NATIONAL ECONOMICS UNIVERSITY

SCHOOL OF ACCOUNTING AND AUDITING

GROUP ASSIGNMENT
ENGLISH FOR ACCOUNTING
TOPIC: Revenue Recognition in Accounting

Lecturer: Mrs Le Kim Ngoc

Course: KTTC1112(123)_03

Group: 09

Students: Duong Van Thuong - 11215617

Tran Thi Ngoc Ha - 11217943

Vu Minh Anh - 11214006
Nguyen Thuy Quynh - 11217877
Hoang Duc - 11211364

1
TABLE OF CONTENTS
I. INTRODUCTION ................................................................................................. 3
II. DESCRIPTION OF THE ISSUE ..................................................................... 3
1. Definitions ....................................................................................................... 3
2. Why is revenue recognition important? ....................................................... 4
3. Discuss the criteria for revenue recognition as per the International
Financial Reporting Standards (IFRS) and Generally Accepted Accounting Principles
(GAAP). 4
III. DISCUSSION ON THE ISSUE ........................................................................ 4
1. The challenges associated with revenue recognition ................................... 4
2. The changes in business models are complicating revenue recognition .... 5
3. Improper revenue recognition can lead to financial frauds ....................... 5
IV. COMMENTARY AND EVALUATION OF THE ISSUE ............................. 6
V. SOLUTIONS TO THE ISSUE ......................................................................... 7
1. Follow guidelines ............................................................................................ 7
2. Make use of technological advancements (organizing data, billing,...) ..... 7
3. Follow reinspection and control activities. ................................................... 8
VI. CONCLUSION .................................................................................................. 9
REFERENCES: ......................................................................................................... 10

2
 I. INTRODUCTION
The effective recognition of revenue is not only crucial for financial reporting
purposes but also plays a significant role in assessing a company's performance accurately.
Adhering to revenue recognition principles ensures that revenue is recorded in the appropriate
accounting period, aligning it with the specific activities that give rise to the revenue. By
accurately recognizing revenue, businesses can provide stakeholders, including investors,
analysts, creditors, and regulators, with reliable financial information. This information
enables stakeholders to make informed decisions about the company's performance, financial
health, and future prospects. Investors can assess the company's potential for growth and
profitability, analysts can evaluate its financial ratios and trends, creditors can determine the
company's creditworthiness, and regulators can ensure compliance with accounting standards
and regulations. Therefore, the effective recognition of revenue not only promotes
transparency but also enhances accountability and trust within the business ecosystem.
In addition to financial reporting and performance assessment, the effective
recognition of revenue also holds significance in other areas of a business. For instance,
accurate revenue recognition allows companies to measure the success of their sales
strategies and marketing efforts. By properly attributing revenue to the specific activities that
generate it, businesses can evaluate the effectiveness of their marketing campaigns, sales
techniques, and customer acquisition strategies. This information can then be used to make
data-driven decisions on optimizing resources, targeting the right customer segments, and
allocating budgets effectively. Furthermore, revenue recognition is essential for managing
cash flow effectively. By recognizing revenue accurately, companies can forecast future
income streams, plan expenditures, and make informed decisions on investing in growth,
research and development, and operational improvements.
Overall, the effective recognition of revenue serves as a cornerstone for strategic
decision-making, resource allocation, and operational efficiency within a company. This
essay will point out the problems in the revenue recognition system with detailed description,
discussion, commentary and evaluation of the issue then finally suggest proper solutions

II. DESCRIPTION OF THE ISSUE

1. Definitions
Revenue recognition is a critical aspect of financial accounting that determines the
specific conditions under which income becomes realized as revenue. It’s the process of
recognizing or reporting income as it is earned, essentially matching the revenue from
contracts to the expenses related to generating those sales. This ensures that a company’s
financial records are accurate and transparent, aiding in decision-making and providing
investors with an up-to-date picture of a business’s financial situation.
The revenue recognition principle is an accounting concept that states that
recognition of revenue happens when goods or services are provided and not at the exact time
of cash flows. It requires companies to update income statements as revenue is earned instead
of waiting to receive payments.

