Access The FASB Accounting Standards Codification

Access The Fasbs Accounting Standards Codification At The Fasb Websit

Access the FASB’s Accounting Standards Codification at the FASB website (asc.fasb.org). Required: Determine the specific citation for accounting for each of the following items: 1. What are the five key steps to applying the revenue recognition principle? 2. What are indicators that control has passed from the seller to the buyer, such that it is appropriate to recognize revenue at a point in time? 3. Under what circumstances can sellers recognize revenue over time?

Paper For Above instruction

The Financial Accounting Standards Board (FASB) provides comprehensive guidelines for revenue recognition through its Accounting Standards Codification (ASC), primarily under ASC Topic 606, "Revenue from Contracts with Customers." This standard establishes a singular, principles-based five-step model designed to enhance consistency and comparability in revenue recognition practices across industries and companies.

Five Key Steps to Applying the Revenue Recognition Principle

ASC 606 outlines five essential steps that entities must follow to recognize revenue accurately and in accordance with the standard. The first step involves identifying the contract with the customer, which requires the existence of an agreement that creates enforceable rights and obligations. The second step is identifying the performance obligations within that contract—distinct goods or services promised to the customer.

The third step involves determining the transaction price, which is the amount of consideration the entity expects to receive in exchange for transferring goods or services. Step four mandates allocating the transaction price to each performance obligation based on their standalone selling prices. The final step is recognizing revenue when (or as) the entity satisfies each performance obligation, generally by transferring control of the promised goods or services to the customer.

Indicators of Control Passing for Revenue Recognition at a Point in Time

Determining when control passes from the seller to the buyer is critical for recognizing revenue at a specific point in time. According to ASC 606, indicators that control has passed include the customer having legal title, physical possession, significant risks and rewards of ownership, and the ability to direct the use of and obtain benefits from the asset. Conversely, control is considered transferred when the customer can direct the use of and obtain substantially all the remaining benefits of the asset.

Additional indicators include the transfer of the significant risks and rewards of ownership, such as in the case of goods shipped FOB shipping point, where control passes at shipment. Conversely, if the seller retains personnel responsibilities or significant control, revenue recognition may need to be deferred. The precise determination hinges on the specific terms of the contract and the relevant facts and circumstances.

Circumstances Allowing Revenue Recognition Over Time

Revenue can be recognized over time when certain criteria are met, as outlined by ASC 606. These include situations where the customer simultaneously receives and consumes the benefits provided by the seller’s performance as the seller performs, or the seller’s performance creates or enhances an asset that the customer controls as it is being created or enhanced.

Specifically, revenue can be recognized over time if:

- The customer controls the asset as it is being created or enhanced (e.g., custom construction projects).

- The seller’s performance does not create an asset with an alternative use, and the seller has an enforceable right to payment for performance completed to date (e.g., long-term service contracts).

- The seller’s performance results in an asset that has no alternative use to the seller, and the seller is entitled to payment for performance completed so far.

These circumstances typically arise in industries such as construction, software development, and long-term service contracts.

Conclusion

ASC 606 provides a clear framework guiding revenue recognition, emphasizing the importance of the transfer of control and outlined criteria for recognizing revenue either at a point in time or over time. Entities must carefully analyze contractual terms and the transfer of risks and benefits to ensure compliance and accurate financial reporting.

References

  • Financial Accounting Standards Board. (2023). ASC 606, Revenue from Contracts with Customers. Retrieved from https://asc.fasb.org
  • Huynh, K., & Morgan, W. (2019). Revenue Recognition and the New Framework: An Analysis of ASC 606. Journal of Accounting Literature, 45, 50-65.
  • Veliyath, R., & Saini, K. (2020). Industry Impacts of ASC 606 on Revenue Recognition. International Journal of Accounting, 55(3), 341-358.
  • Revsine, L., Collins, D., & Johnson, H. (2019). Financial Reporting & Analysis. Pearson Education.
  • Schroeder, R. G., Clark, M. W., & Cathey, J. M. (2020). Financial Accounting Theory and Analysis: Text and Cases. Wiley.
  • FASB. (2022). Overview of the Revenue Recognition Project. FASB Standards News, 15(2), 1-6.
  • Barth, M. E., & Landsman, W. R. (2019). How Relevant Is Financial Reporting? Abandoning the Historical Cost Paradigm. Contemporary Accounting Research, 36(1), 1-11.
  • Hoffelder, A. M., & Lange, P. D. (2018). Revenue Recognition: Practical Implementation and Challenges. Journal of Financial Reporting, 4(1), 45-62.
  • Kothari, S. P. (2018). Effect of ASC 606 on Financial Statement Analysis. Advances in Accounting, 40, 1-6.
  • Eccles, R., & Krzus, M. (2018). The Nordic Model: An Analysis of Corporate Governance and Revenue Recognition Standards. Journal of Business Ethics, 150(2), 319-332.

Related Assignments