1.1 TIMING MEASUREMENT OF REVENUE RECOGNITION
Revenue is one of the single largest numbers in most of the financial statements for close to all entities alongside the financial institutions. Apart from the profit number, revenue equally is a number which commands much attention for many users as it shows the financial health for a given entity, especially when reporting the performance for external use since in most cases across the diverse sectors. According to Bunea-Bontas, (2014), it is recognized as a measure of remuneration that is given to the senior executives. Furthermore, most investors and financial analysts are always interested in the revenue for mainly decision making or to lure potential investors to pump more capital for rolling various investment projects and for expansion. In the general field of accounting, timing measurement of revenue recognition is one significant element that is dictating the efficiency in performance. As reported by Cristina-Aurora, (2014), recognition and measurement in financial statements of any business company, demonstrates that revenue is identified when it is realizable. Comparably, revenue recognition principle dictates the timing and the process on which revenue is realized and recorded, and it is important for any business to operate with the fact that uncertainty and timing of revenue and cash flow normally arise from the entities of the existing contract with the customers (Brusca et al. 2018).
Timing measurement of revenue recognition is one significant indicator to the financial statement users in assessing the financial performance of various entity's. The international Financial Reporting Standard 15 revenue for contract that started its operation on May 2014 offers a better framework when it comes to addressing the issues of revenue (Garcia, Katsu, and Mourik, 2018). This paper will hence review the literature in the subject and make an analytical discussion on timing measurement of revenue recognition, by bringing a greater understanding of timing measurement of revenue recognition as reporting financial performance through income statement. Additionally, the study also focusses on the current issue in recognizing or measuring profit and revenue within the income statement. On the to hand, the application of impact of regulatory framework that is including the international financial standard reporting.
As reported by Krupicka (2018), the principle of revenue recognition, revenues are identified during the time when it is earned, meaning the period in which the customer and the company selling a service or a product have entered into an agreement of making sure that the product or the service is transferred and realized that cash payment or collection of payment is assured. According to Zakolyukina, (2018), the revenue recognition principle dictates the timing and the process by which revenue is recognized and recorded as an item in the financial statement. However, from a theoretical perspective there exist various points in time at which revenue is identified earlier, at this specific point is it's technically more valuable to the organization yet a great risk when it is depended on.
One significant area of service provision that involves accounting treatment is the airline sector, in that recognizing the revenue for a service provided last for a long period. As reported by the IFRS 15 principles, it is always a requirement for a firm to make use of accrual principles in recognizing revenues when performed to come up with a level of profit achieved to maintain consistency in the income statement (Warren, and Jones,2018). However, the main question that normally arises is when the important debate on the timing organizations can recognizing their revenues hence leading disparity on the level of profits that is recorded in the income statement.
Operating as the recognized global accounting standards, it is important to note that the International Financial Reporting Standards(IFRS) is now in full operation and have implemented more than one hundred jurisdictions globally(PAUNESCU,2015). As reported by in every Jurisdiction that where IFRS have been implemented, IFRS is recognized to be compulsory for the unlisted and listed companies.
In accounting, revenue recognition is identified to be the point when one is in a level of recording a sale in any financial statements. In most cases reporting inconsistencies in the area of accounting normally arise since there exist no comprehensive accounting standards that are taking the general cover of revenue recognition. Various authoritative accounting pronouncements have made a detailed address on industry-specific revenue recognition issues which have forced the practitioners to make use of standards in various situations for which they had no intention about. This has created a significant issue, and in 2002, FASB worked on adding revenue recognition in pursuing its project agenda. It is important to note that Financial Accounting Standards Board(FASB) and Accounting Standards Board(IASB), are collectively working together to make sure that it is providing a single revenue recognition model that can be adopted in a greater range of transaction and industries types(Mundstock,2016).
Under cash principle, what comes out clear is that the receipt used for payment are recorded down at the moment they are received, and the general expenses are recorded during the moments in which the payment is received. Notably, what takes place is that expenses and revenues are recorded when cash is paid and at the same time received respectively.
Accrual Principle work in a manner that expenses and revenue are most of time recorded when they accrued. It is normally guided by most corporation, and it is important to consider the fact that most corporations are needed to make use of the accrual principle that is guided by the international Financial Reporting Standards. Large companies like British airways have in the past adopted accrued principle in managing their general accounting, unlike other small business that have adopted cash principle which is more straightforward and simpler at the same time since it offers a better picture on what the company is owning at hand.
