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Revenue recognition
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Revenue recognition
Introduction
Revenue is among the most important figures in a company’s financial statements; it is normally the largest. In addition, it normally determines the profit that the company makes and is used in forecasting sales. However, due to the different accounting practices between companies and lack of consistency in revenue recognition among companies, there was a challenge in determining how revenue has to be recognized. Due to this, the IASB and FASB devised a unifying standard that could evaluate a period revenue has to be identified. The new standard comprises five steps that consider how and when payment should be recognized, and this section shall describe them in detail.
The five steps of revenue recognition
The initial step is identifying the contract with the customer. A contract is normally the agreement between two or more parties that comes with rights and obligations that are enforceable. Some of the conditions that must be met during the accounting of a contract between a firm and a customer as revenue according to the standard indicate that all parties involved have to approve the agreement and have legal obligations of performing their duties under the contract. The rights of each party concerning the goods and services that are being transacted should be determined. The second step is identifying the performance obligations in the contract by the selling firm (Young et al., 2018). This is simply the buyer pays the seller to receive deliveries. The customer has to benefit from the good, and the promise by the firm to transfer the product has to be distinguished from other commitments in the contract.
The third step is determining the transaction price that shows the amount of consideration that a firm expects to be entitled to purchase the products. The transaction price is normally the amount that the firm allocates to performing the obligations under a given contract. The fourth step is assigning the transaction price to the performance obligations identified in the second step. The management has determined the individual selling price for all items and allocates transaction prices according to the relative value compared to the total value of each product. Lastly, revenue recognition is done when the performance obligations have been satisfied by transferring the promised product to a customer. The customer may have the future right to direct the asset’s use and obtain substantial benefits.
Starbucks and the five-step recognition model
Starbuck’s Form 10-K shows how the company uses the five-step model. Most sales and revenues of the company come forms the sales in the licensed and the operated stores of the company. The sales and revenues also come from the packaged products and the royalties from Nestle and other partnerships. The five-step process is evident according to how the revenue streams have been displayed in the 10-K form. The company has patents and trademarks for its products to have a known standard in its operations. A clear boundary is evident whereby the funds for the licensed stores get allocated for accurate tracking of revenue.
Prevention of financial statement fraud
The five-step process is very important in the prevention of financial statement fraud in all organizations containing Starbucks. Adherence to the process enables the security with consent that the contract’s obligations are met, and funds remain safe. In addition, it offers a type of backup to make sure that whatever is recorded on the financial statements matches with all that was agreed on and accounted for in the contract process (Ambarchian, 2018). Besides, it is also possible to cover any amendments in the five-step model to add more protection for the company and accountability for the customers.
Firms need to follow the five-step revenue recognition process regardless of the accounting standard they use. For example, the Form 10-K of Starbucks indicates how the company uses the method. In addition, using the model allows transparency and prevents financial statement fraud in organizations.
References
Ambarchian, V. (2018). Recognition of a significant financing component in contracts withCustomers.Econ-Papers
Young, S. D., Cohen, J., & Bens, D. A. (2018). Corporate Financial Reporting and Analysis: A Global Perspective. John Wiley & Sons.
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