Revenue SAB 104

For most companies, revenue “is among the largest and most value-relevant item in a firms’ financial statements” (Zhang, 2005). It can be argued that profit is most important, however, revenue must be recognized before profit can be calculated and communicated within the company’s financial statements. Revenue within the financial statements provides an understanding of the profitability of the company and the ability to value the company within a specific period. Revenue is budgeted and compared to actual performance, as well as provides a way to demonstrate the company’s goals, and “in forming expectations of future revenues based on past revenues and the assumptions in the forecast model” (Wagenhofer, 2014, p. 351). Companies view revenue …show more content…
104 provides additional criteria as to when the realization principle is satisfied by the 1) persuasive evidence of an arrangement exists, 2) delivery has occurred or services have been rendered, 3) the seller’s price to the buyer is fixed or determinable, and 4) collectability is reasonably assured. These principles can be easily accomplished for a company that sells and delivers a product at a specific point in time and the product holds no type of warranty. However, for an industry that the above principles do not apply, revenue recognition becomes exceptionally complicated. Companies who maintain complex contracts with guarantees of delivery of goods and/or services throughout a point in time do not abide by the realization principle. A large number of these companies are in industries such as real estate, media and entertainment, healthcare, technology and construction. For these industries, revenue would not always be recognized over the life of the contract, but instead of segments that would recognize revenue during specific achievements or when deliverables are achieved (Lucas & Landry, …show more content…
57). Prior to 2002, FASB only provided conceptual guidance on revenue recognition, and very little on a general standard when referencing revenue recognition. Per the FASB’s Concepts Statement No. 5, paragraph 83(b), revenue has “been earned when the entity has substantially accomplished what it must do to be entitled to the benefits represented by the revenues”. In order to obtain a “true” understanding of revenue recognition, an entity must obtain its guidance from multiple locations such as the Accounting Principles Board (APB) opinions, FASB Statements, FASB Interpretations and Securities and Exchange Commission (SEC) Staff Accounting Bulletins (SABs). Overall, most entities were still unclear, if not more confused, once they were able to mill through the multitude of information through the many different

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