Role of Revenue Recognition in Performance Reporting

The role of revenue recognition in performance reporting[Name of the Writer][Name of the Institution]

Running Head: Role of Revenue Recognition in Performance Reporting1

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).SummaryIn 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 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).

AnalysisThis 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 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. ConclusionThe 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, 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.

BibliographyAnon., 2011. Revenue recognition for cloud-based computing arrangements. Strategic Direction, 27(5).Bauman, M. P., 2009. A MarketBased Examination of Revenue and Liability Recognition: Evidence from the Publishing Industry. Review of Accounting and Finance, 4(3), pp. 52-63.khan, A., 2012. Revenue Recognition, Earnings Management, and Earnings Informativeness in the Semiconductor Industry. Revenue recognition reports, 24(2), pp. 25-31.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 and Business Research, 44(4), pp. 380-382.Mintz, S. M., 2010. AN INSTRUCTIONAL CASE IN PREMATURE REVENUE RECOGNITION. Research on Professional Responsibility and Ethics in Accounting, 11(3), pp. 193-205.Rasmussen, S. J., 2013. Revenue Recognition and Performance Reporting. Journal of Finance, 27(1), pp. 91-112.Wagenhofer, A., 2014. The role of revenue recognition in performance reporting. Accounting and Business Research, 44(4), pp. 349-379.