Accounting of Revenue Recognition and Simple Revenue Recognition

Question: Discuss about the Article for Accounting of Revenue Recognition? Answer: The article had stated about reporting the revenue of the firms. The test was conducted between complex revenue recognition and simple revenue recognition by the managers with respect to the rate of misreporting of the revenue. The item was a part of the financial report while the misreporting could be seen due to over emphasised or complicated recognition system. The FASB guideline had clearly stated that in normal condition, the recognition of revenue is possible after realizing the same. It extended its recognition for the cash sales of the traded items or the earned items from the central operation. However, in the different contexts, the result might be changed for the contract items. The terms of the contract would establish a perfect contract between two parties to determine the transaction price of the goods. The revenue can be recognised from the different business in different ways such as in construction the contract income from time to time can be realised. This is also a type of realisation of revenue. The milestone project can realise the revenue. However, the recognition of that type of revenue is made in a different way like recognising the milestone at first. The substantiation of the milestone is required in this case, as revenue generated from non-substantive milestone cannot be recognised as the revenue for the income statement. The involuntary conversion of the fixed assets into money while selling or earning the residual income would be recognised as the revenue of the business. The transaction involving the non-monetary assets may have earned money due to exchange of the assets. It would be considered as the gain or loss due to exchange. The gain can be realised as the income from the transaction. The firms must disclose such elements in its notes as per the rules mandated in FASB guidelines where the details of the income recognition can be observed ("Revenue Recognition"). What particular issue(s) did the researchers attempt to study, and what motivated them to do so (what purpose did their study serve to them)? The researcher had tried to find out the incidences and consequences of misreporting as it had become an important issue for the standard setters. The approach of FASB was to control the trustworthiness of the institution in public. Therefore, the paper had tried to study the understanding of complex behaviour of accounting standards while evaluating the cost and benefit of the approach. The researcher attempted to study the revenue recognition, as there were three reasons behind it. The first one was the availability of revenue recognition in all types of firms. The second one was the availability of restatement of revenue in majority of the annual report and accounting reports of the firms. The last reason was the complex nature of revenue recognition due to fact present in the market. These reasons were the motivational factors for the researcher. We might see that the factors were common and abundant in nature in the market. The data might be gathered from the annual reports of the companies from their past financial reports. Further, the changes in the reporting system could be found and might be compared with the current system of reporting to describe the complexity of the reporting. The main issue of making financial reporting complex might be concluded in this way, as the restatements of the firms were available openly. Further, the revenue recognition had the major contribution towards the restatements of the accounting reports. The main issue was to study the accounting complexity regarding the transaction in the business. The potential transaction may not be certain in this world of business. Thereby, the usage of transaction in accounts may increase the complex nature of accounting presentation and treatment for the accountants. The uncertainties normally increased the contracts with the specific customers and for the multiple contracts the complex transactions can be increased too. Therefore, the study had tried to find the solution in this regard where the reporting standard might enhance the complex nature of recognition. The main excerpts in this regard was to describe the principles of accounts in simple language for any sophisticated, complex transaction in business. The facts must be guided with the details of the facts of the transactions. It was found that multiple bodies had issued guidelines for the transaction recording. It had made the work of the accountants complex in nature to report the transaction for some specific cases. The huge volume of standards and interpretations might make the appropriateness of the guidance difficult for the accountants. It was also stated in the study that differentiating the transaction and standards in complex world of accounts was almost impossible. The reason was simply the relation between the standards and transaction standards were made for the specific transactions. It also happened in case of revenue recognition in contract where the revenue could be recognised after realising it from the transaction. But, before collecting the cash, the revenue could not be recognised. The study had measured the overall complexity of the transaction and the standards. In the meantime, the segregation of the standards and the transaction was not done rather capturing the combined view of t he both. The main motivational factor was the accounting complexity and misreporting fro this study. The complexity might raise the expenses in the financial market. The major cost was associated with the misreporting of the accounting information. The study had found that there were two distinct ways of misreporting such as mistakes of the accountants and manipulation of the accounting information. The mistakes in preparing the accounts might happen as the complexity of the standards and transactions led the accountants to do so. It also increased the misreporting of the accounts. The manipulation of accounts is also possible as managers might take the opportunity of high earnings from the manipulation of the accounts. The mistakes were the evidence of inaccuracy of the accounts preparers while the manipulation was the proof of uncertainties created for the investors. The rich example in this regard was the accrued liabilities of the balance sheet of the firm where the investors due to uncer tain inflation could not understand pensions and retirement benefit funds as changing of the policy to measure these funds. The help of the complex reporting structure was the main catalyst for the managers in doing so while it became their personal gain for future. What types of conceptual or theoretical arguments did the researchers make to develop their hypotheses and/or analyses? The researcher set the hypotheses on basis of the three constructs complex accounting, misreporting in accounts due to complexity and the prediction due to the both theories. The complexity was always the major problem for the researcher as they could find the problem with the accountants. The restatements of the revenue as well as in other segment of the accounting report were increased due to complicated accounting standards. In this regard, researcher found that complex behaviour of the standards made the accounting report more erroneous. Complex accounting standards made the transactions more complicated as well as the complex transactions might become potential threat to the accountants at the time of reporting in the financial accounts. Therefore, the difference was observed in setting the GAAP of the accounts where to control the reliability of the accounting information, standard setters normally made the standards complicated. However, the concept of setting the complex sta ndard had made the error in accounting report more. In addition to this, the managers as seen by