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Explain 5 Step Process For Revenue Recognition Under Asc 606

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5 step process for revenue recognition under ASC 606 OVERVIEW OF ASC 606 [1] [2] [4]  Revenue recognition is an important standard used in many financial ratios to examine and compare companies. The Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) recognized that existing revenue recognition literature varied between their jurisdictions and that both frameworks needed upgrades. The two organizations worked together and Accounting Standards Update (ASU) 2014-09 is the aftereffect of their joint efforts. This update will be part of the Accounting Standards Codification (ASC) as Topic 606: which will replaces the existing revenue recognition literature in Topic 605. [1]  Why is the FASB doing this? …show more content…

Some entities will be needed to make more estimates, for instance, for transactions with variable consideration. In addition, the increase in estimates and judgments is accompanied by an increase in disclosures to describe the estimation methods, inputs, and assumptions. It is required that all entities will need to update their accounting policies, procedures, and internal controls to conform to the new revenue recognition model. SCOPE [2] The new standards apply to contracts with customers to provide goods or services in all in the ordinary course of business. This can also include the sale of non-financial assets such as fixed assets and intangible assets that are not part of a company’s ordinary course of business. Specifically excluded in ASC 606-10-15-2 from this new guidance are

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Also, it can be challenging since guidelines created by Financial Accounting Standards Board (FASB) are complex and are subject to interpretation. To resolve this problem, in 2014, the FASB and the International Accounting Standards Board issued their final standard ASC 606 “Revenue from Contracts with Customers”. This new standard brought many changes in the way revenue is recognized by companies. This revenue recognition standard will require consumer products entities to reassess many of their existing accounting policies and practices. Also, the timing of revenue recognition could change under the new revenue recognition standard.

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While viewing the statements and having an understanding of the purpose of using revenue recognition, it is clear that the corporation isn't using it in their favor. The revenue recognition policy for Carlton inc. is very flawed due to several reasons. The first reasons is that it recognizes their revenues when goods are sold on approval basis as was done in this example regarding the two of the transactions. For example, the first transaction involved the recognition of $400,000 of revenue on two systems shipped to Elegant Housing, Inc. on a trial basis for six months. Elegant paid Caltron $20,000 at the time of shipment, November 15, 20X1, which would be applied to the purchase price if Elegant accepts the systems or forfeited if Elegant returns systems.

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Here, overall company revenues are recognized once there is credible proof that there has been a delivered arrangement (with agreed upon price and confirmed collectability) with risks and ownerships being transferred to the buyer. When it concerns retail stores and internet orders, however, revenues are recognized at the point of sale and upon delivery and receipt of the shipment by its customers. All of which can be reduced based on estimates for returns. As for wholesales, the title has to be passed to the consumer (along with the risk of loss) for recognition. But instead of being estimated as net returns, the company also takes into account discounts, and markdown allowances.

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This standard was adopted based on the

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The accounting standards issued by the AASB are enforced by three groups in Australia. They are the Australian Securities and Investments Commission (ASIC), the accounting bodies and government. Australia Securities and Investments Commission(ASIC) ASIC has the character to tell and educate organization why they should follow as well as what they should adapt because this is the proactive approach to reduce the need for even more reinforcement for compliance. The Corporations Act 2001 assisted that accounting standards are issued by the AASB. For instance, if ASIC notes that the organization did not hand over the financial reports or give wrong information then ASIC will deliver a letter to require for reports and give the true information.

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We believe that these are critical factors which may not necessarily be a CAM. We saw that revenue is the most significant account which can cause a restatement in the retail industry.

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