A Summary of the Accounting Theory

Proposed Changes in Revenue Recognition Under U.S. GAAP & IFRS

By :
Pande Made Indra 1406533724
Ribka Setiawati 1406533850
Melvia Alodia 1406534273

Dosen : Elvia R. Shauki, Ph.D

Fakultas Ekonomi dan Bisnis

Universitas Indonesia
2017/2018
 I. BACKGROUND
In December 2008, IASB and FASB issued a discussion paper about Preliminary Views on
Revenue Recognition in Contracts with Customers which describes a single, contract based
revenue recognition model. The propose of the discussion paper is the revenue recognition
should be based only on an entitys contract with a customer. The objective of this paper is to
create a unified standard for U.S. companies that follow U.S. GAAP and for non U.S. entities
that follow International Financial Reporting Standards (IFRS). The result should be more
consistent revenue recognition for similar contracts regardless of the industry in which an entiry
operates. Thereby, it will improve the comparability and understandability of revenue for users
of financial statements.

II. OBJECTIVE
Both IASB and FASB focus on changes in asset and liabilities for the revenue recognition.
Because the revenue recognition under the proposed model defines revenue in terms of an
increase in assets, a decrease in liabilities, or the combination of the two. By focusing on changes
in asset and liabilities, the earning process approach will be more consistent for similar contracts
regardless of the industry in which an entitiy operates. Thus, the revenue recognition will not be
subjective anymore.

III. METHODOLOGY
This discussion paper that was issued by IASB and FASB in December 2008,
is an important, non-mandatory step in the boards due process of creating a standard. In the DP
the boards explain their initial views on the topic, including some of the principles that they
propose as the basis of a future standard. The methodology used in this discussion paper is by
commenting the discussion paper. The main source of the data is primary data because the
boards first collected the commenting data as a feedback from interested parties and then they
considered the feedback to develop an exposure draft.
IV. FINDINGS AND DISCUSSIONS
Under the new standard, ...
- Revenue recognition focuses on revenue from contract with customer. A contract is
defined as an agreement between two or more parties that creates enforceable rights and
obligations. A customer is a party that has contracted with an entity to obtain a good or
service from the seller. This standard focuses on changes in the rights and obligations
under the contract between the customer and the seller.
- Revenue is recognized when a contract asset increases, a contract liability decreases, or a
combination of the two. A contract asset is is an entitys right to payment for goods and
services already transferred to a customer if that right to payment is conditional on
something other than the passage of time. For example, an entity will recognize a contract
asset when it has fulfilled a contract obligation but must perform other obligations before
being entitled to payment. A contract liability is an entitys obligation to transfer goods or
services to a customer at the earlier of (1) when the customer prepays consideration or (2)
the time that the customers consideration is due for goods and services the entity will yet
provide.
- Revenue is recognized only when the seller satisfies its performance obligations under a
contract that does not occur on day one but over the life of the contract. The standard will
preclude the recognition of a contract asset and revenue at contract inception.
- A performance obligation is a promise in a contract with a customer to transfer an asset to
that customer. Performance obligation initially would be measured at the transaction
price. Under the standard, revenue recognition is linked to customer control as an item is
constructed (satisfying performance obligation) and not based on a proportional
allocation of revenue using percentage-of-completion method.
- Performance obligation should be separately accounted for when the promised assets are
transferred to the customer based on when the customer obtains control of them. If a
contract consists of more than one performance obligation, the entity would allocate the
 transaction price to the performance obligations on the basis of stand-alone selling prices
of the asset underlying the performance obligation.
- If the expected cost of satisfying the performance obligation exceeds the carrying amount
of performance obligation, the performance obligation is remeasured to the entitys
expected cost of satisfying the performance obligation, and a contract loss would be
recognized.
- If an entity transfers a performance obligation to another party, they should not recognize
revenue for that performance obligation.
- Entity should recognize revenue for a nonmonetary exchange transaction only if the
transaction has commercial substance (changes future cash flows of the entity
significantly).
- Revenue recognition could change significantly for some practices, such as contracts with
multiple deliveries, software, construction, and other industries which had specific
standard previously.
- In construction contract, each promised asset within the contract could be a separate
performance obligation according to the new standard.
- In post-delivery services such as warranties, the new standard would defer the revenue
and treat them as performance obligations. Revenue will be recognized when the
obligation is satisfied.
- The new standard provides that contract origination costs would be expensed unless able
to be capitalized under other standards.
- Preparers, auditors, regulators, and standard setters can be benefited by this standard
because it can assist in addressing future revenue recognition question. Users of financial
statement is also benefited because economically similar transactions would be reported
similarly.
Regarding the theory of revenue,
- This standard satisfies the definition of revenue as in the AASB framework.
- This standard modifies the requirement for revenue recognition criteria. The completion
date is when performance obligation is satisfied, no exception. The measurement is
 normally at transaction price or it can be at the cost to complete, if the cost to complete is
higher than the transaction price. The existence of transaction is known from the contract
itself between the entity and the customer.

V. CONCLUSION
Based on the discussion paper, we can conclude that the proposed revenue recognition by the
boards will benefit the users who use IFRS or US GAAP. As we know that the proposed revenue
recognition focus on changes in assets and liabilities, it should not fundamentally charge current
practice for most transaction. Instead, it will simplify the US GAAP and provide the guidance
lacking in IFRS.