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Revenue Recognition under US GAAP and IFRS

International Accounting Standards Board (IASB) and Financial Accounting Standards Board (FASB) are working together to provide a single revenue recognition model that can be applied to a wide range of industries and transaction types. US GAAP currently has many industry-specific requirements that are not always consistent with each other.
Keywords: revenue recognition, IASB, FASB, contracts
The topic of the research is “Revenue Recognition under US GAAP and IFRS”. Revenue is the largest item in financial statements, and issues involving revenue recognition are among the most important and difficult that standard setters and accountants face. Revenue recognition requirements in U.S. GAAP are different from those in IFRSs and both are considered in need of improvement. U.S. GAAP comprises broad revenue recognition concepts and numerous industry or transaction-specific requirements that can result in different accounting for economically similar transactions. Although, IFRSs contain less guidance on revenue recognition, its two main standards IAS 18 Revenue and IAS 11 Construction Contracts can be difficult to understand and apply beyond simple transactions. Also, they lack guidance on important topics such as revenue recognition for multiple-element arrangements.
Reporting inconsistencies in this accounting area arise because there are no comprehensive accounting standards covering revenue recognition. Several authoritative accounting pronouncements have addressed detailed, industry-specific revenue recognition issues which caused practitioners to use standards in situations for which they were not intended. As a result, in 2002, the FASB added revenue recognition to its project agenda.
In accounting, revenue recognition refers to the point when one is able to record a sale in the financial statements. Years ago, the sale was made and then an invoice was issued. Now, products are sold with added services, TVs are being sold with long term warranties, mobile phone contracts sold with a free phone, tickets sold for concerts which will not occur for a number of months, and software sold with free upgrades.
International Accounting Standards Board (IASB) and Financial Accounting Standards Board (FASB) (collectively, the board) are working together to provide a single revenue recognition model that can be applied to a wide range of industries and transaction types. U. S. GAAP currently has many industry-specific requirements that are not always consistent with each other. The boards intend to improve current revenue recognition guidance by:
Enhancing consistency and comparability.
Simplify U. S. GAAP. Currently, there are more than 100 revenue recognition standards in U.S. GAAP. Many of these standards are industry-specific, and some provide conflicting guidance.
Providing guidance lacking in IFRS. The two main IFRS revenue recognition standards are vague, inconsistent, and difficult to apply to complex transactions,
IASB and FASB published a joint discussion paper, “Preliminary Views on Revenue Recognition in Contracts with Customers,” in December 2008 that proposed a single revenue recognition model built on the principle that an entity should recognize revenue when it satisfies its performance obligation in a contract by transferring goods and services to a customer. This principle is similar to many existing requirements. A contract is defined as “an agreement between two or more parties that creates enforceable obligations,” and may consist of either explicit or implicit arrangements. However, IASB and FASB think that clarifying the principle and applying it consistently to all contracts with customers will improve the comparability and understandability of revenue for users of financial statements. The Discussion Paper sought comments on the Boards’ preliminary views on a single asset and liability based revenue recognition model that they believe will improve financial reporting under U. S. GAAP and IFRS by (Ernest

British Airways: SWOT and Porter’s Five Analysis

Before establishing an analysis of the financial performance of British Airways, and stating the main reasons as to why this organization has been chosen as the proposed case study of this report, the most predominant issue at hand is to define ‘financial’ and ‘business’ performance. It performance of a certain organization stands for a measure, which shows how a company can efficiently use its assets from primary mode of business to produce revenues and returns. It can also be considered as a measure of the overall financial performance of the firm over a specific given period or a scale to make comparison of two or more firms in a single industry. Researcher will provide a detailed account of significance of financial performance, but before that, a brief summary of BA as a leading airline company of UK is necessary to explain.
British Airways is the flag carrier airline of United Kingdom and it was first established in 1971 in Waterside. The airline was initially formed to control the two nationalized airlines already operating in UK, i.e. BOAC, and BEA, as well as two other regional airlines operating within the country, Cambrian Airways, and Northeast Airlines. All these four airlines were then liquefied to form British Airways which had much larger infrastructure than any individual company and had high prospective earnings. In the recent times, British Airways provide air transport services as well as deliver cargo shipments in to more than 90 countries all around the world.
