Running Head: Role of Revenue Recognition in Performance Reporting

The role of revenue recognition in performance reporting

[Name of the Writer]
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Role of Revenue Recognition in Performance Reporting

This essay will make an evaluation of the role of revenue recognition in the
performance reporting. In accordance with the Conceptual Framework, the essential
aim of the financial reporting is to make a provision of the decision that is quite
useful and vital to the capital providers and that it definitely makes a reference to
the accountability for a secondary objective (Wagenhofer, 2014). The financial
information is not only mandatory for the stewardship but also useful to make
decisions. More than this, revenue is known to be as the finest determination of the
measure of the financial performance of the firms. It is also essential to note that
the revenue facilitates the users in making a comparison of the target revenue with
the actual revenue. It is also quite evident from the article of Alfred that revenue
facilitates the users in making a comparison of the targeted revenue with the actual
one so that it can be reviewed as to how the company can attain the goals while
developing the expectations of the future based revenues on the prior revenues in
accordance with the assumptions in the forecasted model (Rasmussen, 2013).

Summary
In summary, there is an evidence accruals of the working capital enhance the
prediction of the cash flows for future along with earnings and hence, other accruals
are based heavily on the estimations related to the management. However, it is
quite clear that the revenue amount is quite a common determination of the
companys size and that the revenue change is definitely a typical growth measure.
Apart from this, revenue is definitely found to be a basis for the calculation of the
definite financial ratios like analysis of the profitability like expense and profit
margin, A/R turnover and many more. However, there are several components
within the financial statements that make a provision of any particular information
that is quite complementary to the revenue (khan, 2012). Moreover, the statement

Role of Revenue Recognition in Performance Reporting

of the cash flow incorporates the inflows of the cash from the direct or indirect
rendering of the services or even the sale of products (Laux, 214).

Analysis
This article critically reflects that the revenue is not only utilized for the analysis of
the financial statements but it is also utilized for the determination of performance
measures within the companys management along with the managements
performance evaluation. This is true from the fact that companies utilize revenue
Apart from this, within the statement of financial position receivables, inventory and
other advance payments and along with this, other provisions are associated with
the customer contracts. The article further provides us with a considerable
knowledge that information is also available within the reports that is related to
segment i.e. the companies would make a report of the revenues by the segment
(Anon., 2011). The firms make a provision of the volunteer disclosures for the new
orders that are to be received, outstanding revenue from the contracts that exist,
order backlog along with the other information that is directly essential to make an
estimation of the revenues in future.
The article also critically reflects the viewpoint that revenue is not utilized in the
analysis of financial statements but it also provides a key factor in determining the
performance

measures

in

the

companys

management

along

with

the

managements performance evaluation. Any particular company utilizes revenue to

set target based performance so that the managements compenstion can also be
determined. It is also true to say that the revenue based compensation will result in

Role of Revenue Recognition in Performance Reporting

the induction of the revenue growth disregarding the profitability (Mintz, 2010). In
accordance with Huang, it is also argued that revenue is not found to be a primary
measure of performance. Therefore, the recognition of the revenue produces an
influence on the timings of an earnings of any particular firm or company that
happens when the profits attained from the operating activities of the company are
identified.
More than this, the article also provides some issues when the income and revenue
recognition is solely dependent on the fair values. The example for this is found to
be in the prior stages of the project related to the revenue recognition. This
particular technique requires that obligations and performance rights are to be
determined at a fair value (Bauman, 2009). It is also found that with the late
reporting of the performance results in the back loading compensation. Therefore,
the measure of the performance incorporates income and revenue components that
are not related to the activities of the manager. This then makes the compensation
to be more risky which is then balanced by the risk premium (Laux, 214). However,
there is an alternative for this which is best found in the article which discusses the
compoensation to be based on the short term measures that would stipulate the
paid out compensation for the performance that is not delivered ultimately but can
be reclaimed.

Conclusion
The article provides the readers with a great knowledge about the management of
the earnings . However, in some of the companies, the revenue is manipulated
which is a primary and significant issue for different companies due to which the
revenue recognition is not done in a relevant manner (Anon., 2011). More than this,

Role of Revenue Recognition in Performance Reporting

the research within this article also provides several suggestions that with the
choice to delay or accelerate the revenue recognition, the response is made in
accordance with the different incentives that the managers and firms face.
Furthermore, in accordance with IFRS, the revenue is an enhancement in the
benefits economically during the accounting period that takes the form of inflows,
enhancement of assets, or reduction in liabilities which further results in an increase
in equity that would further be found as a result of the ordinary activities of an
entity (Kim, 2013). There is a new standard found for this which incorporates a
customer contract as a pre condition for the recognition of revenue. And, if any
particular firm or company gets to be a party of the contract, it therefore attains the
right to consider the exchange for oblligations related to performance. Moreover, it
is also argued that the approach related to asset-liability is intented to limit the
discretion of the company for the management of earnings and hence, the
measurement that is cost based results in the reduction of discretion further.

Role of Revenue Recognition in Performance Reporting

Bibliography
Anon., 2011. Revenue recognition for cloud-based computing arrangements.
Strategic Direction, 27(5).
Bauman, M. P., 2009. A MarketBased Examination of Revenue and Liability
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khan, A., 2012. Revenue Recognition, Earnings Management, and Earnings
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Kim, S., 2013. Goodwill accounting and asymmetric timeliness of earnings. Review
of Accounting and Finance, 12(2), pp. 112-129.
Laux, B., 214. The role of revenue recognition in performance reporting. Accounting
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Mintz, S. M., 2010. AN INSTRUCTIONAL CASE IN PREMATURE REVENUE
RECOGNITION. Research on Professional Responsibility and Ethics in Accounting,
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Rasmussen, S. J., 2013. Revenue Recognition and Performance Reporting. Journal of
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Wagenhofer, A., 2014. The role of revenue recognition in performance reporting.
Accounting and Business Research, 44(4), pp. 349-379.