Evaluating the revenue recognition practices undertaken by the Assignment

Evaluating the revenue recognition practices undertaken by the software company - Assignment Example For this case, they need to bring this revenue down so that they can show the stakeholders the true financial statements according to the laid down rules in the International Accounting Standards. There are various accounting concepts and principles that were not adhered to by Isoft company thus why they showed higher revenue than they had actually realised. This paper will critically evaluate the revenue recognition practices which had been used by Isoft and it will also include an analysis of the potential economic and social consequences of these practices. For once, revenue should be earned. This means that anticipated incomes also referred to as receivables should not be recognized until such a time when they have been realized. According to the American accounting association, the term income includes realized net income add and not income only. Isoft Ltd might have overlooked this prudence concept regarding income. (Lynn, 2004) Even if the income elements are expected in the normal course of operations of the firm, a degree of judgement and probability need be attached in making the final conclusion on whether or not to include that income or else the turnover shall be overstated if that income does not materialize. Such items may include doubtful debts, exaggerations of the useful lives of some plant and equipment, etc. Apart from the probability of earning the income so anticipated, recognition as to whether that income should be able to be measured reliably should also be taken into account. Income recognition practices require that income should be measured reliably and with certainty. And if Isoft did not make reasonable estimate, then the whole items of income should have been excluded from the financial statements all together. However they should have included/shown the existence of the income items as a footnote to the accounts. (Wood and Sangster, 1999) Also related to the measurements is the cost at which a firm records its expenses which will have a direct influence to the recognized income. Isoft might have understated their reliability and expenses which is not prudent Another principle of income recognition is that of distinguishing revenue incomes from capital gains. Revenue incomes are those incomes generated from the principle income generating operations of the firm whereas capital gains are those gains made as a result of investments and or even disinvestments. Isoft might have included such capital gains as: Proceeds from sale of assets and Gains on disposals of plant and equipments in its income statements thus overstating revenue. This is a fundamental error that normally arises as a result of poor accounting knowledge on the side of accountants. The income recognition practices stipulate that only revenue incomes should be recognized in the income statements, capitalizing the capital items. 1 It should also not be forgotten that revenues should be matched with cost/ expenses incurred in realizing that income. Isoft did not employ clear cut-offs in apportioning of income and expenses to various financial problems. For instance, they might have wholesomely recognized a given income say rental income, some of which might have been rent in arrears for prior periods for previous debtors for earlier years making good their payments this year. For this case, Isoft should have only recognised rental income that pertain the current