Revenue from Contracts with Clients - Essay Example

Revenue from Contracts with By Revenue is regarded as one of the crucial measures of the financial performance of a company. It offers information on the realized gross earnings and revenues from the activities of the business, which is important in assessing how good a firm has performed during the period. Indeed, majority of the companies report their revenues as their main performance measures on the performance of the company. The revenue is important for financial statement used to comprehend the value generation and profitability sources for the company in a given period. It reports the performance since it captures the transaction gross income that are close at the earnings cycle of the company and therefore, highly certain. When valuing a firm, financial analysts normally start in forecasting the revenue of the future based on the demand of the market for the services and products offered by the firm and their expected share of the market. Additionally, the operating earnings and revenue are crucial when valuing the company with the help of multiples. The revenue is specifically important in valuing companies with losses history since in that scenario, most methods of valuation cannot be applicable. For instance, according to research, the internet’s market prices tend to impound the revenues. Additionally, the change understanding for the investors is considered in deferred revenue. They are normally interested in the equity forecast and analyst valuation. Since the expenditure that corresponds to the deferred revenues are not fully deferred. Since they form part of the expenses that are not within the products and services cost (IFRS 15 Revenue from Contracts with Customers, 2014). Apart from the analysis of the financial statement, the earning s and earnings, serve as one of the main performance measures in managing the companies and in performing the management evaluation and in the debt contracts. This mechanism is normally referred as the accountability or stewardship objective on the financial reporting and is focused on the economic consequence s and incentives of the reported revenues. Therefore, with the help of the performance measures on the recognition principles can later destroy their value. Most companies use the revenues directly in setting the performance targets and in determining the management compensation. The revenue-based compensation induces the revenue growth despite its profitability. The incentive is desirable if the firm follows the strategy of the growth in a given market. Normally, the revenue is considered the performance secondary measure because it is the expense necessary in developing and sustaining the revenue. At this instance, the revenue is crucial because it affects the earning based performance and the earnings measures. The revenue recognition influences the information timing; when the profits from the operating activities of the company are recognized (IFRS 15 Revenue from Contracts with Customers, 2014). The analytical research has examined the two prototypes of the late and early recognition of the incomes and revenue through the completed contract mechanism and the percentage of the completion technique. Since all the earnings will eventually flow via the loss and the profit. The total revenue is similar under the two methods but the percentage of the completion method offers the information before the completed contract method. IAS 18 prescribes the accounting revenue treatment of revenue recognition in conventional kinds of transaction. Normally, the revenue need not to be recognized when they are probable that the economic benefits in the future will flow to the company and that the benefits can be measured in a reliable manner. The IAS 18 covers the revenues and benefits from the rendering of services, sales of goods, and using other to yield the dividends, interests, and royalties. The standard excludes variety of revenues from the insurance contracts, leases, and changes in the value of the current assets or financial instruments, natural rise in the mineral ore extraction or the agricultural assets (Marton & Wagenhofer, 2010). IAS 18 recognizes revenue as one of the crucial numbers to the users of the financial statements. The recognition assesses the financial performance of an entity and its position. However, the requirement of the revenue recognition under the standard is different from the US GAAP and the set of requirement need some improvement. US GAAP entails the recognition of the broad revenue and the various requirements for a given industry or transaction that can lead can lead in various accounting for the same transactions. Although IFRS do not have many requirements on recognizing the revenue, the two revenue standards are the IAS 11 and IAS 18. The two standards are always difficult to comprehend. IAS 18 has long since provided the confined guidance on the crucial topics like the revenue recognition for arrangements that have multiple elements. The International Accounting Standards Board issued IFRS 15 on the Revenue from Contracts with Customers. The element outlines the requirements to recognize revenues applicable to all the contracts that have customers. The issuance signifies the joint project culmination having the United States National standard setter, Financial Accounting Standards Board in developing a global accounting standard for recognizing revenue. The standard established a comprehensive and a single comprehensive framework in recognizing the revenue. The framework is applicable across the capital markets, industries, and transactions at the top of the financial statements of the company worldwide (Marton & Wagenhofer, 2010). The framework replaced other standards such as IAS 18, IAS 11, IFRIC 15, IFRIC 18, and SIC 31. The framework addresses the deficiencies