Revenue is an important aspect of business operations. Every business operation obtains revenue, which needs to be recognized. Understanding recognition of revenue requires a concise definition of the same. Within the business context, revenue is the gross inflow of receivables, cash, or any other consideration obtained during normal operations or activities in an enterprise. Notably, different regions have varied ways of recognizing revenue (Needles, Marian, and Susan 25). The recognition of revenue in the USA differs from the recognition of revenue in Europe. Therefore, firms within the USA will recognize and report revenue differently from firms within Europe. The following is a comparison of revenue recognition in the USA and Europe besides providing an understanding of the importance of revenue recognition. A concluding remark provides a summary of the main ideas discussed concerning revenue recognition.
As mentioned above, revenue recognition is a complex and challenging aspect within the business context, especially in the contemporary environment. It is also true that revenue recognition within the USA differs from revenue recognition in Europe. Therefore, this is a research paper about the revenue recognition methods in the US and revenue recognition in Europe. To accomplish this aim of the research paper, the main research question for the research is, “what are the differences and similarities between the revenue recognition methods in the USA and the revenue recognition methods in Europe?”
Differences between the USA and Europe Revenue Recognition
Whereas USA accounting policies are guided by GAAP, most of the firms within Europe operate under the IAS/IFRS to account for different accounts. In this respect, the first difference in revenue recognition between the USA and Europe is the idea of the criteria used in recognizing revenue (Needles, Marian, and Susan 69). Whereas in the USA only realizable and earned revenues are recognized, accounting standards in Europe allow for recognition of revenue even when it is probable an enterprise will experience the flow of future economic benefits.
Another difference in revenue recognition between the US and Europe is based on services rendered and the right to refund. Within the US, a right of refund within any enterprise may cause preclusion or avoidance of recognizing revenue until the right to refund expires. On the other hand, standards within Europe provide that services need to be considered for identifying the possibility of estimating their reliability. In this perspective, standards within Europe provide for revenue recognition only to the extent of the possible costs incurred that are likely to be recovered. The revenue recognition in the US differs from the revenue recognition in Europe based on services rendered and related rights to refund.
Deferred payment is another basis upon which revenue recognition in the US differs from revenue recognition in Europe. In the US, the discounting of deferred payments to present value for recognition is not required. However, the standards within Europe provide that there is a need to discount any deferred payments to present value before recognizing the same. Such standards in Europe propose that revenue should only be recognized within the current period. Therefore, deferred payments in Europe are only recognized as revenues if they are discounted into present values.
Lastly, revenues from long-term contracts are recognized differently in the US and Europe. In the US, the ARB under GAAP provides for both percentage of completion method and the completed contract technique. In the percentage of completion method, accounting standards in the US allow for part of revenue received from a long-term contract to be recognized (Bohusova 287). Completed contract technique on the other hand provides that revenues obtained from long-term contracts need to be recognized. Notably, in Europe, the IAS 11 provides for both percentage of completion technique and the zero profit technique.
Similarities in Revenue Recognition in the US and Europe
Despite the differences existing between revenue recognition in the US and Europe, there are similarities as well. The first similarity is the definition of revenue in both cases. Standards in the US and Europe define revenue as actual or expected cash inflows that enterprise experiences based on their activities or operations. Revenue in both cases refers to gross inflow attached to economic benefits that arise from the activities and operations of an enterprise (Alford 610). In addition to the definition of revenue, the US and Europe standards have the same stake in respect to the sale of goods. In respect to the sale of goods, the US and Europe accounting standards agree on the fact that revenue derived from the sale of goods should only be recognized once there is the transfer of ownership.
Lastly, rendering services, multiple elements, and other arrangements regarding multiple elements are similar in both the US and Europe. Both the US and Europe accounting standards are clear on the services rendered and how the revenue obtained should be recognized. On the other hand, recognition of revenues derived from long-term contracts is similar in both the US and Europe (Russell 53). These similarities are very essential in making sure that recognition of revenue within the US and Europe adheres to the laid down accounting standards and principles.
Importance of the Revenue Recognition
Revenue recognition is an important aspect of enterprises. It is important to ensure every activity or operation of an enterprise, which provides revenue, is taken into consideration. All the revenues obtained from the operations or activities of an enterprise need to be recognized for understanding or identifying the profits a firm can make. Recognition of revenue also assists enterprises in identifying the various activities that attract positive revenues based on production costs or associated expenses. Revenue recognition is therefore very important in ensuring all the income, profits, and activities of an enterprise.
For many users of financial statements, revenue is very crucial. However, it is worth noting that accountants and all financial analysts have in the past experienced serious challenges and complexity concerning recognizing revenue from operations of a specific business firm. From the above discussions, revenue is the gross inflow of receivables, cash, or any other consideration obtained during normal operations or activities in an enterprise. Such operations may include the sale of goods, services rendered, and the use of enterprise resources yielding to interests, royalties, and dividends amongst others. It is evident from the above discussions that despite the differences in recognition of revenue based on accounting principles used in various regions, there are also similarities that exist on the same. The US and Europe are regulated by different accounting standards and principles hence the differences in the recognition of revenue.
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