No, this is not your beginner’s course in business or accounting, but a post to get you thinking about how you and your company will handle the new revenue recognition guidance issued by the Financial Accounting Standards Board (the FASB) last year.
Revenue, and its misrepresentation, call it, misuse, is one of the most prevalent causes of financial statement fraud there is, and lands more CEOs and CFOs in prison than any other type of fraud. Whistleblowerstoday.com estimates that 40% of all financial statement fraud involves revenue recognition schemes.
My goal in this, and future posts, is to bring to light some of the key changes being made by the US accounting standards board, the FASB, as a result of the issuance of ASC 606 – Revenue from Contracts with Customers.
So, what is revenue? Merriam-Webster’s defines revenue as “money made by or paid to an organization or business”. The FASB, in ASC 606, defines revenue as “inflows or other enhancements of assets of an entity or settlements of its liabilities (or a combination of both) from delivering or producing goods, rendering services, or other activities that constitute the entities ongoing major or central operations”. Seems simple enough, but what really is revenue? Revenue is money you make as a result of your primary business activity whether that is selling cars, selling software, providing consulting services or providing healthcare services. The key here, then is defining your “major or central operations”. What is your core business? Herein lies the first step in defining revenue. For some this may be very simple, but for others this can be complex and may require in depth thought an analysis.
So, I leave it to you…What is revenue?