...theme Revenue Recognition R evenue is usually the largest single item in financial statements, and the issues involving revenue recognition are among the most important and difficult ones that standardsetters and accountants face. In recent years, concerns related to the recognition of revenue in accordance with Accounting Standards have heightened significantly. Quite often, companies end up tweaking the Revenue numbers, besides some other reasons. Recording revenue improperly is also a commonly used ‘earnings management technique’. The ever evolving business models and the growing online economy have only compounded the issue. Earnings Management/Issues with revenue recognition have been the subject of headlines in the United States and in the other parts of the world in the last few years. -Shrikant Sortur The author is a member of the Institute as well as AICPA, working with Lason Systems Inc, MI, USA. He can be reached at shrikant_ sortur@yahoo.com Revenue Recognition Under US GAAP It is estimated that Revenue Recognition related aspects appear in close to two hundred different pieces of accounting literature; of course these pieces of literature include many nuances, some of which are unique to particular transactions. Since no comprehensive standard on revenue recognition exists, there is a significant gap between the broad conceptual guidance in the Financial International Accounting Standards (IAS) are drafted on a ‘Principles-based’ approach....
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...the accounting department at his aunt’s software company, O’Brian Software. Nick is going over the financial statements when he recognizes some questionable revenue recognition issues. Nick proceeds to address his concerns with the chief financial officer of the company, Lee Marchetti. Lee explains to Nick how revenue recognition is broken down and that a lot of information and judgment is involved. It is also pointed out that since the company went public three years ago they have consistently received ‘clean’ opinions from external auditors. Nick admits that Marchetti strikes him as a honest man with years of experience. Out of concern for his aunt’s company he approached his aunt, who is not known for her accounting expertise, but is the CEO of O’Brian Software. After explaining his concerns she asked Nick whether or not they should present this information to the audit committee. Issues/Questions The initial question is whether or not the audit committee should be made aware of Nick’s revenue recognition concerns. As President and CEO of Softrax Corporation, Robert O’Connor, points out, this is a serious claim. It is imperative that Nick does his research before making such a claim. The underlying issue in this case is if O’Brian Software is creating ‘cookie jar’ reserves by understating profits in periods of prosperity and then creating false reserves in times the company needs a boost. The smoothing of revenue recognition can mislead investors by providing them...
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...company acquired Corporate Collaborations this entity manages private and public social media networks that earn its revenue providing corporate social network development and hosting services. The audit committee of the company has requested the company to hire a new audit firm with a better experience in auditing of public technology companies. 2. Auditing and reporting issues: Miss Kristine Drew is the senior auditor for this company and is responsible for auditing revenue. She should start by asking for reviews from the predecessor audit firm in order to identify any problems they faced and to incorporate appropriate actions in order to minimize those risks. Ms. Drew should start off by initially accessing the controls of the activity reports. If the controls are strong and the data could not be manipulated, then it can be presumed that the data is accurate if this is not the case, then Ms. Drew should take up the services of a professional to figure out a way and if it is still not possible then she should state the facts on the audit report. The existing customers with hosting contracts of three years are changed to five-year contract, the revenues from this change have to be accounted prospectively. The revenue recognition for the new contracts for hosting that is for five years with three months free service, at the end of the five-year tenure the revenue should be charged over five years and three months and not over...
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...business and the industry in which the client operates. Understanding the client’s business is helpful to auditors not only to outline the scope and the timing of the audit, identify the audit strategy, and isolate the most significant factors of materiality, but also to determine the client’s business risks and their potential translation to the financial statements. Every industry has inherent risks and there are many factors that contribute to the increase of these risks as described in AU-C §315.A18; however, Computer and Software industry has been well known as a “leader” of high risk industries ranking No. 1 on “Restatement Activity Across Industries” study published by the Center for Audit Quality in Financial Restatement Trends in the United States: 2013 – 2012 report. High technology industry is exceptionally competitive as it demands constant innovation, change, and differentiation. Participants are pressured to “move quickly or move out”; classic example is Blackberry that was once the leader in the smartphone business, but quickly perished as its competitors took over. From a financial reporting standpoint, this industry is particularly controversial because of the profusion of its intangible assets, research and development expenditures, and revenue recognition complexity, and perhaps after Blackberry, going concern principle. The leading company in this risky industry today is Apple, Inc. By operating in the Computer and Software industry, Apple is prone to...
