Most revenue transactions, those initiated and completed almost at the same time, pose few problems for revenue recognition. accountants havedeveloped a model in which an entity recognize revenue when payment is realized or to be realizable and the "earnings process" is substantially complete. But that earning process sometimes provides users offinancial statements with information that is not the most useful for making economic decisions.
The application of the earning process approach has led to more than 100 standars on revenue andgain recognition in U.S. GAAP, some of which can produce conflicting results for economically similar transactions. Thats why the notion of an earnings process is not precisely defined and people oftendisagree on how it applies to particular situations.
Gaps in guidance still exist. The continuing need for guidance suggests that more robust revenue recognition guidance is needed in US GAAP.Guidance also is needed because the earnings process approach leads to a misrepresentation of an entity´s contractual rights and obligations in financial statements. The definition of revenue depends onchanges in assets and liabilities, so there are some think that the earning process could be improved by focusing on that changes.
Problems in IFRSs
IFRSs have fewer standars on recenuerecognition than U.S GAAP. However, those standars also need improvement.
Inconsistency with asset and liability definitions
Similarly to U.S GAAP, come criticize revenue recognition standards in IFRSsbecause an entity applying those standards might recgnize amounts in the financial statements that do not faithfully represent economic phenomena. That can happen because revenue recognition for the saleof a good depends largely on when the risks and rewards of ownership of the good are transferred to a customer.
Therefore, an entity might recognize a good as inventory even after the customer...