The survey has been conducted to hold a position on Revenue Recognition and how is of import for entities in fiscal coverage and the nexus between gross acknowledgment and originative accounting.

The primary issue in accounting for gross is to finding when to acknowledge gross. Gross is recognized when it is likely that future economic benefits will flux to the entity and these benefits can be measured faithfully. There are identifiable standards to be met and for gross to be recognized. By definition. Gross is the gross influx of economic benefits during the period originating in the class of the ordinary activities of an entity when those influxs result in additions in equity. other than additions associating to parts from equity participants.

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The entities gross may be originating from the minutess and events. such as the sale of goods ; the rendition of services ; and the usage by others of entity assets giving involvement. royalties and dividends.

The acknowledgment standards normally applied individually to each dealing. However. in certain fortunes. it is necessary to use the acknowledgment standards to the individually identifiable constituents of a individual dealing in order to reflect the substance of the dealing minutess are dealt with shall be measured at the just value of the consideration received or receivable.

Fair value is the sum for which an plus could be exchanged. or a liability settled. between knowing. willing parties in an arm’s length dealing. 1 Creative on the other manus refers to the usage of accounting cognition to act upon the reported figures while the legal power of accounting regulations and Torahs. so that alternatively of demoing the existent public presentation or place of the company. they reflect what the direction want to state the stockholders. It is the transmutation of fiscal accounting figures from what they really are to what preparer desires by taking advantages of the bing regulations and /or disregarding some of them2.

There are figure of ways direction can utilize to pattern Creative accounting such the pick of accounting policy and besides the usage of unreal
minutess to Revenue Recognition. The focal point of this survey lies more on the Revenue acknowledgment a tool of originative accounting. The Management aim is to maximise stockholders wealth. Sometimes Organizations public presentation do non ever be good to run into this aim. Management may utilize originative accounting tactics to make a good image of company ( find ways to better consequences ) to run into the aim of stockholders. Besides Management use originative accounting to maximise for their ain wealth maximization. among other thing is end fillip and wages increases

Literature Review

Gross acknowledgment
Fiscal coverage statements are tools to pass on entity public presentation to internal and external users of its fiscal consequences information. Gross acknowledgment is of import facet of organisational.

The public presentation organisation is measured based on the consequences from its operations activities and the bottom line ( the net income ) plays a important function. Gross is deciding of public presentation of Organization since the net income which is index of organisational public presentation is the consequences of the Organization’s entire gross less entire costs. Internation Accounting Standard ( IAS ) 18 Revenue acknowledgment. stipulate standards to run into for gross to be recognized in Financial Statements.

By definition. Gross is the gross influx of economic benefits ( hard currency. receivables. other assets ) originating from the ordinary operating activities of an entity ( such as gross revenues of goods. gross revenues of services. involvement. royalties. and dividends ) Recognition of gross. acknowledgment. as defined in the International Accounting Standard Board ( IASB ) Framework. means integrating an point that meets the definition of gross ( above ) in the income statement when it meets the undermentioned standards. that: Its likely that any future economic benefit associated with the point of gross will flux to the entity. and the sum of gross can be measured with dependability.

As mentioned. each activity has its acknowledgment standards on top of the one reference. These are as follows ; Sale of goods Revenue originating from the sale of goods should be recognized when all of the following standards have been satisfied: I. The marketer has transferred to the purchaser the important hazards and wagess of ownership two. The marketer retains neither go oning managerial engagement to the grade normally associated with ownership nor effectual control over the goods sold three.

The sum of gross can be measured faithfully four. It is likely that the economic benefits associated with the dealing will flux to the marketer. and v. The costs incurred or to be incurred in regard of the dealing can be measured faithfully

Rendering of services
For gross originating from the rendition of services. provided that all of the undermentioned standards are met. gross should be recognized by mention to the phase of completion of the dealing at the balance sheet day of the month ( the percentage-of-completion method ) I. The sum of gross can be measured faithfully ;

two. It is likely that the economic benefits will flux to the marketer ; three. The phase of completion at the balance sheet day of the month can be measured faithfully ; and iv. The costs incurred. or to be incurred. in regard of the dealing can be measured faithfully.

