Question

Highlight the importance of revenue in a kingdom.

Answer 1

This paper examines revenue and profit or loss recognition and how these measures provide financial information about companies’ performance. First, I review academic literature that examines the importance of revenue in informing capital markets and in performance evaluation and discusses findings on revenue management. Second, I describe fundamental revenue recognition concepts developed in the academic literature based on the economics of and risks involved in the earnings cycle. Third, I evaluate the recent revenue recognition standard of the IASB, which aims to state a single consistent principle for revenue recognition. I argue that striving for a consistent standard is undesirable because the economic characteristics of earnings cycles differ across firms and so does the usefulness of information. Consistent with that, the new standard actually uses different recognition criteria. In addition, the standard does not fully follow the asset-liability approach, but contains elements of the revenue-expense approach. Finally, despite the Conceptual Framework favours neutrality over conservatism, many requirements in the new standard induce conservative revenue recognition.