Corporate Reporting and Analysis - IAS-18 - Case Study Example

Corporate Reporting and Analysis Table of Contents Table of Contents 2 Introduction 3 Standard of the IAS-18 4 Limitation of the IAS- 18 4 Key Elements of IFRS 15 5 Identifying the Contract 5 Identifying the Performance Obligation 6 Satisfaction on Performance Obligation 6 Revenue Recognition after the Performance Obligation is Satisfy 7 Potential Problems Facing by IFRS 7 Concussion 8 References 10 Introduction Capital and revenue are very important parts for an organisation. It has been often described that the availability of substantial capital and revenue generation in an organisation work as a life entity. The revenue and the capital investment is fundamental element, which helps in determining the financial performance of any company. The revenue recognition plays comparatively important part than the income to an organisation. In an online based or internet based organisation, the revenue is much important than the income. After the evolution of the internet based marketing or e-trading business organisation, the attention upon revenue recognition has been increase gradually (Wagenhofer, 2013). The revenue recognition also plays an imperative role in the performance evaluation of a company. In case of airport business, the non-aviation revenue plays crucial role. In relations to the regulated air travel or airport, business the aviation-based revenue is a significant source of business. The role of non-aviation revenue is paramount important for evaluating the performance of the airport business (Zenglein & Muller, 2007). The essay is highlights the several problems, which the financial market has been facing due to the conflict of revenue recognition in the capital market and examines the importance of revenue in informing in the performance evaluation. The essay further discusses about the several standards, rules and policies articulated by International Accounting Standard Board (IASB and the International Financial Reporting Standard (IFRS) relevant to revenue and suggests the potential improvement in performance reporting created by the issuance of IFRS 15. Standard of the IAS-18 The International Accounting Standard is a framework for the tax legislation for all organisations, which are dealing with the financial instruments. The IAS 18 mainly governs the aspects related to revenue preconisation and the performance evaluation of an organisation. This standard is mainly applied for accounting relevant to revenues that mainly arises due to few transactional events, which include sales of goods, the use of assists yielding interest, royalties and dividends and the rendering of services. In 1982, this standard came into existence that included provision related to revenue recognition. Under this standard, the goods, which are considered transactional goods, should be produced by the entity. The merchandise, retail products and the land are recognised under the International Accounting Standard 18 certified goods (European Commission, 2009). As per to this standard, rendering of services includes the performances or services, which has been provided by an authorised entity. For instance, the services provided by a project manager and architecture are referred as rendering services as per the IAS 18. As per the IAS 18, interest is charged over the cash or cash equivalent, which is used by an authorised entity (European Commission, 2009). Limitation of the IAS- 18 The IAS-18 is an important standard for recognising the revenue of all financial activities. The IAS- 18 plays an important role for the development of the international financial market. Though the standard is very much effective for generating the several policies, which are related with the finance and revenue, but it is unable to cover the several elements of the revenue concept. The standard does not include the revenue, which has been generated from lease agreement recognised under the IAS 17. The standard does not include the other source of revenue, which has been covered earlier. The standard does not include the IAS 28, IAS 39 and IAS 41. The standard does not deal with the insurance contracts that are dealt under the IFRS. IAS 18 does not include the revenue recognition from the agricultural product. The initial recognition that involves changes in the valuation of the biological assets of agricultural activity has not been included in the standard (European Commission, 2009). There are several disadvantages of the IASB, which has been faced by the several countries and economy. The main disadvantages of IASB are influence on an economy that has adverse impact upon the small business entrepreneurs. The small business are facing the competitive disadvantages, where the larger business were reaping more advantages due to deficiency in the revenue related standards articulated by IASB. It is also notified that the small businesses are spending more amounts on the regulatory activities in terms of generating the revenue than the larger or bigger companies. The IASB failed to provide the several benefits related to tax law, security law and the banking and the banking and the financial regulation, which the several companies are facing due to the interference of the IASB (Hearst Newspapers, LLC, 2014). Key Elements of IFRS 15 There are few core principals, which have been followed by the IFRS. Those principles are also followed by the several entities. The elements of the IFRS include identifying the contract with the customers, identifying the performance obligation in the contract, determining the transactional price, allocating transaction price to the performance obligation and the recognition of the revenues. Identifying the Contract The first element of the IFRS mainly identifies the several problems, which are related with the financial business purpose. It has been determined that the standards prescribed under the IFRS has been influencing the companies to make a contract between the two parties. At the initial stage, the IFSR should recognise the importance of the contract and identify the degree to which the contract has been fulfilling the several criteria articulated in the contract. The IFRS has also defined criteria, which are quite similar to the IAS 11. The single contract is also governed by the similar criteria that govern the