The accounting rules of the realization of revenues especially of long term contracts with customers is being proposed to align the US and international accounting standards. The move is targeted towards closing the ambiguity of the revenues already collected from customers but being recorded and reported as revenue over time. The Financial Accounting Standards Boards (FASB) is planning to bring about sweeping changes in the revenue recognition of companies having international customers. Revenue recognition is the realization and acceptance of the revenue as an income for a fiscal year and is being accounted for as income which is liable to be taxed.
The deferred revenue is the one in which companies recognize and collects revenues from customers and considers them as revenue over a period of time which is usually the length of the contract period, and is not being recognized as an immediate income which may be liable to be taxed.
These changes would have significant impacts on the financial statements of companies. They will be liable to be taxed on revenues which is being recovered but has been considered as revenue over time. The income already recovered from customers will become liable to tax and this will have principle change in the companies’ profits, total sales and income, and net profit and tax expense. The impacts will be different in different industries because every industry will be subject to a specific tax liability and the contract type of these companies may decide the recognition of revenues as an income for the period. Licenses of intellectual property rights, agreements and contracts mentioning variable consideration and ambiguous payment system, mounting disclosures, contract costs, agreements with multiple elements, etc. will be major determinants in recognizing the revenues of companies’ (Adams, 2014).