3
 Revenue Recognition Principle (5 steps)
Step 1: Identify the contract(s) with a customer.
Step 2: Identify the separate performance obligations in the contract.
Step 3: Determine the transaction price.
Step 4: Allocate the transaction price to the separate performance obligations.
Step 5: Recognize revenue when each performance obligation is satisfied
2. Why is revenue recognition important?
Revenue recognition is a crucial accounting principle that outlines the process of
recording and reporting revenue in an organization’s financial statements. It involves
identifying when and how much revenue should be recognized, ensuring accurate financial
reporting.
Revenue recognition is essential for stakeholders such as investors, creditors,
employees, and customers who rely on financial information to make informed decisions
about the organization. Accurate revenue recognition helps build trust with stakeholders by
providing transparency into an organization’s operations.
Moreover, it ensures compliance with legal and regulatory requirements while
mitigating potential risks associated with misreporting revenues. Without proper revenue
recognition practices in place, there may be discrepancies between reported earnings and
actual cash flow.
Furthermore, consistent application of revenue recognition policies can help identify
trends in business performance over time. This data can assist management in making
strategic decisions related to pricing strategies or expansion plans.
3. Discuss the criteria for revenue recognition as per the International
Financial Reporting Standards (IFRS) and Generally Accepted
Accounting Principles (GAAP).
A few of the IFRS criteria used in revenue recognition that differ from U.S. GAAP
include:
- Standing contracts: Under IFRS, companies may recognize revenue at the end of a
contract period if certain conditions are met.
- Variable consideration: Revenue can be recognized when it is probable that economic
benefits will flow to the entity and the amount of revenue can be estimated reliably.
- Multiple-element arrangements: Revenue for multiple elements in an arrangement can
be allocated based on the relative selling prices of each element, provided that the
selling price is determinable and there are no other factors influencing the allocation.

III. DISCUSSION ON THE ISSUE

1. The challenges associated with revenue recognition
Revenue recognition has become increasingly complex and challenging. This is due to
the different practices that different industries apply. In 2002, a collaboration between the
US-based FASB and the IASB created a common revenue recognition approach for both US
GAAP and IFRS. The result was “Revenue from Contracts with Customers,” ASC 606 for
US companies, and IFRS 15 for the majority of jurisdictions outside the US. Both are based

4
on the 5-step revenue recognition flow; however, there are some differences between these
two revenue recognition standards. Some differences include:
- Collectibility threshold: The threshold for a contract to be probable is different across
ASC 606 - around 75% to 80% and IFRS 15 - 50%
- Impairment loss reversal: US GAAP precludes an entity from reversing an
impairment on an asset that is recognized in accordance with the guidance on costs to
obtain, while IFRS 15 requires it.
- License of intellectual property: this relates to the impact of different approaches on
the timing of revenue recognition.
- Shipping and handling: ASC 606 allows entities to include shipping and handling
costs after the customer has obtained control of the goods as part of the activities to
fulfill the promise to transfer the goods. IFRS 15 does not provide such an option.
- Noncash consideration: the standards differ in that ASC 606 specifies how and when
a noncash consideration should be measured, whereas IFRS 15 does not specify this.
- Sales taxes: SC 606 allows entities to elect a policy that excludes all sales taxes from
the transaction price, while IFRS 15 does not offer such an option.
2. The changes in business models are complicating revenue recognition
Besides various revenue approaches, the changes in business models like the rise of
the digital economy also further complicate revenue accounting. Emerging technologies have
revolutionized the way businesses operate and interact with customers. Along with these
advancements, the methods of revenue recognition have also undergone significant changes.
One of the key aspects of revenue recognition in the digital age is the concept of multi-
element arrangements. Determining the appropriate allocation of revenue among these
elements requires careful analysis and consideration of various factors. Furthermore, the
increasing prevalence of subscription-based models has challenged traditional revenue
recognition norms. This requires a shift from recognizing revenue upfront to spreading it over
the subscription period. Revenue recognition in the digital age requires businesses to adapt to
emerging technologies and implement best practices to accurately account for revenue. As
technology continues to advance and new business models emerge, staying abreast of these
developments and following industry standards becomes crucial for financial transparency
and decision-making.
3. Improper revenue recognition can lead to financial frauds
Firstly, the most common type of accounting fraud is improper timing of revenue
recognition. Companies might accelerate revenue recognition to meet earnings targets or
delay it if they’ve already met their targets. For instance, Marvell Technology Group was
charged with pulling in sales from future quarters to close the gap between actual and
forecasted revenue.
A company inflating its earnings by recognizing revenue related to fake contracts or
other nonexistent sales is another common type of deceit. An example is the internal
investigation at Chinese chain Luckin Coffee, which revealed it had recognized $300 million
in fictitious revenue in 2019.
The third type of fraud is channel stuffing. This involves a company flooding the
distribution channel with more products than it can sell, thereby recognizing revenue for
products that might not be sold in the foreseeable future. A well-known example of

5
fraudulent revenue recognition and channel stuffing is Valeant Pharmaceuticals (now known
as Bausch Health), which used various types of accounting malfeasances, including channel
stuffing of $58 million in sales of pharmaceutical products to a mail order pharmacy
company.