When the above standards are non met. gross originating from the rendition of services should be recognized merely to the extent of the disbursals recognized that are recoverable ( a “cost-recovery attack )

Interest. royalties. and dividends
For involvement. royalties and dividends. provided that it is likely that the economic benefits will flux to the endeavor and the sum of gross can be measured faithfully. gross should be recognized as follows: I. Interest: utilizing the effectual involvement method

two. Royalties: on an accruals footing in conformity with the substance of the relevant understanding three. Dividends: when the shareholder’s right to have payment is established

Creative Accounting
Creative accounting refers to the usage of accounting cognition to act upon the reported figures. while staying within the legal power of accounting regulations and Torahs. so that alternatively of demoing the existent public presentation or place of the company. they reflect what the direction wants to state the stakeholders. Purposeful intercession in the external fiscal coverage procedure with the purpose of obtaining some sole addition. There are some many ways direction can utilize to pattern originative accounting such as picks of accounting policies. usage of unreal minutess and gross acknowledgment. In this survey. our chief focal point will be on subsequently. the gross acknowledgment.

Gross Recognition is the most manipulated point. Deloitte on its reappraisal on what fraud strategy are most common. gross acknowledgment represent 41 % of all fraud strategies in United States between 2000-2006. For Many Companies the gross figure is a individual aggregated large figure. Creative comptroller has ever known that. one of the ways to blow up net income is to blow up gross. In accomplishing this end foremost they manipulate just value measuring standards.

The standards are subjective and depend upon the parties to the minutess unity. The just value finding is based on cognition and willingness of the parties to the minutess. Second they recognize gross before it is earned i. e. pre mature acknowledgment of gross. In complex minutess which involves the drawn-out phases of sale particularly with accrual system.

The acknowledgment of gross in footings of its timing can be really ill-defined. therefore the chance for use occurs and this can ease premature acknowledgment of gross. Before looking how gross acknowledgment nexus with originative accounting. first we have to look the motivation behind Creative accounting. Dr. Syed Zulfiqar Ali Shah and Dr. Safdar Butt in their article Creative Accounting: A Tool to Help Companies in a Crisis or a Practice to Land Them into Crises which besides appeared on NBAA diary No. 28 of April-June 2010states and explains the undermentioned as motivations for originative accounting.

To run into internal marks
The directors want to cook the books for run intoing internal marks set by higher direction with regard to gross revenues. profitableness and portion monetary values.

Meet external outlooks.
Company has to confront many outlooks from its stakeholders. The Employees and clients want long term endurance of the company for their involvements. Suppliers want confidence about the payment and long term relationships with the company. Company besides wants to meat analyst’s prognosiss and dividend payout form.

Provide income smoothing.
Companies want to demo steady income watercourse to affect the investors and to maintain the portion monetary values stable. Advocates of this attack favour it on history of step against the ‘short-termism’ of measuring an investing on the footing of the immediate outputs. It besides avoids raising outlooks excessively high to be met by the direction.

The originative accounting may besides be a consequence of desire for some revenue enhancement benefit particularly when nonexempt income is measured through accounting Numberss.

Change in direction
There is another of import inclination of new directors to demo losingss due to hapless direction of old direction by some commissariats

Gross Recognition as method for Creative accounting patterns There are figure of ways direction usage to carry on originative direction. among them is gross acknowledgment. Firms virtually have a free manus in clocking the engagement of their grosss at any phase get downing from the minute gross revenues contracts are signed till the promised merchandise or service has been to the full delivered to and accepted by the clients.

For this we can mention to a authoritative illustration of Microsoft which was to a great extent fined by US SEC for its manipulative gross acknowledgment policy. Microsoft recognized merely a little per centum ( 20-30 % ) as gross at the clip of the sale and staying sum was kept as proviso for future after gross revenues services. Why Microsoft adopted that scheme.

