InstantExpert
A quick guide to revenue
recognition
Revenue recognition is a delicate area for many businesses, and getting it wrong can have serious consequences
A quick guide
to revenue recognition
Revenue recognition is a delicate area for many businesses, and getting it wrong can have serious consequences
Revenue recognition is essential because it ensures that financial information is reliable, transparent, and consistent, allowing stakeholders to make informed decisions.
Just ask Tesco about the importance of getting revenue recognition right.
In 2014, its increasingly aggressive interpretation of the practice caused it to overstate its profits by £263m. So, let’s unpack the key principles of revenue recognition, its importance and challenges.
EXAMPLE
Tesco’s £263m overstatement
Tesco overstated its profits by £263m for the first six months of 2014. The scandal revealed that accruals were carried back into the relevant financial period and liabilities deferred later, which inflated the interim figures.
Walk me through it
The core principles of revenue recognition are outlined in the Financial Accounting Standards Board’s (FASB) Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers. They include:
a. Identifying the contract with a customer.
b. Determining the performance obligations.
c. Allocating the transaction price to each obligation.
d. Recognising revenue when obligations are satisfied.
Common challenges
Accountants may face several challenges in revenue recognition, such as:
a. Determining the transaction price when contracts include variable consideration or complex pricing structures.
b. Assessing performance obligations accurately, especially in cases involving multiple deliverables.
c. Allocating transaction price fairly across performance obligations.
d. Recognising revenue over time or at a point in time, depending on the nature of the performance obligations.
Recent updates to standards
The FASB and the International Accounting Standards Board (IASB) jointly issued ASC 606 and International Financial Reporting Standards (IFRS) 15, respectively, to establish a unified revenue recognition framework. These standards introduced a five-step model for revenue recognition, emphasising the importance of consistency across industries.
Got a suggestion?
Let us know what you’d like to become an instant expert in by completing our reader survey. For more details, click here.