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...Conservative Accounting SUMMARY O'Brian Software, a multimillion dollar software company, provides custom software systems, maintenance, support and training. Nick, a recent college graduate, just began working for the family run software company. After being hired to the firm's accounting department, Nick began to suspect unintentional and misleading revenue recognition . Nick believes his Aunt Amelia, founder and CEO, is an honest business woman and that her chosen CFO, Lee Marchetti, is also an honest man. Nick also knows that the financial statements have been reviewed and approved by the internal and external auditors and the firm's internal controls are effective. Despite these facts, Nick believes the firm has been smoothing earnings and creating inflated reserves. Most firms are usually charged with inflating earnings instead of under reporting, but both are equally illegal and unethical. After approaching Lee Marchetti with his concerns, Nick has informed his aunt, who has little accounting knowledge, of his suspected issues. Nick and Aunt Amelia are now faced with the decision as to whether or not the audit committee should be made aware of these concerns. ISSUES There are three issues at play regarding proper accounting and ethical business practices. The first issue is whether or not O'Brian Software is practicing conservative revenue recognition or smoothing earnings by creating cookie jar reserves. Many companies utilize revenue deferrals for product returns, warranties...
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...Software Revenue Recognition A Roadmap to Applying ASC 985-605 Third Edition December 2011 Subtopic 985-605, Software—Revenue Recognition, from the FASB Accounting Standards Codification®, is copyrighted by the Financial Accounting Foundation, 401 Merritt 7, PO Box 5116, Norwalk, CT 06856-5116, and is reproduced with permission. SOP 97-2: Copyright 1997–2009 by American Institute of Certified Public Accountants, Inc. Used with permission. This publication contains general information only and Deloitte is not, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. Deloitte shall not be responsible for any loss sustained by any person who relies on this publication. As used in this document, “Deloitte” means Deloitte & Touche LLP, Deloitte Consulting LLP, Deloitte Tax LLP, and Deloitte Financial Advisory Services LLP, which are subsidiaries of Deloitte LLP. Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries. Certain services may not be available to attest clients under the rules and regulations of public accounting...
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...PROPOSED MBA RESEARCH TOPICS SOFTWARE ANALYSIS BUSINESS DECISION IMPACT ON PEAK FINANCIAL PERFORMANCE CONTAC T INFORMATION Primary Contact: Dawn Simon Director, Co-Manager Equity Technology Team Merrill Lynch Investment Managers 800 Scudders Mill Road Plainsboro, NJ 08536 Phone: 609-282-0328 Fax: 609-282-6597 Secondary Contact: Martin Seyffert Research Associate Equity Technology Team Merrill Lynch Investment Managers 800 Scudders Mill Road Plainsboro, NJ 08536 Phone: 609-282-6632 Fax: 609-282-6597 UNDERLYING ASSUMPTION We specialize in technology equity portfolio management. As a subset of this work, we also examine the timing and relationships within software companies of the following variables: 1) R&D cycle; 2) product deployment period; 3) sales cycle; 4) contract duration; and 5) "disposable life" of software. Our assumptions may, or may not, be valid. Our assumptions are as follows: The technology industry is in a state of flux with the duration of the above listed items completely mismatched within companies. The mismatched time horizons are causing more volatile stocks, stemming in part from, less stable financial performance for software companies. We believe that faster development cycles and Internet-based distribution channels have accelerated parts of the business, while R&D cycles and contract duration have not yet been adjusted - or even recognized as an issue within many companies. Below are the specific areas we...
