree with a separate private company board with final authority. In response, the FAF chose to establish a new board, the PCC, with final approval by the FASB despite the recommendation of a separate private board by the BRP and the AICPA (FAF, 2012, p. 2). It is important to realize that the FASB receives its funding from public organizations and the board’s primary focus is on structuring accounting standards that suit large business industries that report to the
Generally accepted accounting principles (GAAP) were first established in the 1930s in response to the historical stock market crash in 1929. Nowadays GAAP is influenced by several organizations including the Financial Accounting Standards Advisory Council (FASAC), Securities and Exchange Commission (SEC), American Institute of Certified Public Accountants (AICPA) and the Internal Revenue Service (IRS). Publicly trade companies are required to follow GAAP in the United States. Many other countries have their own set of accounting principles. In today’s global business climate, many businesses need to grow in order to survive. A small business may choose to merge with a bigger another company, and a large company may want to acquire a small company in order to expand in certain condition. More and more international mergers and acquisitions are happening nowadays. But how would they adapt to the ever-changing accounting standards in different countries? There are complications of consolidation of the financial statements when companies make merger/acquisition deal. To be able to adapt to the new business environment, GAAP is also making changes. International Financial Reporting Standards (IFRS) were first developed by the International Accounting Standard Board in 1973. IFRS gained its popularity quickly. Nowadays, over 100 countries recognize IFRS. As the biggest economy in the world, United States (United Nations 2012); however, did not plan to implement IFRSs until 2011. In this paper, we will discuss the possibilities of future of convergence between U.S GAAP and IFRS.
...pt. That is however, not to say that it is without its problems, as previously discussed, it can possibly lead to a two tier system of reporting, despite reducing complexity its flexibility can limit comparability and place a heavy onus in terms of judgement of the preparer. Finally its simplifications may perhaps infringe upon the ease of which a private entity wishes to become public listed company. However, the disadvantages of adopting the standard are fat outweighed by the potential benefits it offers. As more time goes on, we will no doubt see more countries and companies adopting the standard. If capital providers (primarily banks) clearly understand and have confidence in the financial statements prepared under the guidance of the standard; then an SMEs ability to obtain the capital it need improves. Ultimately the economy in which it operates improves.
Accounting gives companies, investors, regulators and others with a standardized way to explain the financial performance of an entity. Accounting standards present preparers of financial statements with a set of rules that they have to follow when preparing an entity’s accounts, making sure this standardization is across the market (Robert 2008). Many Companies are required to publish their financial statements in accordance with the relevant accounting standards. To simply International Financial Reporting Standards (IFRS) is one set of accounting standards, which have been established and maintained by the IASB with the purpose of those standards being efficient of being useful consistently. These two bodies work together to come
Over the last several years, the controversy of the United States adopting International Financial Reporting Standards (IFRS) has been a significant issue for many businesses who are pro Generally Accepted Accounting Principles (GAAP). Although U.S GAAP has been the common accounting principles for many countries, specifically the US, now countries are adopting IFRS. In addition, there are many organizations such as European Union (EU) and International Accounting Standards Committee (IASC), who want domestic and international businesses to have one set of standards to be implemented. On November 14, 2008, the Securities and Exchange Commission proposed a rule named “Roadmap for United States Issuers”. This proposed rule could potentially force businesses that are publicly traded in the United States to begin implementing IFRS for the years after December 2014. Moreover, transitioning from U.S. GAAP to IFRS can effect financial reporting, operations within a company and can cost companies money.