“Restatement and revision of Accounting research bulletins; Accounting ” by American Institute of Certified Public Accountants Committee on Accounting Procedure

Even if the lease agreement is a renewal for store space that had averaged monthly sales of $25,000 for the past 2 years, minimum lease payments would include only the $200 monthly base rental; the supplemental rental is a contingent rental that is excluded from minimum lease payments. The future sales for the lease term do not exist at the inception of the lease, and future rentals would be limited to $200 per month if the store were subsequently closed and no sales were made thereafter. This study demonstrates the effectiveness and importance of historical analysis as a pedagogic tool. Specifically, the study illustrates how historical analysis may provide explanations that provide greater insight into the reasons underlying the construction of current reporting requirements than may be obtained from the authoritative text, the conceptual framework, or accounting theory. The study also examines how historical analysis may be used to demonstrate to students that, rather than being conceived and constructed in a theoretical and conceptual vacuum, accounting policy decisions are often heavily influenced, and sometimes constrained, by legal, political, and societal forces. In this particular case, the research suggests that current reporting requirements were constructed to discourage the use of stock dividends that policymakers perceived as a deceptive financial practice.

Why is ARB different to RIBA?

Differences in Scope

The key difference between RIBA and ARB is their scope. While the RIBA is a charity that offers a professional membership and other services and resources to its members, the ARB is a statutory regulator that focuses primarily on protecting the public interest.

Compare, for example, the relatively short operating cycles of grocery chains like Safeway, Kroger, and Lucky Stores … Although the change from ARB No. 43 (FASB 1953) to SFAS No. 151 (FASB 2004) seems trivial at first glance, using a sample of U.S. manufacturing firms from the Compustat database (SIC 2, 3) for the period 2003–2008, we document that abnormal production costs significantly increased after SFAS No. 151 became effective in 2005. The empirical evidence substantiates our hypothesis that the explicit expensing and reporting of idle facilities, as stipulated in SFAS No. 151, inadvertently further induces opportunism for excess production. Moreover, we find that firms that have limited options to indulge in accruals management, and those that have pressures to boost income, will have higher excess production after the adoption of SFAS No. 151. Supplementary analyses indicate that our results are robust with regard to controlling for sales manipulation, and to alternative explanations for excess production as well as alternative overproduction measures. ARB No. 43, along with other ARBs, played an essential role in shaping accounting practices in the United States during its time.

Opinion No. 6. Status of Accounting Research Bulletins

They are used by accountants and auditors to ensure that financial statements are prepared in accordance with generally accepted accounting principles. FASB issued Statement no. 151 , Inventory Costs
/st/index.shtml ), an amendment of Accounting
Research Bulletin (ARB) no. 43, chapter 4. The statement clarifies
that abnormal amounts of idle facility expense, freight and/or
handling costs and wasted materials (that is, spoilage) should be
recognized as current-period charges, and it requires the allocation
of fixed production overheads to inventory based on the normal
capacity of the production facilities. The guidance is effective for
inventory costs incurred during fiscal years beginning after June 15, , but earlier application is permitted for costs incurred during
fiscal years beginning after November 23, 2004. A lease agreement for retail store space could stipulate a monthly base rental of $200 and a monthly supplemental rental of one-fourth of one percent of monthly sales volume during the lease term.

The staff presumes that such contractual customer acceptance provisions are substantive, bargained-for terms of an arrangement. Accordingly, when such contractual customer acceptance provisions exist, the staff generally believes that the seller should not recognize revenue until customer acceptance occurs or the acceptance provisions lapse. Customary business practices and processes for documenting sales transactions vary among companies and industries. Business practices and processes may also vary within individual companies (e.g., based on the class of customer, nature of product or service, or other distinguishable factors).

The information content of security prices

Once the $25 million threshold is met, Company A would recognize the contingent rental income as it becomes accruable, in this case, as the customer recognizes net sales. The staff does not believe that it is appropriate https://simple-accounting.org/ to recognize revenue based upon the probability of a factor being achieved. Even before the FASB issued its exposure draft on the subject in 1993, however, controversy began to surround its deliberations and decisions.

  • In addition, the research illustrates how the dynamic and evolutionary attributes of the standard-setting process become clearly visible when examined from a historical perspective.
  • Refers to AU 150 (replaced by AU-C 200), a specific section of AICPA’s Codification of Statements on Auditing Standards.You can find a copy of AU 150 on the PCAOB site.
  • Side agreements could include cancellation, termination, or other provisions that affect revenue recognition.
  • The FASB’s exposure draft proposed that the cost ofstock options be expensed on the income statement, consistent with other forms of compensation.
  • If this is the first time you used this feature, you will be asked to authorise Cambridge Core to connect with your Dropbox account.

Topic 13-A provides the staff’s views in applying generally accepted accounting principles to selected revenue recognition issues. In addition, the staff hereby revises Topic 8-A to conform to FASB Statement No. 13, Accounting for Leases . The Committee on Accounting Procedure (CAP) was the first private sector organization tasked with setting accounting standards in the United States.

Accounting Research Bulletins (ARBs)

According to professional standards, a current asset is defined as any asset that is intended to be converted into cash within one year or the company’s operating cycle, whichever is longer.1 As illustrated in Figure 6-1, a company’s operating cycle is the time it takes the company to convert its cash to inventory (to purchase or manufacture inventory), sell the inventory, and collect cash from the sale. In other words, the operating cycle is the time required for a company to go through all the required phases of the production and sales process. Because Company A’s contingent rental income is based upon whether the customer achieves net sales of $25 million, the contingent rentals, which may not materialize, should not be recognized until the customer’s net sales actually exceed $25 million.