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...DISCUSSION OF SAB 101 Q & A Definition of Revenue (FASB Concepts Statement No. 6): Inflows or other enhancements of assets of an entity or settlements of its liabilities (or a combination of both) from delivery or producing goods, rendering services, or other activities that constitute the entity’s ongoing major or central operations. Separate definition for Gains Guidelines for Revenue Recognition The revenue recognition principle (FASB Concept Stmt. No. 5) provides that companies should recognize revenue 1) when it is realized or realizable and 2) when it is earned. Revenues are realized when goods and services are exchanged for cash or claims to cash (receivables). Revenues are realizable when assets received in exchange are readily convertible to known amounts of cash or claims to cash. Revenues are earned when the entity has substantially accomplished what it must do to be entitled to the benefits represented by the revenues, that is, when the earnings process is complete or virtually complete. Revenue Recognition Issues Usually revenue is recognized at the point of sale because most of the uncertainties related to the earning process are removed and the exchange price is known. But, the earning process itself is not defined precisely anywhere in the authoritative literature. More importantly, an entity's earnings process(es) is (are) determined by its business model(s) and the number of business models can grow...
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...taken over by a larger software company and they also want to increase their market share and take over industry leadership from Electronic Arts. CEO Bruno Bonnell has decided to implement a name brand strategy whereby IESA will become Atari. Bonnell’s decision was presumably based upon the positive recognition given to the Atari name brand by teenagers, and adults in their 20’s and 30’s. The key issue facing Infogrames is whether name branding is a source of sustainable competitive advantage. Conclusion and Recommendations Infogrames’ implementation of a name branding strategy will not be successful for two reasons. First, the following analysis reveals that there are three key success factors for software companies participating in this industry. Infogrames’ acquisition of Hasbro does not help them to better meet any of these three objectives. Second, Infrogames has rationalized the acquisition of Hasbro based on the name branding strategy using the Atari moniker. The analysis, however, reveals that there is no competitive advantage gained on the software side of this industry for name branding. In short, consumers do not appear to make their game purchases with any regard whatsoever for the company that produced the game. As such, the acquisition of Hasbro, and the name branding strategy, will be a failure for ISEA because neither the acquisition nor the branding strategy contributes to the key success factors identified for this industry or to achieving a sustainable...
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...IBISWORLD.COM DocumentPreparationServicesintheUS June 2012 1 Prepared for success: The industry is well placed to take advantage of trends toward outsourcing IBISWorld Industry Report 56141 Document Preparation Services in the US June2012 AndrewKrabeepetcharat 2 AboutthisIndustry 2 2 2 3 Industry Definition Main Activities Similar Industries Additional Resources 16 International Trade 17 Business Locations 29 Industry Assistance 30 KeyStatistics 19 CompetitiveLandscape 19 Market Share Concentration 19 Key Success Factors 19 Cost Structure Benchmarks 21 Basis of Competition 30 Industry Data 30 Annual Change 30 Key Ratios 4 IndustryataGlance 5 IndustryPerformance 5 5 6 8 Executive Summary Key External Drivers Current Performance Industry Outlook 31 Jargon&Glossary 21 Barriers to Entry 22 Industry Globalization 23 MajorCompanies 23 Nuance Communications Inc. 24 MModal Inc. 11 Industry Life Cycle 13 Products&Markets 13 Supply Chain 13 Products & Services 14 Demand Determinants 15 Major Markets 27 OperatingConditions 27 Capital Intensity 28 Technology & Systems 28 Revenue Volatility 29 Regulation & Policy www.ibisworld.com|1-800-330-3772|info @ibisworld.com WWW.IBISWORLD.COM DocumentPreparationServicesintheUS June 2012 2 AboutthisIndustry IndustryDefinition This industry provides one or more of the following: letter or resume writing; document editing or proofreading; typing...
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...assignment is the work of the group), except where work quoted or paraphrased is acknowledged in the text. I also certify that it has not been submitted for assessment in any other unit or course. . DATE: 27/09/2014 An assignment will not be accepted for assessment if the declaration appearing above has not been duly completed by the author. Content Section 1 Report Purpose………………………………………………………………………………………3 Organisation………………………………………………………………………………………….3 Business Process Change…………………………………………………………………………3 Capability Maturing Model………………..………………………………………………………..4 Company Strategy…………………………………………………………………………………..4 Section 2 Process Flow Chart…………………………………………………………………………………5 Section 3 Identify one specific activity to be performed within the process change……………6 Measuring human performance and metrics for task completion…………………….7 Balanced Scorecard……………………………………………………………………….8 Fishbone Diagram…………………………………………………………………………9 Perceived value the fishbone diagram………………………………………………….9 Section 4 KPI’s………………………………………………………………………………………..10 Six Sigma, Balanced Scorecard and ISO 9000/9001…………………………………12 Recommend measurement methodology - BSC………………………………………13 Section 5 Flowchart...
