N400 Accounting

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Part A: Literature Review

The main issue for this literature review is to assess the impact that joint US GAAP and IFRS revenue recognition project will have on firms. This literature review seeks to validate that the firms will be affective negatively and positively when the project is fully implemented. Revenues remains an essential number to financial statement users when assessing the financial performance as well as position of an entity. Nevertheless, recognizing revenue requirements in the United States GAAP vary from those of IFRS, and both sets of requirements require enhancement (Zeff 2013). The United States GAAP entails vast recognition of revenue concepts along with several requirements for a given industry and transactions which could lead to diverse accounting for the similar transactions economically. Despite IFRS’s less requirements recognition of revenue, the 2 principal standards for recognizing revenue, IAS 18, Revenue, along with IAS 11, Construction Contracts, could be challenging to fathom as well as apply (Waymire and Sudipta 2008).

Further, IAS 18 offers restrained guidance on significance subjects like recognition of revenue for multifaceted-aspect arrangements. Consequently, the FASB and IASB introduced a joint project for clarifying the principles for the recognition of revenue as well as for developing a shared revenue standard for the United States GAAP alongside IFRS which would: (i) Eliminate inconsistences as well as shortfalls in the prevailing requirements of revenue (ii) Give a robust scheme to address issues of revenue (iii) Enhance comparability of practices of recognizing revenue crossways entities, jurisdictions, industries as well as capital markets.

 (IV) It will give useful info to users of financial statements via enhanced requirements for disclosure (v) Simplifying the financial statements preparations by lessening the quantity of requirements that a given entity has to refer (Shamrock 2012). The FASB and IASB have proposed amendments to Standards Codification of Accounting for FASB as well as IFRS. This literature review present a detailed examination of recognition of revenue project that has been generated in a collaborative manner by FASB and IASB as a mechanism for enhancing present guidelines for accounting (PwC 2013).

It is determined in this review that when the project is fully implemented, the projected standard would influence entities in 3 diverse manners: (i) Entities could incur the costs of implementation (ii) Entities could undergo restructuring of their respective businesses practices in reaction to the new standard (iii) Financial statements alterations could happen for certain entities. Particularly, the review has estimated that airline revenue could reduce by approximately ten percent in year the projected standard will be implemented since the deferral of revenue from regular flyer programs (AAA. 2010).

Such approximated influence are because of significant variations between present GAAP and projected recognition of revenue guidance project (Pounder 2012). The outcome of this review is suggestive that certain entities could require to undertake preparation of significant alterations linked to implementation of recognizing revenue program (Financial Accounting Standards Board & International Accounting Standards Board. 2012).

The recognizing revenue project implementation remains undisputedly going to have an extensive impact on many entities utilizing IFRS and GAAP alongside financial information users that are prepared in compliance with the standard. Substantial alterations on the processes of accounting utilized in recognizing revenue will occur thereby greatly impacting entities embracing this standard (De Franco, Kothari and Verdi 2011).

With regards to the cost of implementing the project, entities will be required to undertake preamble approximation of the cost for applying this newfangled standard as well as presently forecast the total costs. For example, IBM has approximated the total cost to be ranging between $35 and $40 million. Such an estimate makes up less than the 1% of the revenues of IBM, nevertheless, the firm could surely rather spend such cash elsewhere (Brown and Yen-Jung 2006).

Several entities like IBM shall face differing degrees of costs for implementing the standard resulting from this recognizing revenue project. Such costs shall entail those incurred when updating software for accounting, staff training, and collection of essential info needed for the restatement of forthcoming year’s financial statements along with additional inevitable costs. Both the initial as well as the recurrent efforts for implementing such alterations could be costly leave along being burdensome, in the absence of generation of meaningful information to both users internally or externally of the financial info (Holzmann 2011).

In the construction industry, firms seem to feel as if it will be a total waste of time and money implementing the projected standard. For example, Boeing from the aerospace industry, hold that applying the projected guidance might prove costly, impracticable as well as burdensome as a result of duration, number as well as complexity of the long-run contracts. There is prevailing evidence crossways industries suggesting that many companies remain extremely troubled with cost of implementing this projected standard (Petersen 2005).

With respect to business practices’ restructuring, the critical review of literature unearths that entities have indicated their willingness to alter the manner in which their operations are undertaken in reaction to the alterations in the standard of accounting. The single most remarkable case of such a change took place where FASB gave statement of financial accounting standard 123R (SFAS123R). It altered the manner in which compensation is accounted for by firms in terms of stock options. The SFAS123R needed the entities to undertake to report the compensation of stock option as the expense on respective statements of income in the time issued as well as undertake adjustments to the option’s fair value at every subsequent date of reporting (Peterson, Schmardebeck and Wilks 2014).

