The Writing Assignment Will Demonstrate Writing Across The C

The writing assignment will demonstrate writing across the curriculum by responding to the following topic in a words in length paper

The writing assignment will demonstrate writing across the curriculum by responding to the following topic in a words in length paper. Topic: Two accounting students were discussing the timing of revenue recognition for long-term construction contracts. The discussion focused on which method was most like the typical revenue recognition method of recognizing revenue at the point of product delivery. Bill argued that recognizing revenue upon project completion was preferable because it was analogous to recognizing revenue at the point of delivery. John disagreed and supported recognizing revenue over time, stating that it was analogous to accruing revenue as a performance obligation was satisfied. John also pointed out that an advantage of recognizing revenue over time is that it provides information sooner to users. Discuss the arguments made by both students. Which argument do you support? Why?

Paper For Above instruction

The discussion of revenue recognition for long-term construction contracts is a complex and significant aspect of accounting practice, primarily because it impacts how and when revenue is reported, which in turn affects financial statements and decision-making processes of stakeholders. The two accounting students, Bill and John, explore contrasting perspectives on the most appropriate method of revenue recognition: recognizing revenue upon project completion versus recognizing revenue over time. Analyzing their arguments reveals fundamental principles within Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS), as well as practical considerations related to financial reporting.

Bill advocates for recognizing revenue at the point of project completion, positing that this method is most akin to recognizing revenue at the point of delivery of a product. Under this approach, revenue is not recognized until the construction project is fully finished and the performance obligation has been entirely satisfied, aligning with the traditional realization principle that revenue should be recognized when earned and realizable. This method offers the advantage of simplicity and clarity; it reflects a definitive point in time when the company has fulfilled its contractual obligations, and the risks and rewards of ownership are transferred to the customer. This approach is consistent with the outcome-based model in accounting, as it recognizes revenue only when the project’s completion can be reliably measured, and the costs incurred are known.

However, critics of revenue recognition solely at completion argue that this approach may delay revenue recognition and thus obscure the company's current financial performance. It fails to provide timely information to investors, creditors, and other stakeholders, which could hinder informed decision-making. Additionally, in the context of long-term contracts, completion can be a lengthy process, and waiting until project completion could distort the financial picture, especially if the project spans multiple accounting periods.

Conversely, John supports recognizing revenue over time, asserting that it better approximates the ongoing performance and provides earlier, more relevant information. Under this method, revenue is recognized progressively as the company satisfies its performance obligations, which is aligned with the percentage-of-completion method endorsed by both GAAP (via ASC 606) and IFRS (via IFRS 15). This approach reflects the reality that construction companies often perform work over extended periods, and the transfer of control or benefits to the customer begins before the project’s completion. Recognizing revenue over time therefore allows for a more accurate reflection of the company’s economic activities within each reporting period, enhancing the timeliness and relevance of financial information.

An important advantage of revenue recognition over time highlighted by John is that it provides earlier financial insights, enabling stakeholders to assess ongoing performance more accurately. This timeliness can be critical for decision-making, especially when projects are large and span multiple periods. Moreover, recognizing revenue incrementally aligns with the performance-based nature of long-term contracts, emphasizing progress and ongoing obligations.

Despite these benefits, the over-time recognition method demands rigorous measurement of progress and costs, and it introduces complexities in estimating the percentage of completion. Accurate progress measurement can be challenging, and any misestimations can lead to misstated revenues and profits. Therefore, implementing this method requires robust internal controls and transparent reporting practices.

In my view, I support John's argument for recognizing revenue over time, particularly because of the advantages related to providing timely and relevant information to users. Stakeholders benefit from understanding the company’s performance as it occurs, rather than waiting until project completion. Additionally, the recognition of revenues proportionally to the work completed aligns with the economic realities of long-term projects, allowing for a more precise reflection of ongoing obligations and resource utilization. While there are challenges in accurately measuring progress, advancements in technology and estimation methods have made the over-time recognition approach more feasible and reliable.

In conclusion, although recognizing revenue at project completion can offer simplicity and clarity, supporting the traditional view, recognizing revenue over time offers a more realistic and informative picture of the company's ongoing performance. Therefore, I believe that the over-time revenue recognition method better serves the principles of financial reporting and the needs of stakeholders by providing timely, relevant, and accurate information.

References

• FASB Accounting Standards Codification (ASC) Topic 606. Revenue from Contracts with Customers. Financial Accounting Standards Board, 2014.
• International Financial Reporting Standards (IFRS) 15. Revenue from Contracts with Customers. International Accounting Standards Board, 2014.
• Kieso, D. E., Weygandt, J. J., & Warfield, T. D. (2020). Intermediate Accounting (16th ed.). Wiley.
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