The reply is to ( 1 ) conceal significant net incomes. ( 2 ) signaling effects. ( 3 ) avoiding complacence and last but non the least ( 4 ) to describe smoothened net incomes to its stockholders & A ; stakeholders. 3 Furthermore. NBAA Account Journal vol. 25 No 4 October –December 2010. lineation ways in which Revenue Recognition can be used as a method of originative accounting. This include but non limited to Common gross Manipulations and channel dressing. Multiple element agreements. side letters or understanding and non substantial unit of ammunition trip agreement. Bill and hold agreements. backdated contracts and Fictitious minutess

Common gross Manipulations
Gross acknowledgment abnormalities frequently involves both skip and committee Acts of the Apostless which are inherently either or both inclusive and sole of originative accounting use. In books and records include committees such as false entries. misstated contracts. back dating. misapplication of accounting criterions. Committees result into overstated gross. mis-timing of acknowledgment. overstated receivables.

Channel Stuffing
Channel Stuffing is a pattern of conveying gross frontward from future financial periods. This is done by bring oning clients to subject purchase orders in progress. Channel Stuffing is an illustration of existent gaining direction which involves use of existent or normal operations to act upon reported public presentation. A good illustration of channel dressing is Coca Cola channel stuffing pattern of 1997 to 1999 where coca Cola offered downstream bottlers extended recognition to bring on them to buy more than demanded.

Multiple component agreements.
IAS 18 provides counsel on gross addition from the normal sale of goods and proviso of services. The complex issues that arise from the principle-agent relationship and multiple component agreement. The gross collected for 3rd parties is non to be recognized by an entity. For illustration. in a telecommunication industry. operator steadfast signifier confederations and enter into Side letters or understanding

This involves act of marketer to recognition the purchaser for unsold goods or to supply future stock rotary motion rights or to widen payment footings such that a
dealing becomes a cargo

Bill and hold agreements.
This include the sale of merchandise and executing the repositing service for the merchandise. It is a contract of providing goods where the marketer reassign the rubric but does non reassign physically present the goods until a ulterior day of the month.

The measure and keep agreement are popular in the oil and gas industry every bit good as international gross revenues. They are merely acceptable when it is likely that the bringing will be made. the points on manus is identified and ready for bringing to the purchaser at the clip when sale is recognized. the purchaser specifically recognizes the differed delivered instructions and the usual payment footings apply. The sale on measure and keep agreement must fulfill conditions that the marketer merely retains the goods for safe maintaining and transportation and the goods must non used by the marketer to carry through other orders.

When these status are met so gross revenues can be recognized on a measure and hold agreements. In pattern these regulations can be violated by marketer and this spell to be an act of originative accounting. The specific instance in point would be on timing of the acknowledgment between old ages as the transportation of hazards and wagess can be distinguish and hard to bring out. Therefore due to this the Revenue acknowledgment can be shifted frontward or rearward to accommodate the demands of the originative accounting.

Backdated Contracts
Backdating of grosss contracts facilitates early acknowledgment of gross than usually expected acknowledgment day of the month. Company must follow with any Torahs. regulations and ordinances associating to dating paperss used in concern. Any going from this may pull judicial proceeding because such backdating may amount to fraud. counterfeit and condemnable discourtesies.

Recognition of gross earlier than its expected day of the month act as a method of originative accounting because the fiscal statements for early acknowledgment period will non show a true and just value of the company’s public presentation. instead public presentation consequences from manipulated figure through originative accounting.

Genuine Transaction
Genuine minutess can besides be timed so as to give the coveted feeling in the histories. As an illustration. say a concern has an investing at historic cost which can easy be sold for a higher gross revenues monetary value. being the current value. The directors of the concern are free to take in which twelvemonth they sell the investing and so increase the net income in the histories Fabricated Minutess

Fiscal Statements are inflated by entering gross revenues of goods or services that ne’er occurred or by blow uping existent gross revenues. This is one of the taking malicious uses than the other type of gaining direction because it engrosses paperss disproof. forgeryand use. On the other manus fabricated gross can be accomplished with side understandings. contra understandings ( gross revenues that offset a purchase dealing ) and conditional gross revenues.

