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Summary c245 tASK 1.docx C245 Revenue Recognition Importance Accounting Research C245 Task 1 Western Governors University Revenues are the inflows or other enhancements of assets of an entity or settlement of its liabilities during a period from delivering
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c245 tASK C245 Revenue Recognition Importance Accounting Research C245 Task 1 Western Governors University Revenues are the inflows or other enhancements of assets of an entity or settlement of its liabilities during a period from delivering or producing goods, rendering services, or other ...
c245 task 1docx c245 revenue recognition importance accounting research c245 task 1 western governors university revenues are the inflows or other enhancements of assets of an entity or settle
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C245
Revenue Recognition Importance
Accounting Research C245 Task 1
Western Governors University
Revenues are the inflows or other enhancements of assets of an entity or settlement of its
liabilities during a period from delivering or producing goods, rendering services, or other
activities that constitute the entity’s ongoing major or central operations (Kieso, 2013, p 53).
Revenues have many names, such as sales, fees, rent, interest, royalties, and service revenues.
Revenues are important assessments of how successful a company is operating. The financial
industry uses revenues to gauge a company’s success and how a company is meeting its targets.
Under generally accepted accounting principles (GAAP) the recognition of revenues
occurs when revenues are realized or realizable and when it is earned. The Untied States
Securities and Exchange Commission (SEC) staff believe that revenue is realized or realizable
and earned when persuasive evidence of an arrangement exists, delivery has occurred or services
have been rendered, the seller’s price to the buyer is fixed or determinable, and collectivity is
reasonably assured (Codification of Staff Accounting Bulletins, 2017). Revenue recognition
becomes more complex when one or more of the above principles are not met. This can be seen
in the following industries: real estate, construction, healthcare, and entertainment. These
industries recognize revenue in a customer-by-customer basis or contract-by-contract basis.
Revenue recognition is one of the biggest factors of fraud and error in the accounting
world. Misstatement of revenue recognition can be from mistakes in interpretations or fraud.
Revenue recognition is prevalent in fraud with the following issues: fictitious sales, improper
cut-offs, sham related-party transactions, and side agreements. Fictitious sales include shipment
of products to nonexistent customers, sales recorded for canceled or duplicated order. Improper
, cut-offs include holing the books open beyond the end of an accounting period to record end-of-
period sales. Sham related-party transactions includes recording intercompany transactions as
external sales and sales of assts to one related party to another. Side agreements are agreements
that are create outside the normal and proper recording processes. The most common schemes in
revenue recognition fraud are related to fictitious sales and timing issues, which account for 83
precent of revenue recognition frauds (Campanelli & Florio, 2019).
Revenue recognition fraud is prevalent because of the incentive, opportunity and rational
that is present in a company. Incentive to commit fraud can stem from a manager’s yearly bonus
being based on the amount of revenue the company recognized in a year. In the case the
manager could use fictitious customers to make sales look better than what the truth is to get a
higher bonus. Opportunity for fraud becomes an issue when a company does not have good
internal controls set forth to help prevent this type of situation. An example of opportunity is if
the same person who puts in the customer orders for a company is the same person who approves
orders. When committing fraud some managers rationalize that the fraud is acceptable because
the manager is trying to help the company by making the company look better on the books.
There are two revenue recognition methods to account for contract-by-contract basis
situations. Both methods have positive and negative consequences. The first method is
percentage-of-completion method which recognizes revenues, costs, and gross profit as a
company makes progress toward completion on a long-term contract (Kieso, 2013, p 1058). In
this method, a company must meet one of three of the following criteria to recognize
performance obligation in a certain period. A customer receives and consumes benefits of the
company’s services, the company’s services create or enhance a customer-controlled asset, or the
company has an enforceable right to payment for services completes to date (PWC, 2017, p 14).
The alternative method is completed-contract method which recognizes revenue and gross profit
only at point of sale – that is, when the contract is completed (Kieso, 2013, P 1063). In this
method a company can either benefit or hinder from the tax rate of the period in which the
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