Reason for choosing the organization:
There are plenty of reasons as to why this particular organization has been chosen as subject case study. As we know the ongoing economic recession, and this has folded the developed countries into a web of economic decline. The rise of oil prices from $48 to $110 per barrel since the last 6 years is also a reason for the deepest economic downturn for transporting companies. BA faces a challenge of a permanent shift in the business travelling where the larger organization do not prefer their employees to travel for short trips by paying high premium prices. The financial access that was readily available few years ago is now declining and less finance is readily accessible and cash level is decreasing All three challenges force us to make up an analysis that would reveal the financial performance of British Airways over the three years period, i.e. 2007 – 2009.
The review of the financial performance of any particular company that is facing a financial crisis would be the best approach to determine the factors and develop a clear understanding as to why the financial crisis is being faced by that company. A number of factors can be counted towards explaining the problem. Researcher has chosen the financial performance as the main indicator for developing a clear understanding of the financial crisis BA is facing. The financial performance over a specific three years period would also assist the researcher in making up the prediction concerning the future prospects, which would be based on the recognition of significant variables affecting the organization as well as its financial performance. The next two sections would be based on discussion of aims, objectives, and research questions raised by the researcher.
Research Aim:
The main aim of the research is to make up an analysis of financial performance of British Airways (BA) over a three year period (2007-2009). Apart from the discussion of the financial performance, the report would also be looking at the micro and macro economic factors that lead to the expansion and development of the overall growth of aviation industry in UK.
Research Objectives:
To analyze the financial performance of British Airways in lieu of the recent financial crisis, and forming an in-depth discussion of how the financial crisis has affected the revenue, cash balances, and stock prices of BA.
To evaluate the factor s that lead to the direct effect on growth rate of the airline industry.
To ascertain the macroeconomic as well as microeconomic factors those affect the financial performance of BA.
To understand the global trends and fashions adopted in the industry as well as viewing the BA as playing a key role in global aviation industry.
Observation of the effects of modern technology on the performance of BA on financial and economic grounds.
Research Approach:
Researcher will make the most of qualitative as well as quantitative methods to ascertain the research objective and aims. The Qualitative method uses a number of approaches and it will be based on different theoretical principles, such as Hermeneutics, Phenomenology, and Social interactions.
The quantitative approach would also be taken, based on the principles of positivism, as well as neo-positivism. The approach would be based on the pre-designed standards which are developed before carrying out the actual research (Adams et al. 2007. The significance of qualitative and quantitative methods in a research project as follows: “If graduate students are to blend qualitative and quantitative research methods in their research study, they can profit at the outset from considering three questions: How are the terms qualitative and quantitative best defined? What are examples of qualitative and quantitative methods? How can the two methods be compatibly combined?” (Murray, 2003)
The argumentative reasoning adopted in this report would be based on inductive as well as deductive approach. Saunders et al. (2003) define the inductive approach as the one in which you gather data and form data analysis on the basis of which you develop a theoretical approach. On the other hand, they have defined the deductive approach as the one where a hypothesis is developed first and then a research design is established to explore and test that hypothesis. The very useful approach is to attach both of the approaches to different philosophies; the inductive can be considered more as qualitative approach, where as deductive as more of a quantitative approach (Saunders et al. 2003).
Methods of Data collection:
There are two types of methods which are given below.
Primary Data collection: This data collection is based on interviews, group discussion, Informal Discussion, Debates, Surveys, Community meeting and events (Kumar, 1996).
Secondary Data collection: This data collection is based on books, journal, articles, websites, newspapers, magazines, television and company financial reports (kumar, 1996).
Data Collection process:
Researcher has used mainly secondary source due to availability of reliable and bona fide information. The sources that the researcher has used would basically concern the annual reports from 2007-2009 periods from the website of British Airways. The economic survey of United Kingdom, as well as stock prices would also be used to explore the financial performance of British Airways. Researcher has managed to gather these sources through secondary approach. Therefore the primary sources are not very much often used. The audited financial statements of British Airways are the most relevant source for data collection on the basis of which analysis would be conducted. These financial statements or other relevant data is attached in the Appendix at the end of the research study for the convenience of reader. Researcher has used reference books as well as ACCA text books of paper F7, F9 and P3.