Practical Example

Xerox Corporation
Beginning: The Wall Street Journal. February 6. 2001
Xerox Corporation had the wont of acknowledging renting payments as gross revenues. In April 2002. after an probe by the SEC. the American company was forced to reclassify its fiscal statements for the old ages 1997 to 2000 and cut down recognized grosss by US $ 3. 000 million and net incomes by US $ 1. 500 million. with equity being reduced in the same sum. As a consequence. the SEC fined Xerox US $ 10 million. By that clip. the monetary value of the company’s portions had plummeted from US $ 62 to US $ 4. 5.

How did this company pull strings its gross figures?

Xerox sold clients photocopiers under long-run understandings. in which the clients paid a amount of money to Xerox. portion of which was to buy the machine and the other portion to cover fixs and care on a long-run footing. This was non debatable in itself from a clerking position. provided that the sum matching to the sale monetary value of the machine was recognized as gross in the first twelvemonth. plus grosss matching to maintenance services in the current twelvemonth. reassigning the remainder of the standard sum to deferred Revenues. which. in bend. were recorded as gross revenues
in the twelvemonth in which the fix services were rendered. So. if a photocopier. for illustration. is valued at US $ 100. and five-year care costs US $ 50. the client would pay Xerox US $ 150 when buying the machine.

The right accounting method for entering this operation. if the dealing were performed on 1 January. would be to acknowledge US $ 110 of gross revenues in twelvemonth 1 and US $ 10 of gross revenues in each of the undermentioned four old ages. Accounting malpractice on the portion of Xerox consisted in acknowledging US $ 125 of grosss from the sale of the machine. therefore underestimating the sum of future fix services. entering US $ 130 as grosss in twelvemonth 1 and postponing merely US $ 20 over the staying four old ages of the contract. In this manner. it increased twelvemonth 1profits well and decreased future net incomes. The entire sum of the dealing in gross revenues remained the same ( US $ 150 ) ; the job is merely the timing of the acknowledgment of these gross revenues


Enron and other energy merchandisers earned net incomes by supplying services such as sweeping trading and hazard direction in add-on to developing electric power workss. natural gas grapevines. storage. and treating installations. When taking on the hazard of purchasing and merchandising merchandises. merchandisers are allowed to describe the merchandising monetary value as grosss and the merchandises costs as cost of goods sold. In contrast an “agent” provides a service to the client. but does non take on the same hazards as merchandisers for purchasing and merchandising.

Service suppliers. when classified as agents. are able to describe trading and securities firm fees as gross. Enron’s method of describing hyperbolic trading gross was subsequently adopted by other companies in the energy trading industry in effort to remain competitory with the company’s big addition in gross. Enron’s usage of deformed. “hyper-inflated” grosss was more of import to it in making the feeling of invention. high growing. and dramatic concern public presentation than the cover of debt. Between 1996 to 2000. Enron’s grosss increased by more than 750 % . lifting from $ 13. 3 billion in 1996 to $ 100. 8 billion in 2000.

This extended enlargement of 65 % per twelvemonth was unprecedented in any industry. including the energy industry which typically considered growing of 2-3 % per twelvemonth to be respectable for merely the first nine months of 2001 ; Enron reported $ 138. 7 billion in
grosss. which placed the company at the 6th place on the Fortune planetary 500.

Group Discussion Regarding Revenue Recognition
The Management aim is to maximise stockholders wealth and this is achieved when the companies they are pull offing are executing good. entering high gross figure and a good underside line figure. the net income.

