Historical Development of Financial Accounting Theory

Revenue Recognition
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Revenue Recognition
Historical Development of Financial Accounting Theory
Understanding the historical development of financial accounting theory can help in explaining the current discipline’s structure and thereby contributing to the debate about the relationship between varying theoretical perspectives (Beattie & Davie, 2006). Factors that have influenced the development of the accounting thought according to Beattie and Davie (2006) include institutions, groups, the accountancy profession, individuals, new ideas, and journals. The development of the accounting thought has also been impacted by the external economic, cultural, and social factors (Beattie & Davie, 2006).
The history of accounting dates back to as early as 7500-3350 BC in Mesopotamia (Berisha & Asllanaj, 2017). During the period, farmers invented symbols to calculate and count the goods they produced. It is the in the same region that accounting continued to develop. As informed by Berisha and Asllanaj (2017), five thousand years before the double entry system emerged, Mesopotamia had in place accountants who recorded economic activity. The accountants who were referred to at the time as “scribes” were employed by private firms, temples, and palaces (Berisha & Asllanaj, 2017). Deals had to be reported to the scribes who prepared financial transaction records and recorded them on clay tablets. In the clay tablets, the names of the contracting parties were recorded alongside the details of the transaction. Accounting also developed in Ancient China, Egypt, and Rome between 3000 BC and 1100 AD. As informed by Berisha and Asllanaj (2017), clay tablets that contained tax records were found three thousand years before Christ’s birth. The use of papyrus in Egypt instead of clay tablets allowed a more detailed capture of the transaction details. During this period, it was necessary for a scribe to be able to write and read more than a thousand symbols. Several horizontal lines in the papyrus allowed the scribes to group the data.
The double accounting system emerged in 1494 due to the influence of writing development, capital accumulation, and trade and production (Berisha & Asllanaj, 2017). It is also during this period that other disciplines such as art, philosophy, science, architecture, and literature developed. As such, the increasing need for financial information contributed to further development of accounting. According to Berisha and Asllanaj (2017), the double accounting system has proved useful up to date. Accounting further developed during the 18th century when Great Britain strengthened its economy (Berisha & Asllanaj, 2017).
The year 1854 saw the establishment of the first professional national accounting body in Scotland. The body was known as the Institute of Chartered Accountants of Scotland (ICAS). This was followed by the establishment of the Institute of Accounting Experts in Great Britain and Wales (ICAEW) in 1880. With ideas and capital moving to the US from Great Britain, accounting practice and theory in the former were developed. This influenced the establishment of the National Accounting Institute in 1887. A further increase in the demand for financial information in the 20th century saw more development of accounting and as a result, international accounting rules were set (Berisha & Asllanaj, 2017). As such, in 1973, professional accounting bodies in different countries including Germany, France, Australia, Mexico, Japan, Ireland, the US, and the UK formed the International Accounting Standards Committee (IASC). During the 11th World Congress of Accountants, the International Federation of Accountants (IFAC) was established with its key objectives being formulating and publishing International Accounting Standards (IAS) and issuing of guidelines for ethics, auditing, management accounting, and public sector accounting. The International Accounting Standards Board (IASB) was established in 2001 to replace IASC. IASB roles include developing and publishing international financial reporting standards and approving the interpretations recommended by the International Financial Reporting Interpretations Committee (Berisha & Asllanaj, 2017). As informed by Berisha and Asllanaj (2017), in 2005 the EU and other countries such as New Zealand, Australia, South Africa, and Korea decided to move to International Standards for Financial Reporting (IFRS). Other countries such as Brazil, Korea, Taiwan, Russia, and Canada joined the wave in adopting IFRS.
Current GAAP Principles related to Revenue Recognition
According to Bohusova and Nerudova (2009), FASB Concepts Statement No. 6 defines revenues as “inflows or other enhancement of assets of an entity or settlement of its liabilities from delivering or producing goods, rendering services, or other activities that constitute the entity’s ongoing major or central operations” (p.13). Therefore, in order for revenue to be recognized, these two criteria have to be met. In addition, Concepts Statement No. 5 defines the criteria for revenue recognition. In this case, revenue must be realizable or realized and earned. Therefore, revenues are recognized when merchandise, products, as well as other assets are exchanged for claims of cash or cash. Simply, recognized are not recognized until they are earned. As informed by Bohusova and Nerudova (2009), the way the revenue recognition is applied is not consistent in different industries. This is because there exist different requirements for transactions that are similar economically. This varying requirement reduces the comparability of revenues across industries and entities. According to Bohusova and Nerudova (2009), the recognition of sales of real estate, cable television services, and software revenues have specific rules. The rules have exceptions for particular types of transactions.
In the case the customer has a right to return goods, there exist rules that have to be followed. Revenue from such transactions can only be recognized at the time of sale when the Statements of Financial Accounting Standards (SFAS) 48 conditions are met. Even in such case, the seller is required to reduce the revenues such that the expected returns are reflected.
SEC Staff Accounting Bulletins (SAB) 104 also offers guidance on how revenue should be recognized by public traded entities (Bohusova & Nerudova., 2009). In the case of bill-and-hold arrangements where the firm has invoiced a customer before the delivery of products, revenue should not be recognized until a fixed delivery schedule that is consistent with business purposes of the customer has been established by the firm (Bohusova & Nerudova, 2009). As such, SAB No. 104 has the guidelines for revenue recognition in bill-and-hold arrangements. Revenues can only be recognized when the written arrangement has considerable business purposes.
It is evident that under GAAP, there are many standards relating to revenue recognition. Bohusova and Nerudova (2009) inform that the over 100 standards on revenue can yield conflicting outcomes for transactions that are economically similar. In addition, the authors point out there is not any general standard under GAAP for revenue recognition.
U.S. GAAP vs. IFRS
There exist significant differences between the GAAP and IFRS in relation to revenue recognition. According to Bohusova and Nerudova (2009), the definition of revenue under GAAP is similar to IFRS. Under GAAP, revenue is defined as the actual or expected inflows of cash that have occurred or will result from the ongoing key operations of the entity. On the other hand, revenue under IFRS is defined as the gross economic inflow benefits during the period of an entity’s ordinary activities. In this case, the benefits can be aspects such as rent, sales, fees, dividends among others. Therefore, revenue definition is similar under the two frameworks.
In regards to the criteria for revenue recognition, US GAAP differs significantly with IFRS. As explained earlier, it is necessary that the revenue be realizable or realized under GAAP. In addition, revenue has to be earned. It is also important to note that the GAAP has guidelines that apply to different industries or entities. On the other hand, the revenue is recognized when there is a possibility that the entity will receive future economic benefits. In addition, it is necessary that the economic benefits be able to be measured reliably.
Revenue measurement under US GAAP is similar to the measurement under IFRS. Revenues are measured at fair value in both cases. Under US G...