The 5 Step Model of Revenue Recognition Case Study

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Jet Blue Case StudyWill the new revenue standard provide more decision-useful information than prior U.S. GAAP?Generally speaking, revenue recognition is the process of recording revenue in a company\'s accounting records. However, there are different ways to approach revenue recognition, and each perspective may slightly alter the way that revenue is recorded. For example, the cash basis approach simply records revenue when cash is received, regardless of when the product or service was actually sold. The accrual basis approach, on the other hand, records revenue when the sale is made, even if cash has not yet been received. There are also hybrid approaches that combine elements of both cash and accrual basis accounting. Ultimately, the most important thing is to be consistent in your accounting methods so that your financial statements accurately reflect the financial health of your business. With that said, there are some important points to consider in the case of Jet Blue and the new revenue standard.As Deloitte (2021) explains, “the core principle of the revenue standard is to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which an entity expects to be entitled in exchange for those goods and services” (p. 1). One reason for the revenue recognition principle is to ensure that financial statements provide a true and fair view of an entity\'s financial position. If revenues were only recognized when cash was received, then entities could manipulate their financial statements by delaying recognition of revenue until they needed it. Thus, Deloitte (2021) adds that “significant judgments frequently need to be made when an entity evaluates…

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…that businesses must consider a number of factors, including the timing of the delivery of goods or services, the completion of any necessary performance obligations, and the amount of risk involved.

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Yet, making the correct decision is essential in order to provide accurate information to investors and other stakeholders—and that is what the 5-step model is meant to help companies like Jet Blue do.As a result, the FASB’s 5-step model of revenue recognition is a vast improvement over prior US GAAP. Previous accounting practices were often too narrowly focused and resulted in disparate treatment of similar transactions. The new standard provides a more principles-based approach that will result in greater comparability of financial statements across companies. While the transition to the new standard will be challenging for some companies, the long-term benefits are expected to be well….....

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