Revenue Recognition

Assignment 2: Revenue Recognition

Patrick Szydlowski

ACC577Dana Leland

For this assignment, assume you are a CPA researching and making recommendations to your client regarding revenue recognition methods. Choose a specific client, (e.g., manufacturer, retailer, restaurant, etc.) for this assignment.

1. Evaluate the risks of moving from rules-based accounting standards process to principles-based process related to revenue recognition.

For the example, we chose to consult large car manufacturer located in the Northwest corner of the US. The manufacturer creates automobile and distributes nationally to dealers.

First we should define what rules-based accounting is and how GAAP applies it to revenue recognition. The convergence to GAAP, which is thought of as more rule based, to IRS which is considered more of principal based needs to be fully understood and aligned prior to implementation. This understanding is important not only for our investors but also companies and vendors we do business with. For example if we sign a long term contract for raw material we want to confirm that they are financially sound and their financial statements will support and provide us with the adequate information for this determination. Principal based accounting may provide the preparer and auditor more latitude which in turn muddies the water for comparative and enforcement. This is why it is key that there is an agreed upon conceptual framework for GAAP and IFRS as the convergence continues. When moving to principal based accounting the SEC defines its optimal principal as below,

“In our view, the optimal principles-based accounting standard involves a concise statement of substantive accounting principle where the accounting objective has been incorporated as an integral part of the standard and where few, if any, exceptions or internal inconsistencies are included in the standard. Further, such a standard should provide an appropriate amount of...