many researchers could make the reporting failure due to manipulation. The challenge of misreporting could be enhanced by complicated rules for presenting the accounts. Further, the theory of revenue recognition said that there were many ways to recognise the revenue. The different circumstances of recognising the revenue might hamper the focus of the accounting standard to present the trustworthy accounting report. The managers might manipulate the expenses or to inflate the income by recognising the un-cashed items in the report. In this way, they might be able to make the income higher. It made the job of the investors difficult to understand the reliability of the accounting report. Therefore, the consequences of misreporting might bring severe harmony in the accounting presentations. Further, the theory of prediction had showed that complex rules of accounts had misled the report more than else in an accounting report. How do the researchers design the study to examine the issue? The study was designed on basis of simple hypotheses where empirical measurements were the main motive of the researcher. In this regard, the researcher made three proxies to conduct the research. The first one was the number of words used in describing the revenue recognition in the annual report of selected the firms. The second one was the number of methods applied in recognising the revenue of the firms. The last one was the factor score made by both of them. In addition to this, the design of the research was meant to be descriptive as the study followed the path of the previous papers. In this context, the design of the research was observed to follow the likelihood of revenue restatements of the firms due to complexity in the standards. However, it was considered that two effects were not mutually exclusive to each other. Therefore, the design maintained the facts of complexity in reporting with two factors error and manipulation with growing numbers of restatements. The test was conducted between the complexity proxies to find the relation with error or the restatements of the accounts. The sample of the firms was 333 revenue restatements from 1997 to 2005. The restatement of the controlling firms was selected in two ways non-revenue restatement and no restatement during the sample period. However, the researcher did not conduct the study by directly selecting the 333 samples. The selection of sample had some scientific methods where SAB 101 and EITF restatements were mandatory. The sample was selected from GAO sample where the size of the sample was 738. However, the entire sample was not considered as it was filtered in scientific way. The logic behind filtering the sample was to reduce the numbers of reports. Among the GAO sample, 39 revenue restatements were obsolete, as those were not related to the revenue recognition. Those 39 reports were related to the non-operating income from the previous years. The financial and the banking firms reports were excluded from the list of the sample, as their revenue recognition process was different from the general firms. The reports did not possess the 10-K disclosures and CRSP database in the criteria. Those were being rejected from the selected sample. The sample was fulfilled by option compensation data and CEO turnover for filling the proxies. The samples made senses due to its acceptability of the objectives of the study. Further, the selected sample was justified as the sample rejected the unwanted information like non-operating revenue of the firms. The controlling of the test was done by dividing the two different small samples for comparison. The first sample consisted of those firms restated different attributes other than revenue. The design of the sample was justified as it could show the control of the governance and incentives of the top management in the firms. The impact of the incentives on the restatements could be observed from the above design model. However, the limitation of this model was the reflection of true complexity on the restatements of the accounts due to over complicated revenue recognition had been made for the firms having restatements. The sample was prepared from GAO sample. However, researcher excluded the financial firms and the firms having more than one restatement in a year. The second type of measurement was made from the firms having no restatements over the period of analysis. In this due course, the matched ample approach was justified as it provided the opportunity of estimating the full e ffect of misreporting. The matching principles like book to market and assets as the smaller firms used to make the restatements. The selection of the sample was based on the asset sizes of 70 130% of the assets of the sample firms in the same financial year. The refining process was continued by sampling the firms closest to the book to market ratio. In this way, total 334 firms were being selected and the sample was formed. The revenue recognition of the firm was the measurement of the complexity of the reporting. The longer disclosures explained the more elaborations from the managers for complicated method of reporting. The statistical test like restatement design was prepared using the regression logistic. The depended variable was 1 for restatement of revenue recognition and 0 for restatement other than revenue. The control variable for this test was relevant value, governance report and other. These were the determinants of misreporting. The conditional logistic regression was done to get the non-random sampling to match the variables. There was an irregularities and consequences test for this study. In this context, the researcher had tried to find out the association of complexity intentional or unintentional reporting. The effect of complexity was also measured in this test. Three variables were the main input for this test restatement for revenue with other, restatement was made from the audit ors and restatement became the reason of missing the target of revenue. The last test was on measuring the consequences of misreporting test. The impact on the shareholders due to restatement was measured using three variables likelihood of intentional action from AAER statement, return on investment after the restatement was announced and the turnover rate of CEO. Learning on restatement of revenue due to complex recognition system From the above discussion, we have learnt that complexity in recognising the revenue of the firms might decrease the authenticity of the report provided with the firm to the shareholders. The report showed that empirically, the majority of the firms had provided more restatements and disclosures related to the restatements had been provided manipulated data. Further, the short restatements with revenue and without the same had provided with the error in the accounting information. The chance of meeting the criteria of stating the correct information regarding the accounting information might be reinstated using the simple accounting standards. However, the complex structure of standards had provided the opportunity to the managers to inflate the revenue in a year intentionally to increase their income and incentives. The FASB had made the rules of contract costing and revenue recognition much complicated where the majority of the faults were seen in the research paper. The recognitio n of income in the milestone project might allow the firms to increase their income at the time of the on-going project as they could show more income from the advanced and recapitalising the advance in its equity. It might help them in taking away the short-term benefit of tax rebate as well as the manipulating the true scenario. Further, the challenge of misreporting due to error happened for complex standards were found in the study. The errors were the result of the complex form of accounting presentation. References "Revenue Recognition". asc.fasb.org. N.p., 2014. Web. 11 Mar. 2016.