Revenue recognition: En teoretisk analyse af Exposure Draft June 2010 fra IASB

Henrik Brun Graversen

Student thesis: Master thesis


Revenue is the single largest item in the financial statement and certainly one of the main key performance indicators and at the same time revenue recognition is also one of the most complex areas in relation to accounting. The IASB and the FASB have undertaken a project on revenue recognition, which has as its purpose to provide a single revenue recognition model in a robust framework. According to the current standards, revenue is recognized based on IAS 18 except for construction contract which is recognized based on IAS 11. According to IAS 11 revenue is recognized when the entity reliable can estimate the revenue, cost and outcome of the construction contract. The revenue recognition shall be based on the stage of completion. IAS 18 operates with the elements of goods and services where revenue from sale of goods is recognized when control and risk have been transferred towards the customer based on the invoicing principle. Services are recognized on the same conditions as IAS 11 where it is the stage of completion which determined the revenue for current accounting period. The current standards are showing significant lack of guidance and there are conceptual differences between the framework and the underlying accounting standards. It is therefore the boards’ intention to remove the inconsistent and weakness in the current standards and create a model which will improve the comparability and simplify the preparation of the financial statements. IASB and FASB have been working on the project since 2002 and in June 2010 an ED was published, which this thesis is based on. The core principles in the ED for recognizing revenue are to identify contract(s) with customer and identify separate performance obligation in the contract(s). Second the transactions price has to be determined and allocated to each performance obligation, and finally the entity recognizes revenue when it has transferred the control and satisfied each performance obligation. The proposed standard is based on the asset and liability approach, and is significantly different from the IAS 11 and IAS 18, which is based on the transferring of control and risk towards the customer. Overall the proposed standard eliminates the inconsistent and weakness in the current standards, however the proposed standard is still based on a frame and show significant lack of guidance in several critical areas like identifying separate performance obligations within multiple contracts, and when are goods and service transferred to the customer. The missing guidance result in that the entity has to interpret the paragraph which increases the possibility of two entities recognizes revenue differently hence it is similar contracts. The outcome of that is a decrease in comparability of the financial statements which is bad for the users and against one of the main objects of the proposed standard. Revenue is measured according to the current standards at “fair value” while the contract value according to the proposed standard needs to considerer the “time value of money” and the probability-weighted estimate of the possible consideration amounts. If the proposed standard is being implemented it will have a significant impact on today’s accounting treatment and many of the respondents to the ED ask whether it is possible to only have one revenue recognition model. The missing guidance in the proposed standard can result in recognition of revenue at a time, which is not within the objects depending on how you interpret the paragraphs, however the standard due moves the focus from the delivery terms to the scope of the contract which will improve the comparability.

EducationsMSc in Auditing, (Graduate Programme) Final Thesis
Publication date2011
Number of pages111