StudentShare
Contact Us
Sign In / Sign Up for FREE
Search
Go to advanced search...
Free

Accounting Standards Codification Revenue Recognition - Essay Example

Cite this document
Summary
As the paper "Accounting Standards Codification Revenue Recognition" tells, according to the ASC guidelines, an entity should report the gross or net earnings from its transactions depending on whether it is acting in the capacity of a principal seller or as an agent…
Download full paper File format: .doc, available for editing
GRAB THE BEST PAPER94.2% of users find it useful
Accounting Standards Codification Revenue Recognition
Read Text Preview

Extract of sample "Accounting Standards Codification Revenue Recognition"

Accounting Standards Codification Revenue Recognition Memorandum April 18, ASC Guidelines onRevenue Recognition Introduction Accounting Standards Codification has issued guidelines on the recognition of revenue, using the gross method and net method of revenue recognition. This paper summarizes the guidelines issues by ASC, and investigates the extent to which they are being applied in practice by examining the practices of two well-known companies in the online retail industry. Analysis ASC Guidelines on Revenue Recognition According to the ASC guidelines, an entity should report the gross or net earnings from its transactions depends on whether it is acting in the capacity of a principal seller or as an agent. The principal supplier earns the entire revenue from the sale transaction and should therefore report the gross earnings, while the agent earns a commission on the transaction and should report the net earnings. The guidelines specify eight tests to ascertain whether a particular entity is acting in the capacity of a principal. Satisfaction of many of these conditions would normally indicate that the entity is acting in the capacity of principal and should record thee gross revenue. The eight tests specified by ASC are: 1. Responsibility for providing the product: An entity that has the responsibility for supplying the product (or service) and for its acceptability is most likely to be a principal 2. Risk for Inventory: The party that has unmitigated general inventory risk would be acting in the capacity of a principal. Such party would maintain an inventory of products before sale with accompanying inventory risk and will take ownership if the product is returned by the customer. 3. Price fixation: The entity that has the power to fix or change the price would be a principal. 4. Changes to product: The entity that makes changes to the product or carries out a service ordered by the customer would be acting in the capacity of principal. 5. Supplier selection: A party that has the discretion to select a particular supplier, from several suppliers who can provide the product, for fulfilling a particular order to a customer would be acting in the capacity of principal. 6. Determination of product specification: An entity that determines the nature or characteristics of the product that must be supplied against a customer order is likely to be a principal. 7. Physical loss inventory risk: If the entity assumes risk of the product until transfer to the customer or gets the title back if the product is returned, it is most probably acting in the capacity of a principal. 8. Credit risk: An entity that takes the risk for collection of outstanding amounts is a principal. (Accounting Standards Codification) The ASC guidelines also specify three criteria to test whether an entity is acting in the capacity of agent and hence should record the net revenue. 1. The primary responsibility for supplying the product lies with the principal and not with the entity concerned. 2. The entity concerned earns a fixed amount, irrespective of the amount billed, or a fixed percentage of the price 3. The credit risk does not lie with the entity but with the supplier.i (Accounting Standards Codification) Accounting Method Adopted by Amazon.Com Amazon.Com recognizes and records gross revenue when several or all of the following conditions are satisfied. Amazon is 1. Primarily obligated to deliver the product 2. Subject to inventory risks 3. Has the power to fix the price and selecting suppliers, or The company recognizes net revenue as commission, if it is not primarily obligated to fulfill the purchase contract and does not have the freedom to establish prices.ii (Amazon.Com) Amazon.Com has included three of the eight conditions specified under the ASC. Conditions such as carrying out product changes, determination of product specifications, and assumption of credit risk have not been included by Amazon. Some of these are specified as providing weaker evidence. However, when a number of factors are being considered and judgment is made on the basis of several of these factors, it would have been more appropriate to include all of them, which Amazon has not done. Thus while Amazon’s stated practice is in conformance with the ASC guidelines, it does not include all the conditions. Accounting Method adopted by Overstock.Com Overstock.Com specifically states that it follows the ASC guidelines on Principal Agent Considerations while determining whether the gross or net revenue should be recorded. The tests applied by Overstock are similar to those used by Amazon and include (i) being the primary obligor in the transaction (ii) being subject to inventory risk and (iii) having latitude in establishing prices and selecting suppliers. Overstock records the gross revenue if most of these conditions are satisfied.iii As in the case of Amazon, Overstock also does not include all the considerations set forth by the ASC, but the conditions included are the most critical ones, and are fully in agreement with the ASC guidelines. Observations on the ASC Guidelines The ASC guidelines are fairly clear in specifying various conditions that could support the judgment in respect of the nature of a transaction and whether the gross or net revenue should be recorded. However, by classifying some of these as “weak” evidences, ASC has introduced a certain measure of ambiguity that could lead to non-uniform practices. Should the weak evidences be considered while making the judgment? The two companies reviewed apparently think that the “weak” evidences are not material. To make the process more precise, I would suggest that the conditions may be divided into two groups. The first group should list those conditions, the satisfaction of any one (or other specified number such as two) of which should cause the gross revenue to be recorded. The second group should list those conditions, more than one (or other specified number) of which should be satisfied in order to record the gross revenue. Secondly, instead of specifying two separate sets of criteria for gross and net revenue recording, there could be one set that integrates all conditions that satisfy either type of revenue recording. If a transaction is not found to be belonging to one of these types, it should be automatically included in the other. Conclusion The Accounting Standards Codification guidelines regarding recording of gross or net revenue are fairly clear and straightforward. However, the categorization of the factors that influence the final judgment into strong and weak evidences leaves room for ambiguous interpretation. It might be better to divide the conditions into two groups. Satisfaction of any condition in the first group or more than one condition in the second group should result in recording the revenue in the specified manner. Works Cited Accounting Standards Codification. "Revenue Recognition: Principal Agent Considerations - Other Presentation Matters." n.d. 17 April 2013 . Amazon.Com. "SEC Filings ." n.d. 17 April 2013 . Overstock.Com. "SEC Filings." n.d. 17 April 2013 . Read More
Cite this document
  • APA
  • MLA
  • CHICAGO
(“ASC 2 Essay Example | Topics and Well Written Essays - 500 words”, n.d.)
ASC 2 Essay Example | Topics and Well Written Essays - 500 words. Retrieved from https://studentshare.org/finance-accounting/1621011-asc-2
(ASC 2 Essay Example | Topics and Well Written Essays - 500 Words)
ASC 2 Essay Example | Topics and Well Written Essays - 500 Words. https://studentshare.org/finance-accounting/1621011-asc-2.
“ASC 2 Essay Example | Topics and Well Written Essays - 500 Words”, n.d. https://studentshare.org/finance-accounting/1621011-asc-2.
  • Cited: 0 times