IV. COMMENTARY AND EVALUATION OF THE ISSUE

Upon exploring the fundamental principle that is revenue recognition (RR), it further
cements the notion that the practice signals towards major implications on both investors and
companies alike, namely their financial performance, and therefore it is crucial that the
regulatory bodies must make the appropriate responses aimed at addressing its potential
challenges.
Firstly, there are three critical aspects to how investors make their financial decisions
with the revenue recognition practices at hand. The first one being the issue of making
accurate investment decisions. Investors rely heavily on financial statements to make
informed investment decisions. The timing of revenue recognition directly affects key
financial ratios, such as the price-to-earnings ratio and return on assets. Misreported revenue
can mislead investors and result in poor investment choices. The second aspect concerns risk
assessment. Investors assess a company's financial health and stability based on its revenue
patterns. Inaccurate revenue recognition can obscure a company's actual financial position,
leading to incorrect risk assessments. The final but no less crucial aspect has a lot to do with
stock price volatility, which happens when the practice of revenue recognition is inconsistent
or even aggressive. When revenue is recognized too early, it may create unrealistic growth
expectations, causing stock prices to surge and plummet when the truth finally emerges.
Furthermore, companies have the direct power and the suitable RR tools to present
their financial performance however they please, but not without the moral and ethical
obligation required upon them, perhaps more so than just the sole duty of pleasing their
investors and share-holders. There are, once again, three crucial implications for companies’
financial performance when applying RR practices. In managing their earnings, companies
may be tempted to manipulate RR to meet or exceed earnings targets. This can lead to short-
term gains but erode long-term trust and shareholder value. Revenue recognition rules can
also influence how companies structure contracts. They may opt for longer-term contracts to
recognize revenue steadily over time or employ creative financing arrangements to accelerate
revenue recognition. However, it is without a doubt that companies must abide by the
disclosure requirements to maintain transparency and credibility. They must provide detailed
disclosures about their revenue recognition policies and any significant judgments made.
Failure to do so can irredeemably damage their reputation.
With all that being said, accurate and transparent revenue recognition is essential for
building trust in financial markets and facilitating informed investment decisions. Regulatory
bodies play a crucial role in responding to the challenges associated with revenue recognition,
striving to ensure fairness and transparency in financial reporting. Investors, companies, and
regulatory bodies must collaborate to maintain the integrity of financial markets and protect
the interests of all stakeholders. With the adoption of Accounting Standards Codification
(ASC) 606, The Financial Accounting Standards Board (FASB) aims to standardise revenue

6
recognition practices. This rule provides a comprehensive framework for revenue recognition
and enhances comparability across industries. Regulatory bodies have also imposed stricter
disclosure requirements, ensuring that companies provide comprehensive information
regarding their revenue recognition practices, contractual arrangements, and potential risks.
Regulatory bodies, such as the Securities and Exchange Commission (SEC), have bolstered
their auditing and enforcement efforts to identify and penalise companies engaging in
fraudulent revenue recognition practices.

V. SOLUTIONS TO THE ISSUE

1. Follow guidelines
The lack of standardization in financial reporting has made it difficult for investors
and other consumers of financial statements to compare results across industries, and even
companies within the same industry. Therefore, the most effective approach to address issues
related to revenue recognition is to ensure that industries adhere rigorously and consistently
to established guidelines. ASC 606, a new revenue recognition standard jointly developed by
the Financial Accounting Standards Board (FASB) and the International Accounting
Standards Board (IASB), offers a framework for companies to recognize revenue in a more
efficient and uniform manner. The standard’s purpose is to eliminate variations in the way
businesses across industries handle accounting for similar transactions.
Adhering to the new compliance standards may require a significant investment of
time and planning, but it shouldn't be viewed as an intimidating process. In reality, both large
and small organizations will discover that this transition offers them a chance to positively
transform their businesses.
In developing ASC 606, FASB and IASB wanted to provide a framework to drive
consistency in financial reporting, improve comparative analysis and reporting, and simplify
the preparation of financial statements through a 5 Step Model for Revenue Recognition:
1. Identifying the contract with a customer
2. Recognizing the performance obligations in the contract
3. Determining the transaction price
4. Allocating the transaction price
5. Recognizing the revenue
The "Revenue from Contracts with Customers" rule standardizes and simplifies the
way companies record revenue from customer contracts. This rule, effective for fiscal years
starting after December 15, 2017, addresses how businesses report details such as the nature,
amount, and timing of revenue related to customer contracts. The impact of this change may
not be as significant for companies like retailers that sell products and receive revenue
upfront. Complying with this standard will not only affect your accounting and financial
departments but will also have implications for your IT systems, HR policies, and more. It is
these broader implications and uncertainties that are causing concern for many companies.
2. Make use of technological advancements (organizing data, billing,...)
The root of the revenue recognition challenges is often lack of segregating and
organizing data in a systematic way. The usage of billing, revenue accounting, management
and other tools result in disparate data from various sources. Firms need to group and