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...of printing and copying equipment to businesses. Its document technology segment offers desktop monochrome and color printers, multifunction printers, copiers, digital printing presses, and light production devices; and production printing and publishing systems for the graphic communications. HP provides products and services to both businesses and individuals. Its printing segment provides consumer and commercial printer hardware, supplies, media, scanning device, software and services; and LaserJet, inkjet and printing, graphics, software and web services. Compare with HP’s wide range of product selections, Xerox offers more in-depth products in copying and printing area. Horizontal analysis is the comparison of historical financial data or financial ratios over a series of reporting periods. A horizontal analysis was conducted for Xerox and HP for the period of 1997 to 2000. Some noticeable differences were found in comparison of the two companies’ results. First, Xerox’s revenue decreased while HP’s revenue increased dramatically over the four years. Xerox was having difficulties in adapting to the competition driven by rapid technological advances. Second, due to the net losses and dramatic changes in net income, Xerox had negative cash flow from operating activities for the year 1998 and 2000. Third, Xerox‘s cash account increased at an abnormal rate due to huge amount of debt borrowing and sale of account receivables. A basic ratio...
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...The World of Accounting ACC/ 291 The Ever Changing World of Accounting 2 The world has evolved over the years; making the lives of people easier and allowing them to become more efficient to meet the demands and growing population. In the not so distant future, some of the World’s people will make another change, so that the accounts they use will make the way they do business with other will become even more well-organized and capable of trading and buying from those they have not been able to before. In some parts of the world, some industries use an accounting system called the Generally Accepted Accounting Principles, which is also known as GAAP, and in the others those people use International Financial Reporting Standards, which is sometimes referred to as IFRS. Although these accounting systems have some of the same basic functions, they have the ability to conform to one main system. So, why would a country change their accounting system? In order to understand why the change is needed, the FASB and IASB fair value has intensified, it is clear that the need for consistent fair value measurements in a global market. However, the fair value measurements have set principles based on global framework, with very few exceptions. This has impact all fair value measurements in a reporting entity’s of financial statements. A component depreciation is a method in which certain parts of a property are individually depreciated at many different rates or prices...
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...in specific order by liquidity. Do the IFRS and GAAP conceptual frameworks differ in terms of the objective of financial reporting? No the objectives are both the same for the GAAP and IFRS, they have very similar ways of reporting financial information. They both want companies to keep the information they report up to date, and data needs to be reported in an honest manner. All data reported should also be useful, to an investor, creditor, or regulator. When information is reported correctly, companies are abiding by the industry standard set forth. What terms commonly used under IFRS are synonymous with common stock and balance sheet? Balance sheet is synonymous with the statement of financial position. They both show the comparison the company’s assets, liabilities and equity, made with the time period reported in the financial statement. Common stock is synonymous with the Share capital ordinary. They both are set to show the value of equity within the company Describe so of...
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...APPLE COMPUTER INC NYTIMES/ APPLE ANNUAL REPORT Oct 19, 2010 Apple Incorporated Apple Computer, Inc. is one of the most popular hardware and software companies in the world today. It is also the most innovative and competitive corporation in the technology industry. The Apple Corporation created mainly technological products that are available in the market these days. The company is famous for its quality and high technology innovations. Besides the current fame of the Apple Computer, Inc., like any other companies, it continuously experiences instability and uncertainty. Apple Corporation undergoes certain stages where it sees its strengths and weakness as wells as evaluates possible opportunities and threats to the company in maintaining and acquiring the status it currently has. The Apple Corporation has its strengths that set it apart from the rest. This company has made its own way on creating its name in the technology industry competing with IBM, Microsoft Corporation and other technology-based companies. Through the innovations done by the creative and talented minds in their company, the most sought after technological products today came from the Apple Computer, Inc. The Apple Corporation is the creator and maker of the widely known technological products like iPod, iPhone and Apple laptop. These creations have attracted most people specially those who are technically knowledgeable. Besides the products technical purposes, those are as well entertaining and useful...
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