by specifying the robust and comprehensive framework for the measurement, disclosure, and recognition of revenue. Specifically, IFRS 15 improves and up standard the revenue from contracts with customers, it reduces the need to interpret guidance based on case-to-case basis in addressing the issues of revenue recognition. Additionally, it provides information that is more crucial by improving the disclosure requirements. Consequently, the framework establishes a concrete framework to determine revenue recognition. The main principle in that standard is that a firm needs to recognize revenue in depicting the transfer of the promised services or goods to the client in an amount reflecting the consideration, which the firm expects to undergo exchange of services, and goods. A firm will assess if the promised services or goods arise from the sales incentives and incidental obligations are services or goods are distinct. Revenue from Contracts with Customers is applicable to the entire client’s contract except for the leases within the IAS 1 leases, financial tools, and contractual rights within the financial tools. Other contracts include the Joint Arrangements, Separate Financial Statements, Investment in Joint Ventures and Associates, and insurance contracts within the insurance contracts, and the non-monetary exchange between the institutions in similar business line in facilitating sales to the potential clients. A contract with the client maybe slightly within the IFRS 15 scope of other frameworks and standards. In the scenario IFRS 15 if other frameworks specify separating or measuring the parts of the contract, then those measurements and separation needs are applied. The transaction price is reduced by figures that are measured under the standards. If no other framework guidance on separating the contracts, then the standard will be applicable. The Revenue from contracts with customers begins with the summary of the revenue recognition model. The first step in revenue recognition is identifying the contract with the client (“REVENUE RECOGNITION|TECHNICAL”, 2014). The condition met in the step including the approving by the contract parties, the payment terms for service or goods to be transferred is identifies and the contract has a commercial substance. The second step is identifying the performance obligation in the arrangement, here the entity needs to assess the services and goods that have been obligated to the client and come up with a performance obligation. The third step is determining the price of transaction; the fourth step is allocating the transaction price to the contract’s performance obligation. Consequently, the five steps will be recognizing the revenue when the firm satisfies the performance obligation. The first step in setting out the IFRS 15 is that the contracting parties need to give the contract a go-ahead. The members need to commit themselves to performing their respective obligations, assuming there is implied or oral conflict, this might be a problem, but all the pertinent circumstances and facts need to be taken care of when assessing the commitment of the partners. The parties do not always support to commitment of fulfilling all the contractual commitment. IFRS 15 provides the illustrations where a client is needed to purchase a certain number of goods. However, the experience from the past shows that the client does not always carry out this and the other partner do not always implement the contract rights. There need to be evidence; however, the two parties need to substantially commit to the contractual agreement. If the standard had required the entire obligation to be attained. Additionally, the IFRS 15 do not apply to contracts that are unperformed where all the contractual partners have the right to end the agreement without any penalty. The contracts fail to affect the financial position of an entity until the party performs the contract. Conventionally, the standard definition of a customer is a party has a contract with the firm to produce services or goods that are considered output of the ordinary activities of the entity in exchange considerations. A firm or an entity need to recognize the recognize when the institutions satisfies the performance reporting through transfer of promised services or goods to the client. An asset undergoes transfer when the client is able to control the asset. For each performance transaction identified based on the institution, the entity need to determine the contract inception if it satisfied the performance obligation over a certain period. When an entity fails to satisfy the performance reporting over a certain period, then it will be satisfied consecutively. Revenue is regarded as one of the crucial measures of the financial performance of a company (Termaten, 2014). When valuing a firm, financial analysts normally start in forecasting the revenue of the future based on the demand of the market for the services and products offered by the firm and their expected share of the market. Apart from the analysis of the financial statement, the earning s and earnings, serve as one of the main performance measures in managing the companies and in performing the management evaluation and in the debt contracts. The revenue-based compensation induces the revenue growth despite its profitability (Termaten, 2014). References IFRS 15 Revenue from Contracts with Customers. (2014). Basis for Conclusions International Financial Reporting Standard®, 2(3), 55-175. Marton, J., & Wagenhofer, A. (2010). Comment on the IASB Discussion Paper ‘Preliminary Views on Revenue Recognition in Contracts with Customers’. Accounting In Europe, 7(1), 3-13. doi:10.1080/17449480.2010.485386 REVENUE RECOGNITION | TECHNICAL. (2014). Five Step Model, 1(2), 49-54. Termaten, E. (2014). Deloitte Luxembourg Newsletter on IFRS 15. Delloite, 1(2), 2-16. Read More