Such an alterations led to increased expense for those firms utilizing staff stock options that subsequently triggered the decrease in net income. Rather than speaking to the SFAS123R consequences, firms made a decision to alter their respective practices relating to the staff stock option. For example, it has been discovered by Brown and Lee that companies reduce option-oriented compensations for their corresponding leading five executives by thirty-one percent in reactions to the SFAS123R’s issuance. The overhead revelations are demonstrative of the impact that standards of accounting have undergone substantial changes to alter entities’ practices.

Such a change will be inevitable in concert tickets sales as business practices in this case will substantially alter. Pricing of tickets is done in varying ways based on when sales are made along with where affiliated seats are positioned, as well as any extra gains such tickets avail. The entire concert’s profitability could be reliant on the particular tickets sales since some are sold at losses. A company which puts a concert might be facing liabilities reporting because of testing (onerous). Probable reactions to the above case shall probably impact the contract pricing and in turn, corresponding performance obligations.

A single most possibility in this scenario is that a given entity might surge the tickets’ selling price to evade onerous testing reporting linked to a liability. The company might further classify these tickets strategically to match the profitable ones with the ones sold at loses, and hence, evade the onerous scenario. Such a move might be a mechanisms of barring loses from projections in the course of life of a given contract.

Part B: Three Articles Selected and Compared

In this section, three article are identified and subsequently critiquing the methods utilized. The article selected include Jack 2014; De Franco et al. 2011 and Peterson et al. 2014. The three article have been chosen since they give the most credible information that will inform my study. The three article have assumed effective methodological approaches for recognizing revenue. Methods employed by these scholars allow for effective measurement of recognition of revenue project’s influence on comparability amid financial statements of companies as well as its corresponding gains to companies and stakeholders. The overhead outcomes are suggestive of a significant rise in comparability as a result of the project.  

Peterson, K., Schmardebeck, R., and Wilks, T. J. 2014. “The earnings quality and informational effects of accounting consistency”. Working paper.

The method used in this paper was effective to understanding the impact of the joint revenue recognition. The researchers first specified the measures of accounting consistency crossways time and firms on the basis of the textual similarities of the accounting policy footnote disclosed in the 10-K fillings. It was effective to examine how such measures are connected with the earnings quality as was done in this paper. The use of absolute accrual model residuals was also advantageous when understanding the consistency. The method was also beneficial since it employed the examination of the info processing effects of consistency in accounting. This is because it allowed the researchers to discover that superior cross-sectional consistency in time-series as well as cross-section is linked to greater analysts’ coverage, increased accurate analyst forecast, and declined dispersion in forecast alongside stronger inventory return synchronicity.

Jack, K., 2014. The Impact of the Revenue Recognition Project (Doctoral dissertation, University of Oregon).

The authors sought out to examine the impact of project of recognizing revenue generated jointly by FASB and IASB as a means to enhance the present guidelines of accounting. The main method used by this study was systematic review of literature. This method was advantageous since it allowed the author to collect data from a range of credible sources and examined them to reach a conclusion. Through this method, the researcher managed to determine that the implementation of the project would impact entities in 3 ways as explained in part A. The systematic review of literature and the case study on Airline industry gave empirical findings on the impact of the project which was effective. Moreover, this method allowed the researcher to understand the background of accounting along with revenue recognition as well as analysis of the present besides proposed standards, hence effectively determining the alterations that recognizing revenue project will have. The method effectively allowed the researcher to examine via the case study of US Airline’s revenue produced especially from frequent flyer programs during the year 2013.  

De Franco, G., Kothari, S.P., Verdi, R. 2011. “The benefits of firm comparability”. Journal of Accounting Research 49, 895-931.

Latest study by DeFranco et al. 2014 indicates that comparability amid firms offers a measurable gain for organizations. The study has focused on developing a measure of the financial statement comparability. It has used empirical analysis included correlation and regressions to come up with a measure that empirically is positively linked to analysist following as well as forecast accuracy besides negatively linked to analysts dispersion in forecast’ earning. The advantage of this empirical analytical approach is that it contributes to the literature in two-fold: it develops an empirical financial statement comparability’s measure that captures the comparability from the users’ perspective like analysts evaluating past performance and forecast future performance of a firm. It has also constructed a measure of the relative comparability at the level of firm-pair whereby a measure is computed for every potential pair of firms in similar industry. Another advantage is that the measure developed is firm-oriented, output-focused and quantitative that is superior to qualitative input-oriented comparability definition like accounting methods.  The advantage is that input-based measures are challenging since researchers have to make a decision on which choices of accounting to utilize, weigh and account for variations in implementations. Another advantage of this quantitative measure is that unlike input-oriented measure that is both costly and difficult in collecting data on a vast set of choices of accounting for a big sample of firms, it is quite easy in this case. Another advantage of this method is that the empirical measure depends on reported earnings as an essential metric for financial reporting. The use of single financial statement measure employed here permits the analysis to be tractable and parsimonious.   