Use of secondary sources can be associated with many advantages as well as disadvantages:
Advantages
Adams et al. (2007) have described the advantages as below:
Larger delegate samples are available, which are considered well beyond the research of an individual researcher.
Secondary data is an excellent source for inspecting the longitudinal data as well as other trends.
Researcher can focus more on the data analysis as well as on its interpretation.
Limitation of Data collection:
According to Adams et al. (2007) the disadvantages of the secondary sources as below:
Data may not be compatible, or the information that has been collected for the data analysis may not be relevant to what is required.
The research might be limited in terms of its depth and information gathered might be odd or not up to date and recent concerns might have been over shadowed that can make the research and analysis outdated.
The information might not be gathered from whole time period that should be covered and there might be found research gaps.
Business and financial performance techniques used:
Researcher would exploit the following four business and accounting techniques in this research:
Value chain analysis
Porters five forces analysis
SWOT analysis
Financial Ratios
As the above mentioned techniques will be elaborated below :
Value chain analysis:
This technique would be useful in gaining the competitive advantage as well as generation of the shareholder value in the market. The analysis basically divides the business into a series of value-generating activities, known as value chain. The actual purpose of the value chain is to better understand the activities with the help of which the firm develops competitive advantage with the course of time in the market. These activities can best be described by the following picture:
(Source: http://www.provenmodels.com/26/value-chain-analysis/michael-e.-porter/)
Porter’s five forces analysis:
This technique allows an organization such as BA to seek for outside forces, i.e. companies involved in market competition that tend to affect the competition within the airline industry. Porter five forces model is as follow.
Source: Book On Competition By Michael E. Porter
Monczka et al. (2009) stated five points as follows:
Highest level of competition in the market would lead to creation of more options and chances for buyers as well as suppliers.
Risk of entry of new competitors in the market.
The threat posed by substitute entrants, i.e. products and services.
Extent and power of buyers.
Extent and power of suppliers.
The key limitation posed in this model is occurred when there is some innovative movement in the market in terms of technological progress which may alter the whole status quo market structure in a very short span of time.
SWOT analysis:
This technique would analyze the strengths, weaknesses, opportunities, as well as threats for BA through inside or outside forces. The main issue at hand then would be to minimize the threats as well as maximize the benefits by British Airways
Strengths: Business strengths are, the things which business doing well or, it have which are better than others e.g. Loyal experienced personnel, efficient processes, Advanced IT systems, better customer care, or any other internal factor that leads to success. Strengths of an organization give it a competitive advantage over its competitors
Weaknesses: Activities which an organization carries out badly and don’t have specialist knowledge to perform in better way are weaknesses of the organization. These weaknesses are internal to organization.
Opportunities: These are the factors which the management could take benefit of, e.g. new IT systems, latest technology t, new products etc.
Threats: These are issues which can have harmful effect on the performance and activities of business. Threats are generally from outside the organization unlike its strength and weaknesses e.g. substitute products or economic downturn, and these factors are outside of control of organization.
International institute of business analysis (2005-2009) A Guide to Business Analysis
Ethical issues:
As a professional ACCA student it is my responsibility to comply with ACCA five ethical principles i.e. integrity, confidentiality, objectivity, professional competence and due care. It is therefore in my research I have not breached any of these ethical principles. So that research work done is not copied or duplicated and I have complied with oxford Brooks University’s outline that is the used Harvard referencing system.
Business status Of British Airways:
British Airways is leading scheduled premium international airlines which flays to over 150 destinations and ha 250 planes in service. British Airways is based in UK and its main revenue earner is UK and in 2008/ 09 48% was generated from UK .22% was from continental Europe and from USA it was 17% and rest was from rest of the world.
Since 2008, British Airways have taken many new initiatives to reduce their additional costs that can enhance their profits. They also have increased the number of flights including Africa as well as Central Asia. These flights will definitely help them in finding new routes and clients as well as cutting down their overall costs. The new routes or flight might however not be very much profitable for them as the flights to central Asia and Africa are not organized very often and are not considered quite profitable routes. Another notable point is concerned with the bad performance of British Airways which was due to sudden rise in the prices of oil during the period 2007-2009.
