Revenue is considered as one of the vital parts for the business companies as is the primary source of income for the companies. For this reason, companies put major focus on the recognition of revenue at the correct time. Thus, it is the requirement of the companies to determine the specific accounting period in which revenue will be recognized (Yeaton, 2015). For this report, the retail industry is taken into consideration. The main aim of this report is to analyze different aspects of revenue recognition in respect to the retail industry.
Importance of Revenue Recognition
Revenue recognition is a crucial accounting practice where the recognition of income is not done at the time of the collection of payment, but at the time of the income earning. It implies that the recognition of revenue is done at the time of deal closure, even before the payment (Tysiac, 2014). Thus, in case, the total amount of annual subscription is $48,000, $4000 will be treated as revenue for each month. The process of revenue recognition can become complicated in the kind of businesses that involve the exchange of service and payment. For this reason, the importance of revenue recognition cannot be ignored as the performance of the companies largely depends on the accurate recognition of their revenues. It needs to be mentioned that the business organizations are required to align their top-line revenues with business growth and churn expenses in order to establish the foundation of precise financial-reporting. At the time of revenue recognition, accountants are required to obtain persuasive evidence on the fact that sales arrangements have been made (Tysiac, 2014). In this process, they need to ensure that the vendor has deliver the contract. Thus, from the above discussion, it can be seen that revenue recognition has major importance in the accounting of the companies.
Timing of Revenue Recognition
In the process of revenue recognition, accountants all over the world put major emphasis on the particular time when the revenue will be recognized. This is called the Timing of Revenue Recognition. It needs to be mention that revenue is recognized when they are earned and there is sufficient assurance for the payment (Dyson, 2015). In case of the sale of goods, the time of revenue recognition is the period in which the delivery of the goods will be done to the customers. In case of the sale of services, companies use to recognize revenue in that particular period when services are performed. In this context, it is important to mention the fact that the companies do not record revenue prior to the period of the delivery of goods or the performance of the services. For example, in case a retail company enters into a new trading agreement with a buyer to sell good on credit on the basis of 30 days credit time. In this process, the company will not record revenue before 30 days until they receive the payment (Wagenhofer, 2014).
In this context, the revenue recognition timing of two of the largest retail corporations of United States can be presented; they are Costco and Wal-Mart. According to the latest annual report of Costco, the company uses to recognize revenue when the member takes possession of the products or receives services. The amount of sales includes shipping fees and sales return (phx.corporate-ir.ne, 2018). At the same time, the latest annual report of Wal-Mart shows that the company recognizes their revenue at the time of the sales of goods to the customers (s2.q4cdn.com, 2018). Thus, it can be observed both the large retain companies in US follow the same process for the recognition of sales. Hence, the above discussion indicates that timing of revenue recognition is an important aspect for the retail companies.
Alterative Solution of Revenue Recognition
Over the years, the Financial Accounting Standard Board (FASB) and the International Accounting Standard Board (IASB) have worked together for the development of new or alternative revenue recognition criteria that can be used by the companies under US GAAP and IFRS. The main intention of the development of this alternative revenue recognition criteria is to improve the financial statements by diminishing the differences between GAAP and IFRS (nasbp.org, 2018). The alternative method of revenue recognition has five steps and the following discussion discusses about these steps:
Step 1: In this step, the retail companies are required to met the criteria of a successful contract. Thus, the contract must have commercial value; there must be identification of promised goods and services; and the identification of payment terms (nasbp.org, 2018).
Step 2: In this step, the companies are required to identify the separate performance obligations when they transfer more than one product or service. As per the new standard, the retain entities are required to consider the performance obligations in the contract (fasb.org, 2018).
Step 3: It is a crucial step as transfer price is determined. In this process, the management of the retail companies are required to consider certain aspects like value of money, time, non-cash considerations, variable considerations and others (nasbp.org, 2018).
Step 4: In this step, the management of the retail companies allocate the transactions prices to each performance obligations. For this reason, the management needs to obtain observable evidence (fasb.org, 2018).
Step 5: In this step, the retail companies recognizes the revenue after the business entity satisfies the performance obligations. In this new model, the accounting standards want the management of the companies to make more estimates and judgments for the identification of performance obligations (nasbp.org, 2018).
The above discussion sheds lights on the importance of revenue recognition for the retail companies. It can be observed that the companies are required to recognize revenue when they are earned. Most impotently, it is essential for the companies to consider the perfect timing of revenue recognition. According to the above discussion, business organizations need to recognize the revenues at the time of the delivery of products and services. The above discussion also mentions about the five step alternative method of revenue recognition developed by FASB and IASB to make financial statements more accurate.
Costco Wholesale Corporation - Investor Relations - Financial Reports. (2018). Phx.corporate-ir.net. Retrieved 24 March 2018, from https://phx.corporate-ir.net/phoenix.zhtml?c=83830&p=irol-reportsannual
Yeaton, K. (2015). A new world of revenue recognition: revenue from contracts with customers. The CPA Journal, 85(7), 50.
Tysiac, K. (2014). Revenue recognition: No time to wait. Journal of Accountancy, 218(1), 40.
McCarthy, M. (2012). Financial statement preparers' revenue decisions: Accuracy in applying rules-based standards and the IASB-FASB revenue recognition model. Nova Southeastern University.
Dyson, R. A. (2015). Case studies in the new revenue recognition guidance. The CPA Journal, 85(3), 22.
Wagenhofer, A. (2014). The role of revenue recognition in performance reporting. Accounting and Business Research, 44(4), 349-379.
Welcome - IASB and FASB Proposed New Accounting Standard for Revenue Recognition . (2018). Nasbp.org. Retrieved 24 March 2018, from https://www.nasbp.org/fasbaccountingst
2017 Annual Report. (2018). S2.q4cdn.com. Retrieved 24 March 2018, from https://s2.q4cdn.com/056532643/files/doc_financials/2017/Annual/WMT_2017_AR-(1).pdf
Revenue Recognition. (2018). Fasb.org. Retrieved 24 March 2018, from https://www.fasb.org/jsp/FASB/Page/Image