FASBs Current Exposure on Revenue Recognition - Essay Example

FASB’s current Exposure Draft on Revenue RecognitionThe common revenue recognition guidelines are developed by FASB mainly to remove inconsistency in the already or current revenue recognition requirements and its weaknesses, the proposed guidelines also provides a more robust frameworks in handling revenue issues among entities hence giving easy way on comparing revenue recognition among companies in the market. The standards improve the quality of the information being availed to the users by more improved discloser principles.

The major parties to be affected here are the company that enters into the contract with the customers and this can only be so if the contract overlaps into other field like leases or insurance in which case, other rules will apply too. The entities will change their revenue recognition policy since the proposed amendment will actually supersedes the current revenue recognition of GAAP and also the IFRSs guides in IASs 11 and 18.It is true with the new proposed guidelines that some entities will be more affected than others and the main areas which the board have identified so far include; whether the recognition of that revenue is fully based on the transfer of goods in question or the service like construction services, customized software’s or in the manufacturing areas.

The companies will also be required to identify the performance separate duty either by dividing the given contract into parts which are actually distinct and can be delivered at different times, this can make an entity to separate the contract and account for it in different way as the current accounting practices. The companies will also be required to analyzed the intellectual property whether it is less than the actual economic value of the property that is the license is being granted in a nonexclusive or exclusive basis in this case the company will be required to recognized the revenue in terms of the license term, and this will actually be different with the current practices of revenue recognition.

The issue on how the credit risk is evaluated is actually contradicting with the current rules and practices and this will have effect on the credit risk of the customers and the collectability period this will in turn affect the amount of revenues recognized by an entity rather than when to recognize such revenue. The companies will also be required to use estimates in calculating the transaction price of a commodity unlike the current rigid rules in following of the rules and standards in coming up with the commodity price.

The new guidelines also give details on how to account for cost of contract services, the new proposal unlike the current guidelines gives or specify the contract parts to be classified as expenses and the cost to be capitalized.In sales revenue system most of the impacted areas includes the recognition and identification of a specific performance obligation, the exposure of credit risk of customers and estimate reliance.Some of the most integral part of the proposed revenue recognition guidance includes the following;Sale of the goods and the buyer has a right to return the goods; this happens when an entity has already transfer the control of the property to the buyer and at the same time gives the buyer the opportunity and the return the goods due to dissatisfaction in any way or the other with the product.

Sale of goods with warrantiesWhen there is agent principal consideration in a sale of goodsUnexercised right of customer in sale of goodsAll these are areas which will be affected by the new proposed guidelines by the FASB in the field of accounting and revenue recognition. These propose changes will really affect how the companies will report their revenue to e greater extend and the entities should be ready for the big change in this field.Generally the proposed rules will ensure good reporting lines and exposed more information to the potential investors and other external users of financial statement.

The customers will also be protected in the accounting process. References1. Proposed Accounting Standards Update (Revised)Issued: November 14, 2011 and January 4, 2012Comments Due: March 13, 20122. Issue Alert 16 feb 2011 Are You Ready for the Proposed Changes to Revenue Recognition? By Jim Kaiser, Denise Cutrone, Ramon Scheffer and Richard Cebula, PricewaterhouseCoopers, LLP