Revenue recognition in the airline and local construction industries : a survey

Abstract

Revenue recognition is one of the most difficult and pressing problems facing the accounting profession. This is the result of the various methods of marketing products and services which make it virtually impossible to develop accounting guidelines applying to all situations. The complexity of determining when to recognise revenue is illustrated clearly by many lawsuits such as those involving U.S. Financial (related party transactions), National Student Marketing (revenue that did not materialise), and Equity Funding (sales that never were). Revenue recognition is a classical example of a broad rule, which requires professional judgements in the local level, since it has very practical implications for both management and the auditors. For instance, the refusal to recognise revenues at the point of delivery for a particular company could mean a drop in sales or the preventing of raising a loan in the marketplace. From the auditors' point of view, an unjustifiable refusal to provide an unqualified opinion could lead to a breach of contract suit from the company. On the other hand, an agreement to provide an unqualified opinion could lead to a class action suit from irate shareholders, if things turned sour. It is therefore not only the members of the various accounting boards such as the International Accounting Standards Committee (IASC) who are obliged to theorise. In fact, practising accountants are often required to exercise their own judgements in theoretical issues, since these are seldom completely settled by accounting authorities. Some of their guidelines, it is true, are quite detailed, but many leave a great deal of discretion to management and to the local auditors.