To sum up, it is significant to acknowledge existing counterarguments in the projected guidance. Being less specific, it will permit greater accountants’ interpretations and escalate the magnitude’s magnitude alongside frequency. Optimistically, the projected recognition of revenue standard shall reduce the quantity of fraud linked to recognition of revenue. In regards to impacts on financial statement, a focus can be made on the programs of customer loyalty. Airlines for instance, have in the past been providing programs for customer loyalty for more than thirty years as mechanism for encouraging repeat customers as well as augmenting air traffic.

Almost all the airlines in the United States provide often flayer programs as a kind loyalty program for customers. Airlines contribute to tickets’ purchase utilizing incremental cost method that culminates into revenue recognition where a traveler takes the already booked flight. Airlines make records of the expense as well as accrue a given liability for the approximated cost of offering upcoming travel for travelers frequently earning flyer miles. However, such a practice is no longer adhering to the projected guidance in Exposure Draft.  Airlines shall be obligated to employ the 5-step procedure for recognizing revenue when determining the much of revenue for recognition as well as when it will be recognized.    

It is recognized that the impact of joint revenue recognition will be felt via three key mechanisms: (i) there will be certain costs linked to altering practices of accounting entities (ii) Reformatting business practices by companies to boost compatibility with newfangled recognition standards for revenue thereby ensuring favorable outcomes of accounting (iii) Financial statements of entities shall be changed materially. Further, the project implementation will also impact the general practices of business further affecting the revenue derived from customer loyalty schemes of airline reporting in the US.  


AAA, Financial A. S. C. 2010. "Response to the Financial Accounting Standards Board's and the International Accounting Standards Board's Joint Discussion Paper Entitled Preliminary Views on Revenue Recognition in Contracts with Customers." Accounting Horizons. 24.4 689-702. Print.  

Beasley, M., Joseph, C., Dana, H., and Terry, N. 2014. Fraudulent Financial Reporting 1998-2007. 2010. Committee of Sponsoring Organizations of the Treadway Commission.  

Brown, L., and Yen-Jung, L. 2006. The Impact of SFAS 123R on Changes in OptionBased Compensation. 

De Franco, G., Kothari, S.P., Verdi, R. 2011. “The benefits of firm comparability”. Journal of Accounting Research 49, 895-931.

Financial Accounting Standards Board & International Accounting Standards Board. 2012.  Proposed Accounting Standards Update — Revenue Recognition (Topic 605): Revenue from Contracts with Customers. FASB. Jan 2012. Web. 20 October 2013.

Financial Accounting Standards Board. 2013. “International Convergence of Accounting Standards – Overview.” n.d. Web. 2 November 2013. http://www.fasb.org/jsp/FASB/Page/SectionPage&cid=1176156245663  

Holzmann, O., J.  2011."Revenue Recognition Convergence: the Contract-Based Model." Journal of Corporate Accounting and Finance. 22.6 (2011): 87-92. Print.

Jack, K., 2014. The Impact of the Revenue Recognition Project (Doctoral dissertation, University of Oregon).

Nelson, G. 2012. “Comment Letter No. 26.” 2012. IBM. Web. 4 December 2013.  

Petersen, R. 2005. Frequent Flyer Services. Frequent Flyer Services, 2005. Web. 2 May 2014. http://www.frequentflyerservices.com/press_room/facts_and_stats/liability_acc umulation.php  

Peterson, K., Schmardebeck, R., and Wilks, T. J. 2014. “The earnings quality and informational effects of accounting consistency”. Working paper.

Pounder, B. 2012. "Changes Are Coming: a New Revenue Accounting Standard Proposed by the FASB and the IASB Would Significantly Change the Core Principles of Revenue Recognition Under U.S. GAAP and IFRS." Strategic Finance Montvale. 93.9 (2012): 37-41. Print.  

PwC. 2013. IFRS and U.S. GAAP: Similarities and Differences. 2013. Print.  

Shamrock, S. 2012.  IFRS AND US GAAP: A Comprehensive Comparison. Hoboken: John Wiley & Sons, 2012. Internet resource.  

Waymire, G., and Sudipta, B. 2008. “Accounting is an Evolved Economic Institution.” 2008. Web. 20 October 2013.  

Zeff, S., A. 2013. “The Evolution of U.S. GAAP: The Political Forces behind Professional Standards.” The CPA Journal. 2005. Web. 20 October 2013.  http://www.nysscpa.org/cpajournal/2005/105/infocus/p18.htm  

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