Auburey a customer. Different contracts require different actions

Auburey
Addison

David
Senteney

We Will Write a Custom Essay Specifically
For You For Only $13.90/page!


order now

Accounting
642

November 30,
2017

 

Revenue from Contracts with Customers

 

ACT 606

            On May 2014,
FASB and the international accountings board issued a joint standard on the
issue of recognition of revenue from contracts with customers.  The FASB and the IASB formed a Joint
Transition Resource Group for Recognition of revenue. This was formed to
address issues based on feedback received from stakeholders. Based on my
research “The main objective of the Transition Resource Group is to inform the
Boards about potential implementation issues. These are issues that potentially
arise when organizations implement the new revenue guidance.

The organization also looks to
assists stakeholders in understanding certain elements of the new revenue
guidance. The Transition Resource Group is not known for issuing authoritative
guidance on the implementation issues. The Board offers evaluation of various feedback
received from the TRG and other stakeholders to determine what action, if any,
is necessary for each potential implementation issue”

 

 

 

 

This update was issued to combat potential
issues that arise when entities try to recognize revenue from customers
contracts. When dealing with customers, issues arise because actions undertaken
to fulfill a contract are not classified as performance obligations. These are
just actions that a business will do to make sure that the contract is
fulfilled. Performance obligations are the actions undertaken to transfer a
good or service to a customer. Different contracts require different actions at
times. So, it is important to recognize which actions qualify as performance
obligations and which actions do not. There will be problem in areas that need
a uniform or reference so this update looks to provide some additional guidelines
and feedback.   

First, it is important to discuss
what a performance obligation is defined as. A performance obligation simply
put is a promise to transfer a good or service. This is important to know
because a performance obligation can be stated in the contract or it can just
be implied. This can lead to a misunderstanding if contractor and contracted
are not on the same page.  This gets
tricky because even if an action is taken to fulfill a contract it is not
considered to be a performance obligation. The action must directly be linked
to the transfer of a good or service to a customer.

If a company or business has certain
standards and policies in place outside the contract, then those are implied performance
obligations.

 

 

This means that this will be
different for different companies since they don’t have the same exact policies
and procedures in place. Even though they are not stated in the contract, if
the business has other policies and standards in place then those are
performance obligations as well. In this next paragraph I will discuss elements
of the update.

According to Cbh, Performance
obligations are the actions taken in the transfer of goods or services to a
customer. These include the actions that ensure that the good or service are in
use and readily available for the customer to use in operations.  The price of the transactions will be
delegated based on the performance obligations. This emphasizes the importance
of performance obligations because it will determine how revenue will be
recognized. In order to be allocated properly, two
things must first be present. First, the good or services must be distinct. Also,
those distinct goods or services must have the same pattern when transferred to
a customer. A good or service is distinct only if the goods or service is
proven to be beneficial and readily available. Also, the promise to transfer
goods or services is separately identifiable from other obligations in the
contract.

The first issue that is addressed is
implementation. Implementation is the carrying out or execution of a standard
or policy. If the implementation of the standard is hard to understand or difficult
to interpret, inconsistencies will likely arise as a result.  The TRG was formed to address implementation
issues that arise from recognizing revenue from contracts with customers which
is the main topic of this paper. This is important because potential issues

 

 

will arise when trying to update and implement a new guidance
for recognition.  The purpose of this
standard is to address the following issues.

            The first
issue addressed is performance obligations. Which is something we briefly
discussed above. The focus of this area is to assess whether promised goods and
services are immaterial in the terms of the contract. So, do the goods or
service are readily available to use in operations. Based upon the feedback and
evaluations they received, the issue of immaterial versus material is one that
needs to be highlighted and improved upon. Organizations are having problems trying
to properly recognize the items in this case to report and recognize them
properly. When an organization has identified a performance obligation they then
need to determine whether it is necessary to assess whether promised goods or
services are performance obligations.

Also, they need to determine whether
promised goods or services are separately identifiable. These issues are
reasons for the FASB update because they present challenges and are hard to be
done properly. A significant challenge that exist is trying to determine whether
shipping and handling activities are a promised service in a contract or are
activities to fulfill an entity’s other promises in the contract. In order to
eliminate this, an update is required to show consistency. FASB as issued this
update to help simplify this issue and make sure they set a standard and policy
that is easier to follow and implement.  If consistency is established then

 

 

different users of financial
information will reach the same conclusion regardless of where they are.  The new update will provide some guidance on
the principle of determining whether a good or service is separately
identifiable or combined.

In some cases, it is difficult to   determine whether its promise to a customer
is separate. For example, a promise to transfer a goods or service to a
customer. This would be an example of an item that is separately identifiable as
opposed to a combined item. The Next

issue that this update hopes to address is the licensing
issue. According to FASB, the licensing issues comes from trying to determine
the nature of a promised goods or services as discussed earlier. The issue
arises when an entity’s intellectual property comes into play.