Though this survey we have learn that. Revenue acknowledgment and Creative accounting is a tool which is much like a arm. If used right it can be of great benefit to the user but if it is mishandled it can do much injury. Many people are taking originative accounting as negative act ; the image to their head is that originative accounting is dishonorable act and use of figures. Though the survey we have learned out that Creative accounting has both advantages and disadvantages. It can assist the company to acquire out of a crisis than set down them to a crisis. Therefore our treatment will concentrate much the advantages of originative accounting as the consequences of Revenue Recognition to the Organization.

Not all facets of gross are covered under IAS 18 ( Revenue Recognition ) . which give the room to direction to utilize their judgements which will ends up with consequences favours place. For illustration IAS 18 provides guidelines on gross addition from the normal sale of goods and proviso of services. The gross that arises from the principle-agent relationship and multiple component agreement is non falls on the two. Deciding whether one operator is moving as an agent in delivering of services is subjective and ill-defined. Thus the determination will be based on affair of judgement and fortunes of state of affairs. When Management use their judgement to acknowledge gross for state of affairs like this we can non state they have manipulated the figure. hence originative accounting become advantageous to them.

Creative accounting besides can be used in echt minutess. For illustration. the disposal of Investment. the mandate of sale prevarications on proprietors but the determination on when to sale is on custodies of Management. For illustration. if the Company have investing of TZS 2m at historical cost which can be easy sold for TZS 3m in current Value. when authorized to sale. the Management of Company are free to take in which twelvemonth to sell the investing and to increase net income in the company consequences.

Due to the inclination of Investors penchant on smooth income to up and down income. Management would wish to dispose this Investing in the period when they see the entity’s public presentation is hapless. The gross from sale will assist to hike their public presentation and stop up describing smooth income and aid to run into outlooks. This is originative accounting. but applied on echt dealing and harmonizing to the demand of the dealing. Revenue acknowledgment acts as a method of originative accounting but on echt dealing.

The two illustrations we have discussed explain in brief how arm. originative accounting could be good to Company. When utilizing originative accounting on in good mode. if the Company is in crisis. can assist the company to get loans from Bank. to pull Investors and besides to actuate employees because non merely loaners and Invertors interested with Company Performance. Employees besides interested to guarantee their occupation security and this is of import because will enable the Company to retain their cardinal forces and besides pull more qualified workers


Creative Accounting is both desirable and unwanted. It depends on the point of one’s statement. The pattern of originative direction has some advantages and disadvantages. Creative accounting is a tool which helps a company to acquire out of crisis than to set down in it. It is much like a arm. If used right it can be a great benefit to the user. Some advantages of originative accounting as a consequence of gross acknowledgment has helped to stabilise portion monetary values. helps/helped companies to unbend their adoption bounds and deliverance companies from hostiles coup d’etat.

On other manus it has brought more injury to companies particularly through ill-timed corporate failures that have brought huge losingss to assorted stakeholders. Besides the improper usage of such originative accounting patterns had fooled both hearers and regulators in the yesteryear and it continues to make the same.

The complex and diverse nature of the concern minutess and the latitude available in the accounting criterions and policies make it hard to manage the issue of originative accounting. It is non that originative accounting solutions are ever incorrectly. It is the purpose and the magnitude of the revelation which determines its true nature and justification. Revenue acknowledgment can as a tool can heighten both advantage and disadvantages of originative accounting.

When Revenue acknowledgment applied on echt dealing and company stop up with good consequences it enhance the advantages of utilizing originative accounting patterns but the worse of it is when it is used to acknowledge gross on unreal minutess and fabricated minutess. this terminal up set downing the company into crisis like ENRON. this is disadvantages of practising originative accounting.

1. The Accountant. The Journal of the National Board of Accountants and Auditors Tanzania. No. 4 October-December. 2010 2. The Journal of the National Board of Accountants and Auditors Tanzania. Vol. 25 No. 28 April-June 2012 3. The Wall Street Journal. February 6. 2001

4. Oriol. Amat: Journal of Economic Literature categorization: M41. Creative Accounting: Nature. Incidence and Ethical Issues

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