Summary of a Staff Accounting Bulletin No. 94 and an FASB Exposure Draft
Part 1: Own words summary of the accounting treatment to a non-accounting major
The aspect of accounting is fundamentally conceptualized on the basic principle that an entity owned for commercial purposes (capital) added to an entity held but owed to someone else (liability) yields a total sum of an individual’s owning (Assets) as at the particular time of carrying out the evaluation. This represents the basic accounting principle of Capital+ Liabilities= Assets from which other accounting principles arise. For purposes of establishing an individual’s true worth in the context of asset ownership, liabilities are deducted from the assets giving rise to a net asset ownership technically known as equity in accounting. Aspects pertaining to increase or decrease in assets, liabilities or equity essentially represent the net position of an individual from the perspective of owning, being owed and the net absolute ownership status from the balance of the two. Increase in liabilities beyond equity yields a debt position during increase in equity beyond liabilities yields revenue from a monetary perspective. Increase in equity beyond liabilities in the context of a group established entity yields contribution and distribution with respect to individual’s share in the gain.
This forms the basis of the US Securities and Exchange Commission (SEC) Staff Accounting Bulletin Number 94 as can be accessed from the Securities and Exchange Commission website. The bulletin gives the staff views as to when the loss or gain should be recognized following an early debt extinguishment. The staff argument is that the loss or gain acquired from the early debt extinguishment should be accounted for in the year that the debt was initially planned to be extinguished. The intention to extinguish it or an early extinguishment should just be recorded as a footnote in the financial statements and management discussions and carried forward as a footnote. What should be recognized in the periods prior to the stated date of extinguishment should just be the interest expense and associated costs of carrying the debt. This will take into account the entire costs associated with the debt. This contrasts the FASB Accounting Codification that such a loss or gain should be accounted for in the year that such extinguishment occurs rather than in the year that it was initially arranged to occur.
Part 2: Description of a current exposure draft outstanding from the FASB
In evaluating the financial position and performance of the company, revenue plays a very crucial role. The standards for revenue recognition are, therefore important in affecting decisions made on the basis of revenue statement in the financial statements. Due to inconsistencies in revenue recognition practices occasioned by differences in GAAP (generally accepted accounting principles) and IFRSs (International Financial reporting Standards) revenue recognition requirements, the FASB (Financial Accounting Standards Board) in conjunction with IASB (International Accounting Standards Board) embarked on the development of revenue recognition standard that will harmonize the inconsistencies in GAAP and IFRSs requirements for revenue recognition. The harmonization is intended to introduce more strength in a framework that addresses revenue issues. Besides, current existence of lack of comparison in revenue recognition procedures amongst various companies in different industries and markets will be eliminated. According to FASB website, the exposure draft once completed will eliminate instances of confusion as external users of financial statements make efforts to gather information from financial statements produced through differing revenue disclosure requirements.
The draft, known as Revenue from Contracts with Customers is currently outstanding and is expected to come into effect on the 1st of January 2015. According to FASB, the draft affects all the companies entering into contracts with customers provided the contracts are not subject to different standards such as leases or insurance contracts. The main principle of the draft is that revenue recognition by an entity should be such that as the entity enters into a transaction with a customer, the amount recognized as the promise for transfer of goods and services is made should reflect the consideration expected as the entitlement to the company or entity for such transfer of goods or services. The main objective of the draft is to pass across applicable guidance through principles as to what entities will include in the financial statements with regard to aspects such as time, nature; amount and revenue and cash flow issues emanating from transacting with the customer inform a contractual relation. The proposals will affect my company in a number of ways. The company will be required to make application of the standard to every contract entered with a customer. Besides, the company will be required to account for every clearly identifiable good or service for which the company enters into a contract with the customer.
Works cited
Securities and Exchange Commission. Cited from: www.sec.gov
Financial Accounting Standards Board. (FASB) Cited from:www.fasb.org