This is an issue that is solved over
time just as revenue is recognized over time. The FASB states it as “Determining
the nature of an entity’s promise through the granting of a license.” The
granting of a license grants access to the entity’s intellectual property.”

The next thing that comes into play
is the scope and applicability of the guidance. Since the guidance is broad it
can be interpreted in a variety of ways. As a result, the application of this practice
is not consistent. As a result, more problems will arise because users will not
apply the standard or police the same way. The reason why this standard is
important is because it will eliminate some confusion and provide some clarity
for the users of the information.  

 

 

 

How broad is the scope of the
guidance and when it is applicable in certain situations? When is it acceptable
to recognize revenue for sales based transactions and activities. This question
also applies to royalties promised in exchange for a license of intellectual
property. This is an issue because it is hard to apply this criteria in certain
situations. It is important to have a clear standard that has a uniform way of
being applied.

Having a uniform standard will help
because there will be reference when certain issues come into play. This is
especially true when intellectual property rights are involved. When certain
promises are made in exchange for intellectual property rights, it is important
to recognize these issues correctly.  The
next issues come from separating contracts that require an entity to transfer
licenses to a customer. This arises from certain contract stipulations that
represent a promised license.

An example of this would be geographical
region or time restrictions. So, has a result of all these issues listed above,
the Board hopes to improve the topic of Revenue Contacts with customers. The
board hopes to do this by reducing the following issues. The first is to reduce
the potential or possibility for diversity in the initial application practice.
By reducing diversity in the application process, the board will eliminate issues
and inconsistencies.

The main people affected by this update
includes entities within the scope of this topic. This basically describes
entities that enter into contracts with customers. This includes contracts with
customers to transfer goods or services. The update will help those businesses
that provide provisions under these topics. The updates will help to clear up interpretation
and

 

 

recognition issues regarding these topics. This is helpful
because entities often into relationships with customers. So, this update will
provide beneficial to both ends. This is because standards and policies will be
applied correct and more effective.  

According to FASB, the provisions are
in place to ensure that an entity should recognize revenue to depict transfer
of promised goods and services. The entity should be able to highlight and give
general sum of how the entity expects to be entitled in exchange for the goods
and services. As a result, an identity should apply the following steps. First
the entity, Identify the contract with customers. They should do their due diligence
to ensure that the contract is standard of both ends.

Make sure that the contract and the
customers are prepared in accordance and standards. Identify the elements of
the contracts that need to be emphasized and make sure that the customer is
properly identified. So, the first step that is required is to identify the
contract with the customers. Make sure that the stipulations and elements of
the contracts are in place and properly identified and drawn out.

The next step is to identify
performance obligations of the contract. This is an important aspect because before
an entity can identify its promised obligations in a contract, it must first
identify the promised goods or services that are stated in the contract. As a
result, these updates should reduce the price and difficulty of applying the
guidance in identified goods and services. According to FASB the new updates
and provision are as follows.

 

 

Based on my research, if promised
goods and services are immaterial, an entity does not have to determine if promised
goods and services are performance obligations. They key here is how are they
in relation to the contract. It is important to distinguish whether they are
material or immaterial. Also, an entity is can account for shipping and
handling after a customer has obtained the goods or service and it is readily
available to use. As I discussed above, the new update requires that the promised
goods and services are distinct.

To be allocated properly, two things
must first be present. First, the good or services must be distinct and those distinct
goods or services must have the same pattern when transferred to a customer. A
good or service is distinct if the goods or service is proven to be beneficial
and readily available. It is proven to be distinct when the promise to transfer
goods or services is separately identifiable from other stipulations in the
contract.  

According to FASB, this update hopes
to better explain the principle and the concept of determining which promised
goods and services are separately identifiable. The updates hopes to do this by
explaining that goods and services are separately identifiable by examining the
nature of its promise in the contract. It is important to know if the item is
combined and if it is combined the promises and services will then be
considered inputs.

 

 

 

 

Finally, how does this compare to
International Standards? The Amendments for this topic 606 provides guidelines
and clarity for revenue recognition. It does not change the core principles and
standards. This update provides more additional feedback in guidance in the
areas that are causing the most problems and Issues. This update is in response
to feedback received from its stakeholders. As I discussed above, this
amendment will look to decrease the amount of judgement necessary when facing
issues of this nature.

The difference between the FASB and
IASB comes in the licensing application. Under the IASB’s standard,
intellectual property will be recognized over time. Also, Revenue in certain
cases may be recognized at a point in time where entities which an entity will
take no actions that will affect or decrease the ability of the customer to
receive the intellectual property.  Overall,
I agree with this update do to the fact that it provides feedback and guidance
in a confusing area for some entities. The update will help people distinguish
promised performance obligations and help entities in the process of
transferring goods and services to a customer.

This update also
helps to identify and separate certain obligations. It also makes it clear that
certain actions undertaken to fulfill a contract are not performance
obligations. And finally, performance obligations can be stated or implied
depending upon the policies and procedures of a business. Thank you, professor,
for a nice and informative class. I enjoyed the course and will definitely recommend
other students.