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Revenue Recognition: Identify Contract (New FASB)| Intermediate Accounting | CPA Exam FAR | Chp18 p1

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Revenue recognition practices  are  currently  the  most  prevalent  reason  for  accounting 
restatements.  In  response  to  fraudulent  activities—and  the  increasing  attention  investors  have 
focused  on  revenue  numbers—the  FASB  and  IASB  issued  a  new  standard  on  revenue 
recognition. This new standard provides a set of guidelines to follow in determining when revenue 
should be reported and how it should be measured.

Most revenue transactions pose few problems because the transaction is initiated
and completed at the same time. However, not all transactions are that simple. The new standard
adopts an asset­liability approach as the basis for revenue recognition. The asset­liability
approach recognizes and measures revenue based on changes in assets and liabilities arising
from contracts with customers. The new standard first identifies the key objective of revenue
recognition, followed by a five­step process that companies should use to ensure that revenue is
measured and reported correctly, with the culmination of the process being the revenue
recognition principle.
Key Objective for Revenue Recognition
3. Revenue is recognized to depict the transfer of goods or services to customers in an amount
that reflects the consideration that the company receives, or expects to receive, in exchange for
these goods or services.
The Five­Step Revenue Recognition Process
4. ( 2) The five­step revenue recognition model is as follows:
1. Identifying the Contract with Customers
2. Identifying Separate Performance Obligations
3. Determining the Transaction Price
4. Allocating the Transaction Price to Separate Performance Obligations
5. Recognizing Revenue When (or as) Each Performance Obligation is Satisfied
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