According to British Airways chief financial officer’s report, the profits reached record levels in 2007-08 as they achieved the target of 10% operating margin for the first time. But for the year 2009 even though revenues were increased but operating costs were significantly increased which turn the profit in to loss. Economic recession has hardly hit British Airways and exchange rates have also adversely affected on British Airways. Pound starling has lost its value to euro and dollar.
The increased fuel prices in years 2007-2009 have directly affected the revenue as well as profits of the industry, whereas it is evident from the graph below that the reduced prices in oil have again raised the profits of the firm to greater amount. The major loss incurred in 2007 by BA was due to the volatility in oil prices and devaluation of pound sterling against dollar and euro. The reduction in the number of passengers lesser than the average annual rate was also low, which can be due to social and economic constraints on the individual level. Even though there was plenty of reason for economy shrinkage but British Airways sales were increased. The graph given below would explain the trends concerning revenues and profits of BA for the period of 2007-2009:
British Airways revenues increased from 8492 £million in 2007 to 8992 £million in 2009 and as in the graph above it can be seen that operating revenues are increasing through the period by 3% which is a healthy sign for the company.
Even though BA‘s revenues are increased but profits have fallen sharply and converted in a loss after tax profits have become losses and 401 £million loss which was recorded in year 2009 is very significant. It is specifically down to fuel and oil cost which has increased sharply by 900£million and some restructuring is been done in its employees contracts which will give benefits in future.
Share price of British Airways was at its peak in 2006/07 but after that there is rapid decent as shown in graph below:
http://www.financial-spread-betting.com/shares/Spreadbetting-British-Airways.html
Share price was at 6.60 £ in 2007and it start dramatically falling and in year 2009 it was as low as to 1.34 £.but after that there is a recovery and share price is increasing gradually.
The reduction of the carbon footprint was the one step that was taken in early 2008 and has been quite successful in attracting more customers than ever before. The 2009 annual report also stated some of the new IT systems being introduced as well as implemented, given as follows:
Cargo tracking
Reservation system
ULD management system
AIRCOM; a technology that provides the location and movement of the aircraft in real time
Movement manager and dispatch manager in flight operations of British Airways
The performance of British Airways is very much closely related to the economic conditions. Therefore, it would be very important to consider the state of economy. It should first be noted that the economic crisis has badly affected the economy of US and UK, and after the recession economic growth is far less than inflation. The individual economic condition would suffer so it would also be affecting the whole state’s economy, and based on that the customer base of the airline industry would also be affected as most of the customers would prefer to travel through train for domestic travel. On the other hand, the consistent downfall in the purchasing power of the consumer as devaluation of pound would also affect the per capita income which would directly impact the consumer base of British Airways.
The economic survey held in UK in 2009-10 stated that year 2007 was the worst year for airline industry. The overall decline of 2.4% in the passenger demand was recorded in the year 2007 alone. However, the losses incurred in 2007, as some economic analysts say, had been met in the 2008 year as the profits were higher and losses lesser, which became worst again in 2009. Although there was some relief in fuel bills but economic recession continued to cause a decline in passenger and freight demand. Long term investment in the period 2007 to 2009 specially restructuring of employees and there contracts BA will gain advantage from it in future.
Even though BA’s financial performance is not great but operationally however, BA is achieving levels of excellence which were never seen in the history of the airline and have won awards for that.
Analysis of British Airways using business and financial techniques
By using different business and financial models here’s a brief explanation of value chain and analysis of British Airways value chain.
Analysis of British Airways through Value chain analysis:
The similar approach as mentioned above in the value chain analysis section would be adopted here, as to develop an understanding of several activities in BA and concerning how it is important in offering the competitive advantage to the firm in discussion.
The British Airways have managed to control the system through forward and backward integration.
The primary activities for BA to take great care would be considered as follows:
Inbound logistics: BA has managed to control the stock. It has also managed to make ongoing relationships with the suppliers.
Operations: The BA management has enabled to make increased bagged security. The management has also taken steps to improve the quick check in services as well as secure online bookings. It has also enabled itself to pre-book additional services.
Outbound logistics: BA has managed to improve the customer services. It has larger database of airport slots which provide majority of the passengers a facility to access their destinations from preferred airport.
Marketing

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