CHECK THESE SAMPLES OF Accounting Standards Codification Revenue Recognition

FINANCIAL REPORTING - INTERNATIONAL ACCOUNTING STANDARS

Answer The international accounting standards are developed and issued by the International accounting standards Board (IASB).... The IASB came into existence by replacing the International accounting standards Committee (IASC) in the year of 2001 (IAS Plus, web).... After formally converting into the international accounting standards setting body, the IASB decided to develop, in the public interest, a single set of high quality international accounting standards(about Us)....
12 Pages (3000 words) Essay

Accounting Standards Boards

leasing, financial instrument and revenue recognition.... accounting standards BOARD 1.... In 2000 use of international accounting standards increased rapidly due to which IASB and FASB decided to collaborate and explore US international standards.... IASB and FASB finally decided to collaborate and work together in order to improve the US accounting standards.... In this MOA they shared their common objective with high quality accounting standards....
4 Pages (1000 words) Essay

Accounting ASC

An example of these guidelines are those provided by accounting standards codification (ASC) that has within it two methods to recognize revenue for online retailers.... Amazon is a company that utilizes the net method of revenue recognition.... Overstock Overstock on the other hand has different revenue recognition procedures.... The recognition is also dependent on the source of the revenue; this is as to whether it is from direct sales or commissions earned....
3 Pages (750 words) Research Paper

New Standards for Revenue Recognition

In the paper 'New Standards for revenue recognition' the author analyzes the existing guidelines for revenue recognition as per the U.... The IFRS stipulates minimum requirements on matters of revenue recognition.... The existing guidelines for revenue recognition as per the U.... This gave birth to the concept of developing one model that can be utilized in addressing revenue recognition.... On June 24, 2010, the Boards made a proposal to have the new joint standard for revenue recognition in place....
7 Pages (1750 words) Research Paper

FASB Codification System

The revenue area informs accounting professional about revenue recognition and accounting standard updates.... It has several authoritative resources on accounting standards on to a single platform which can be searched for accounting professional purpose.... It has several itative resources on accounting standards on to a single platform which can be searched for accounting professional purpose.... s per (Pounder) “Going forward, only FASB will issue authoritative accounting standards....
1 Pages (250 words) Essay

Revenue Recognition and Financial Accounting Theory

Firstly, assets were carried forward in financial statements at original cost and difference between revenue payments and receipts was shown in profit and loss account.... Prior achieving a clear understanding and meaningful insight in the historical development of financial accounting theory, it is important to understand the need of financial accounting in the business world.... Financial accounting is an important operation within an economy....
13 Pages (3250 words) Research Paper

Accounting Standards Update 2014-09 Revenue from Contracts with Customers

n May the Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) agreed upon modifying the existing standard of revenue recognition (accounting standards codification 605) in Generally Accepted Accounting Principles (GAAP) and publish Accounting standards update 2014-09 (AICPA, 2014).... The introduction of topic 606 under accounting standards update 2014-09 in the US GAAP by FASB and IASB has been a significant move in terms of development in the revenue recognition standard....
15 Pages (3750 words) Research Paper

IFRS 15 and IFRS 9 - Accounting Definition

The standard sets out the requirements for the recognition of revenues from contracts with customers.... The standard sets out the requirements for the recognition of revenues from contracts with customers.... The core principle of IFRS 15 is the five-step model that is used in recognition of revenues from contracts with customers.... revenue refers to income arising from the ordinary activities of the entity.... The paper "IFRS 15 and IFRS 9 - accounting Definition " is a great example of a finance and accounting essay....
11 Pages (2750 words) Essay
sponsored ads
We use cookies to create the best experience for you. Keep on browsing if you are OK with that, or find out how to manage cookies.
Contact Us