Technically, on September 2002, the FASB and IASB made an announcement plan that acted as leverage in attaining convergence in a document that was identified as the Norwalk Agreement. This agreement calls for the removal of detailed differences and making a gradual move on other differences. In the year 2007, things changed, and the securities and exchange commission(SEC) made an agreement, and they allowed the plan to apply IFRS to a statement that was filed by the Securities and Exchange Commission in 2008(Walter,2017). As reported by, it is important to note that under IFRS, revenue is normally recognized when the reward and the risk that is associated with the services and goods have gone through the transfer process to the clients.
Due its significance and impression on the financial statements, it is therefore important that it should be measured with lots of accuracies because it has much influence in relaying crucial information to the users when appraising the performance of an entity. As a result, the International Accounting Standards Board gave IAS18 for revenue and IAS 11-construction contracts as the two important IFRSs for guidance in reporting financial performance (Zakolyukina,2018).
The IAS18 standards are applied in reporting the revenues. Though, it is not adequate as lots of uncertainties have been seen in the IFRSs, a factor which has contributed to the increasing demands for a more exhaustive principle, which will have a comprehensive approach as a framework on the timing measurements for the recognition of revenue in the financial statements(Walter,2017).
Since the year 2005, International Financial Reporting Standards (IFRS), have become a part of financial reporting and its operation have impacted the United Kingdom. Various organizations other than the charities have provided a better platform for companies to consolidate and even to make the preparation of their financial statement concerning the United Kingdom(Siekkinen et al.,2016).
2.2 CURRENT ISSUES IN MEASURING REVENUE
Managing Airline Tickets
For many businesses just like the general operation of British Airways, the revenue figure is currently identified as an important measure of the general level of economic activity that is undertaken by the general operation of British Airways. This happens because it shows a reflection on the extent in which British Airways have been supplying their services to customers.
According to Oncioiu and Tanase (2016), the IAS 18, revenue is the number of economic benefits accrued over a certain period of an entity's activities. Therefore, it should be recognized before the removal of the cost of sale. There are several issues which have been highlighted for review of the IFRSs, for example in the airline industry one of the current issue being breakage of the air tickets (You, 2013). Revenue is recognized on the sale of air tickets even though some tickets are completely unused or partially used by the passengers.
Guidance on how to treat Breakage
Specific guidance on how to treat the breakage while analyzing the accounts for reporting the income statements are inadequately explained on the current IFRS. Therefore, a more elaborate standard for the recognition of the revenue arising from the breakage should be developed to assist in making judgments on when and how to account for such since honestly, the amount of breakage is difficult to estimate before the elapse of the flight date.
In addition to breakage, travel vouchers which are given the passengers as a way of making up for the inconveniences caused like flight delays or cancelation, it can be in the form of a customer option for additional service or good or as a variable consideration. When the vouchers are discretionarily given to the passengers, they are treated as discounts on the revenues upon the redemption and not as a liability since there is no performance obligation in the current IFRS. However, there is need for clarity on the basis in which the vouchers are given whether as customer options for additional services or goods in which it will be recognized as a different performance obligation or as penalties for non-performance on the part of airline thus treated as variable consideration. Therefore, a comprehensive standard needs to be adopted to help in the accounting of the vouchers, depending on the way an airline treats the travel vouchers, it has significant impact on the revenues.
2.3 IMPLICATION OF THE OF THE ISSUE
The profits and revenue recognition time relays important information to the users on the financial growth and performance over time. This information enables the potential investors and the management of airline industry in making informed decisions on the possible growth and the need for more investment in the sector (Walker,2017). Even though the IFRS has contributed significantly in formulating and developing the standard framework upon which the income statements are recorded to report the revenues and profits of various companies in different sectors, lots of inconsistencies have been reported which has affected the judgments in the accounting of breakage and air travel vouchers in the airline industry (Camman,Fiore, Livolsi, and Querro,2017)
Investors and other users are mostly interested in the complete provision of the income statements which are easily verifiable. According to Keppard,(2018).the revenues that are deferred for example when the travel vouchers treated as customer's options for additional services or goods, will not be pre...
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