They were discontinued with the dissolution of the Committee in 1959 under a recommendation from the Special Committee on Research Program.[1] In all, 17 bulletins were issued; however, the lack of binding authority over AICPA’s membership reduced the influence of, and compliance with, the content of the bulletins. The Accounting Research Bulletins have all been superseded by the Accounting Standards Codification (ASC). Please list any fees and grants from, employment by, consultancy for, shared ownership in or any close relationship with, at any time over the preceding 36 months, any organisation whose interests may be affected by the publication of the response.

Some have argued that there may be a limited exception to the general rule that revenue from membership or other service transaction fees should not be recognized in earnings prior to the refund privileges expiring. Despite the fact that SFAS No. 48 expressly does not apply to the accounting for service revenue if part or all of the service fee is refundable under cancellation privileges granted to the buyer,35 they believe that in certain circumstances a potential refund of a membership fee may be seen as being similar to a right of return of products under SFAS No. 48. They argue that revenue from membership fees, net of estimated refunds, may be recognized ratably over the period the services are performed whenever pertinent conditions of SFAS No. 48 are met, namely, there is a large population of transactions that grant customers the same unilateral termination or cancellation rights and reasonable estimates can be made of how many customers likely will exercise those rights. FASB Technical Bulletin (FTB) 85-3, Accounting for Operating Leases with Scheduled Rent Increases, addresses whether it is appropriate for lessors in operating leases to recognize scheduled rent increases on a basis other than as required in SFAS No. 13, paragraph 19(b). Paragraph 13 states “There is an important substantive difference between lease rentals that are contingent upon some specified future event and scheduled rent increases that are unaffected by future events; the accounting under Statement 13 reflects that difference. If the lessor and lessee eliminate the risk of variable payments by agreeing to scheduled rent increases, the accounting should reflect those different circumstances.” The staff is aware that sometimes a customer and seller enter into “side” agreements to a master contract that effectively amend the master contract.

accounting research bulletin no 43

As noted above, because the refund privilege extends to the end of the contract term irrespective of the amount of the service performed, SFAS No. 125 indicates that the liability would not be extinguished (and therefore no revenue would be recognized in earnings) until the cancellation or termination and related refund privileges expire. Nonetheless, the staff recognizes that over the years the accounting for membership refunds evolved based on analogy to SFAS No. 48 and that practice did not change when SFAS No. 125 became effective. Reasonable people held, and continue to hold, different views about the application of the accounting literature. For the staff to prohibit such accounting in this SAB may result in significant change in practice that, in these particular circumstances, may be more appropriately addressed in a formal rulemaking or standards-setting project. In addition, the seller should have a demonstrated history of completing the remaining tasks in a timely manner and reliably estimating the remaining costs. If revenue is recognized upon substantial completion of the arrangement, all remaining costs of performance or delivery should be accrued.

Stock splits, stock prices, and transaction costs

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The Committee on Accounting Procedure was an early standard-setting body in the United States and aimed to improve accounting practices and increase consistency and comparability among financial statements. The ARBs were influential in shaping the development of accounting principles in the U.S. during that time. Regulation S-X requires that revenue from the sales of products, services, and other products each be separately disclosed on the face of the income statement.46 The staff believes that costs relating to each type of revenue similarly should be reported separately on the face of the income statement. If Company M does not meet all of the foregoing criteria, the staff believes that Company M should not recognize in earnings any revenue for the membership fee until the cancellation privileges and refund rights expire. All of the accounting positions in the bulletins have since been superseded, but some of the text in the bulletins has been integrated into the successor accounting standards, which are part of Generally Accepted Accounting Principles (GAAP).

Accounting Review

This means the content of the bulletins lacked significant influence and failed to encourage compliance by accountants. It was run by the American Institute of Accountants, now known as the American Institute of Certified Public Accountants. Accounting Research Bulletins (ARBs) were a series of publications issued by the Committee on Accounting Procedure (CAP) of the American Institute of Certified Public Accountants (AICPA) between 1939 and 1959. The purpose of these bulletins was to provide guidance, interpretations, and recommendations on various accounting principles and practices. Accounting for stock involves the determination of both the cost of goods sold during the period and the amount that should be carried forward as stock to be matched against future revenues. Some of the thorniest conceptual and practical problems arise as a result of these measurement issues, many of which have yet to be settled.

accounting research bulletin no 43

If revenue is recognized in earnings over the membership period pursuant to the above criteria, the staff believes that adjustments for changes in estimated refunds should be recorded using a retrospective approach whereby the unearned revenue and refund obligations are remeasured and adjusted at each balance sheet date with the offset being recorded as earned revenue. In licensing and similar arrangements (e.g., licenses of motion pictures, software, technology, and other intangibles), the staff believes that delivery does not occur for revenue recognition purposes until the license term begins.24 Accordingly, if a licensed product or technology is physically delivered to the customer, but the license term has not yet begun, revenue should not be recognized prior to inception of the license term. Upon inception of the license term, revenue should be recognized in a manner consistent with the nature of the transaction and the earnings process.

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