7
aggregate those data so that the entire revenue recognition process can be hassle-free without
any difficulties or ambiguities; this practice will let they analyze the data and related metrics
easily. Not to mention, in order to execute the revenue recognition smoothly you need to be
updated with the latest contract model and follow it to avoid any possible errors. One of the
most common challenges which companies, especially the subscription-based ones face is,
keeping track of all the changes or modifications of the contract by the subscribers taken
place in various stages of the customer lifecycles.
The best solution firms can address is to make use of technology. It is no exaggeration
to say that technology has become an integral and pervasive element within the framework of
modern accounting practices. Across diverse industries, numerous companies are actively
incorporating technology into their accounting systems, with a specific focus on enhancing
the accuracy and efficiency of revenue recording processes.
These technological innovations represent in the form of sophisticated accounting
software and programs, which have given rise to a multitude of automated systems, including
highly specialized revenue recognition systems. The utilization of such advanced software
solutions has proven to be much more accurate and productive, as it streamlines and
expedites the revenue recognition process to unprecedented levels. By automating tasks and
computations that were once time-consuming and error-prone when performed manually,
these systems have liberated financial professionals from the burdens of routine data entry
and calculation, enabling them to allocate more of their valuable time and expertise to
strategic decision-making. Some cutting-edge accounting programs have gone a step further
by introducing real-time revenue recognition capabilities. This remarkable advancement not
only facilitates the swift and accurate recognition of revenue but also equips businesses with
the ability to manage complex transactions.
All in all, the adoption of technology in the field of accounting has evolved into a
comprehensive and transformative force. As firms continue to embrace these technological
advancements, they gain not only increased efficiency in their accounting processes but also
the strategic agility necessary to thrive in today's competitive business environment.
3. Follow reinspection and control activities.
In order to execute the revenue recognition smoothly you need to be updated with the
latest contract model and follow it to avoid any possible errors. One of the most common
challenges which companies, especially the subscription-based ones face is keeping track of
all the changes or modifications of the contract by the subscribers taken place in various
stages of the customer lifecycles.
To address this challenge effectively, firms must exercise even stricter adherence to
regulatory guidelines and industry standards. Ensuring compliance with these regulations not
only instills confidence among stakeholders but also bolsters the integrity of financial
reporting. Robust record-keeping practices and comprehensive documentation become
paramount in this context, as they help maintain a transparent and auditable trail of contract
amendments, making it easier to verify the accuracy of revenue recognition.
The successful execution of revenue recognition depends on the controlling of
evolving contract models, adhering to regulatory standards, and embracing flexibility in
response to changing market dynamics. By doing so, companies can not only navigate the

8
challenges in contract management but also enhance the accuracy and reliability of their
financial reporting, which helps to provide more trust and confidence among stakeholders.

VI. CONCLUSION
Proper revenue recognition is essential not only for accurate financial reporting and
evaluating a company's performance, but also for assessing the effectiveness of sales
strategies, managing cash flow, and making informed, data-driven decisions. The
International Financial Reporting Standards (IFRS) and Generally Accepted Accounting
Principles (GAAP) serve as frameworks for revenue recognition, providing guidelines that
companies must adhere to. However, challenges arise due to the ever-changing practices in
different industries and the emergence of the digital economy. These challenges can create
opportunities for financial fraud, where companies manipulate earnings or recognize revenue
from fraudulent contracts. To mitigate these risks, it is imperative for companies to follow
standardized guidelines, adapt to technological advancements, and ensure compliance with
regulatory requirements. By doing so, transparency, trust, and accuracy in financial reporting
can be enhanced, helping stakeholders make sound decisions based on reliable information.

9
REFERENCES:
1. https://www.ifrs.org/issued-standards/list-of-standards/ifrs-15-revenue-from-
contracts-with-customers/
2. https://stripe.com/resources/more/revenue-recognition-methods#1-sales-basis
3. https://dealhub.io/glossary/revenue-recognition/
4. https://oboloo.com/blog/what-is-the-importance-of-revenue-recognition/
5. https://kpmg.com/us/en/articles/2022/revenue-accounting.html
6. https://trullion.com/blog/asc-606-vs-ifrs-15/
7. https://www.deskera.com/blog/digital-revenue-recognition/
8. https://www.solutions360.com/revenue-recognition-challenges/
9. https://www.muvi.com/blogs/revenue-leakage-common-causes-and-how-to-
stop
10. https://www.leapfin.com/blog/3-most-common-revenue-recognition-
challenges/
11. https://billingplatform.com/solutions/revenue-recognition
12. https://www.muvi.com/blogs/how-to-overcome-challenges-in-revenue-
recognition
13. https://certinia.com/learn/revenue-recognition/complying-with-asc-606-and-
ifrs-15/
14. https://www.forbes.com/sites/greatspeculations/2019/10/10/how-companies-
implemented-the-new-revenue-recognition-standard/?sh=20c6a7e8920e

10