28 Pages Posted: 27 Mar 2011 Last revised: 11 Jun 2013
Date Written: March 6, 2011
This paper proposes an accounting for revenues as an alternative to the proposals currently begin aired by the FASB and IASB. Existing revenue recognition rules are vague, resulting in messy application, so the Boards are seeking a remedy. However, their proposals replace the traditional criteria — revenue is recognized when it is both “realized or realizable” and “earned” — with similarly vague notions that require both the identification of a “performance obligation” and the “satisfaction” of a performance obligation. Our framework aims for the concreteness that yields practical accounting solutions. It has three features. First, revenue is recognized when a customer makes a payment or a firm commitment to pay. Second, revenue recognition and profit recognition are combined, with profit recognition determined on the basis of objective criteria about the resolution of uncertainty under a contract, and then conservatively so. Two alternative approaches are offered: the complete contract method (where profit is recognized only on the termination of a contract) and the profit margin method (where a profit margin is applied to recognized revenues throughout the contract as the contract profit margin becomes clear. The latter requires resolution of uncertainty, so the completed contract method is the default.
Suggested Citation: Suggested Citation
Biondi, Yuri and Bloomfield, Robert J. and Glover, Jonathan C. and Jamal, Karim and Ohlson, James A. and Penman, Stephen H. and Tsujiyama, Eiko, Accounting for Revenues: A Framework for Standard Setting (March 6, 2011). Accounting Horizons, Vol. 25, No. 3, September 2011; University of Alberta School of Business Research Paper No. 2013-690. Available at SSRN: https://ssrn.com/abstract=1792494 or http://dx.doi.org/10.2139/ssrn.1792494
Response to the Financial Accounting Standards Board's and the International Accounting Standard Board's Joint Discussion Paper Entitled, 'Preliminary Views on Revenue Recognition in Contracts with Customers'