IASB/FASBs konvergensprojekt vedrørende omsætning: En konsekvensanalyse af ”Exposure Draft 2011- Revenue from Contracts with Customers” i forhold til den nuværende praksis for indregning og måling af omsætning

Tinh Thi Tran

Student thesis: Master thesis


Revenue is a crucial figure to users of the financial statements in assessing a company’s financial perfor-mance and position. At the same time revenue is also the most common source for manipulation and fraud with the companies’ financial statements which is shown by the many corporate scandals and bankruptcies in recent years. Furthermore, the company’s sales transactions have over time become more complex. It is therefore essential that there are applicable and consistent regulations for revenue recognition. However, revenue recognition under International Accounting Standards (IAS) and International Financial Reporting Standards (IFRS) differ in many ways from the US generally accepted accounting principles (US GAAP). While IFRS and IAS are principles-based and contain no guidance on specific areas, US GAAP is rules-based and provides more than 200 standards, guidelines and interpretations for specific business and indus-tries in relation to revenue recognition. To enable transparency and comparability of the financial statements across industries and borders, the Inter-national Accounting Standards Board (IASB) and the US Financial Accounting Standards Board (FASB) have therefore made an agreement on developing one single standard for revenue recognition. On-going from 2002, the Exposure Draft of the revenue standard was initially published in October 2010 for public hearing. IASB and FASB received massive feedback on this Exposure Draft from the respondents consisting of private and public companies as well as interest groups and professional organisations. IASB and FASB therefore found it necessary to revise the Exposure Draft. The second Exposure Draft – Revenue from Con-tracts with Customers (ED 2011) was published in November 2011 also for public hearing. A final version of the revenue standard is expected to be published by the end of 2012 with the effective date of 1 January 2015. The proposed revenue standard will replace the existing revenue recognition standards, guidelines and inter-pretations regarding revenue recognition under IASB and FASB. The objectives of the proposed revenue standard are; to remove inconsistencies and weaknesses in existing revenue requirements; provide a more robust framework for addressing revenue issues; improve comparability of revenue recognition practices across entities and industries; provide more useful information to users of financial statements through im-proved disclosure requirements and simplify the preparation of financial statements by reducing the number of requirements to which an entity must refer. Based on the above information, the aim of this thesis is to gain an insight into the ED 2011 and to analyse how the proposed revenue standard will impact revenue recognition compared to current practice of revenue recognition and measurement. Based on the impacts of ED 2011, the aim of the thesis is also to analyse if the proposed revenue standard will be able to fulfil its objectives and provide values for users of financial statements as well as prepares. In relation to response the above mentioned aims, an understanding of the general purpose of financial reporting and current regulation of revenue recognition according to IASB and FASB is needed. This thesis will therefore begin with a clarification of the Frameworks under IASB and FASB which contain the core definition and criteria for recognition and measurement of revenue and also the objectives of the general purpose of financial reporting. Subsequently a description of the current regulation of revenue recognition and measurement under IFRS/IAS and US GAAP will take place followed by an impact analysis of the ED 2011. The result of the impact analysis will be evaluated and compared with current practice of the revenue recognition and measurement from a Danish perspective. The impact analysis shows that the principle-based approach in the Framework and also in accordance with current revenue standards of IASB is carried on in the ED 2011. Definition and criteria of recognition and measurement in relation to revenue are all based on same accounting theory as of IASB. However, the proposed single contract-based model for revenue recognition contains new and significant elements contrary to the current practice for revenue recognition. When determining the transaction price, the entity must not only take all variable elements into consideration, but time value of money is also an obligation. Furthermore, when allocating the transaction price to the separate performance obligations in the identity contract, it has to be done by the separate performance obligation’s stand-alone selling price. In addition, ED 2011 does not focus on the criterion “individually negotiated contract” which under current practice of IFRS/IAS remains the core criterion for recognition of revenue over time in relation to contracts with multiple elements. The above mentioned new elements in ED 2011 sound simple on paper but turn out to be very complex to implement in practice. The elements involve not only the company’s ability to consider and determine the required estimates and judgements even more compared to current practice, but will also led to a significant change of the company’s accounting system in relation to compliance the proposed extended disclosure requirements. The ED 2011 will therefore undoubtedly be very costly to implement and apply within practice and more important, leaving the companies with a greater scope for interpretations and flexibility in relation to determining estimates and judgements. This may eventually lead to even more manipulation and fraud on revenue in the companies’ financial statements. The ED 2011’s ability to fulfil its objectives is therefore doubtful.

EducationsMSc in Auditing, (Graduate Programme) Final Thesis
Publication date2012
Number of pages109