compound contract. Identifying the Performance Obligation The essential element of the IFRS15 is to identify the performance obligation of the project. As per the IFRS, the performance obligation refers to a promise in a contract, which is promised by the entity to transfer the goods to the customers within a right time. If the entity promises to its customers to provide more than one goods or services than both the services will be considered as a separate performance obligations. This element also includes the warranties, licensing and the sales related incentives for the better performance obligation. Satisfaction on Performance Obligation As per the IFRS 15, one entity should recognise the revenue after being satisfying the performance obligation. To satisfy the customers the company needs to be more efficient in its performance obligation. In the similar case, the entity should transfer those assets, which are in the control of the company. IFRS has imposed the separate contract inspection for the separate performance obligation. This should be done by an entity for the satisfying the performance obligation. It is very much important for an entity to satisfy the performance obligation on time to get the positive remark for the revenue recognition (McConnell, 2014). Revenue Recognition after the Performance Obligation is Satisfy There are several criteria of the revenue recognition after the performance obligation is Satisfy element, which needs to be fulfilled by the several entities for recognising the actual revenues of the company, which has been generated due to several financial activities. Customers are required to enjoy the several benefits, which have been generated from the entities continuous performance. The effective performance by the company needs to control the assets proficiently. There are several elements, which need to be maintained for recognising the revenue after meeting the performance obligation (Paul & Burks, 2014). Potential Problems Facing by IFRS IFRS is recognised to be a good and efficient standard for the financial institutions. It is considered an appropriate standard, but it has several loopholes in it. These loopholes are considered very important factor for any entity. The small entities or the small companies do not have any rights to dealing out sides of the nation. The small businesses have little or no incentive for adopting the IFRS standard unless and until it is permitted by the regulation. There are lot of scope of arising of the incompatibility in the company for accepting the rules and regulation of the IFRS (Paul & Burks, 2014). There are several weaknesses, which influences the financial activity of an entity. The weaknesses and the inconsistencies in the guidelines of the revenue recognition are referred to be much problematic. The existing IRFS have several limitations related revenue guidelines. These limitations can be recognised as potential weaknesses affecting the complex transactional policies. In order to develop a healthy and inclusive framework the IFRS need to generate the new requirements in the company. The weaknesses in the framework of the IFRS 15 also affect the several sectors of the industries. The telecommunication sector and the residential real estate are the fore most entity, which will be affected by the revenue guidelines of the IFRS 15 (McConnell, 2014). In addition, collaboration of international and industrial measures is recommended to ensure consistency in the standard related to revenue recognition. At the same time, the improvement in this regard needs to be flexible enough to be applied by all the business units (McConnell, 2014). Concussion After reviewing the study, it can be stated that the revenue recognition is an important part for any company. It can be also described that revenue recognition is also useful in identifying the performance of a company. The revenue recognition has been a major element of both the standards including IAS and IFRS. The IASB was initially responsible for framing accounting standards also known as IAS, which is now being gradually replaced by the IFRS due to certain deficiencies in the performance dealing with the revenue recognition standards. However, the small companies are facing the several problems, which are related with the higher rate of investment. Correspondently, it has been found that the IASB has some deficiencies in its standards particularly in relation to the revenue recognition. Based on the understanding derived from the essay, it has been observed that the after the imposition of the IFRS 15, the companies are benefited by this new standard of revenue recognition. However, after the verification of the new imposed policy or the standard the small companies are still facing few problems. Thus, it can be concluded that the problems of the small companies are still prevalent. Under the IAS related to the revenue recognition policy, small companies were faced with high expenses, but with the implementation of IFRS, the small companies are facing investment related problems. Thus, it can concluded that the both the standards have certain drawbacks which need to be revised in order to eliminate any possible unfavourable impact on businesses irrespective of their size. Besides, it is recommended that further industrial and international collaboration is needed to ensure consistency in the revenue recognition standards. References European Commission, 2009. International Accounting Standard 18 Revenue. EC Staff Consolidated Version, pp.1-6. Hearst Newspapers, LLC, 2014. International Financial Reporting Standards - Advantages & Disadvantages. Article [Online] Available at: http://smallbusiness.chron.com/international-financial-reporting-standards---advantages-disadvantages-2167.html [Accessed November 28, 2014]. McConnell, P. 2014. Revenue Recognition: Finally, a Standard Approach for All. Investor Perspectives, pp. 1-5. Paul, A. & Burks, E., 2014. Preparing For International Financial Reporting Standards. Journal of Finance and Accountancy, pp.1-8. Wagenhofer, A., 2013. The Role of Revenue Recognition in Performance Reporting. University of Graz, pp. 1-55. Zenglein, M. J. & Muller, J. 2007. Non-Aviation Revenue in the Airport Business – Evaluating Performance Measurement for a Changing Value Proposition. Berlin School of Economics, pp. 1-20. Read More