...CHAPTER 18 Revenue Recognition ASSIGNMENT CLASSIFICATION TABLE (BY TOPIC) Topics Questions Brief Exercises Exercises Problems Concepts for Analysis *1. Realization and recognition; sales transactions; high rates of return. 1, 2, 3, 4, 5, 6, 22 1 1, 2, 3 1 1, 2, 3, 4, 5, 7, 8, 9 *2. Long-term contracts. 7, 8, 9, 10, 11, 12, 22 2, 3, 4, 5, 6 4, 5, 6, 7, 8, 9, 10 1, 2, 3, 4, 5, 6, 7, 14, 15, 16, 17 1, 2, 3, 6 *3. Installment sales. 13, 14, 15, 16, 17, 18, 19, 20, 21, 22 7, 8, 9 11, 12, 13, 14, 15, 16 1, 8, 9, 10, 11, 12, 15 1, 2, 3 *4. Repossessions on installment sales. 8 13, 17, 18 10, 11, 12, 13, 14 *5. Cost-recovery method; deposit method. 13, 22, 23, 24 10 15, 16 8, 9 *6. Franchising. 22, 25, 26, 27, 28 11 19, 20 10 *7. Consignments. 29 12 21 *This material is dealt with in an Appendix to the chapter. ASSIGNMENT CLASSIFICATION TABLE (BY LEARNING OBJECTIVE) Learning Objectives Brief Exercises Exercises Problems 1. Apply the revenue recognition principle. 1 1, 2, 3 2. Describe accounting issues for revenue recognition at point of sale. 1 1, 2, 3 1 3. Apply the percentage-of-completion method for long-term contracts. 2, 3 4, 5, 6, 7, 8, 9 1, 2, 3, 4, 5, 6, 7, 16, 17 4. Apply the completed-contract method for long-term contracts. 4, 5 4, 8, 9, 10 1, 2, 3, 5, 6, 7, 15, 16, 17 5. Identify the proper accounting for losses on long-term contracts. 6 10 5...
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...we will refer to SAB 101 and IAS NO.18 as mentioned below: SAB 101 – Revenue Recognition Guidelines: Rule 1: Persuasive evidence of an order arrangement exists; Rule 2: Delivery of the ordered goods has occurred or services have been rendered; Rule 3: The seller’s price to the buyer is fixed or determinable; Rule 4: Collectability of the sale proceeds is reasonably assured; International Accounting Standards NO.18: Rule a: The entity has transferred to the buyer the significant risks and rewards of ownership of the goods; Rule b: The entity retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold; Rule c: The amount of revenue can be measured reliably; Rule d: It is probably that the economic benefits associated with the transaction will flow to the entity; Rule e: The costs incurred or to be incurred in respect of the transaction can be measured reliably; 1. What pre SAB 101 revenue recognition methods has Wareham SC Systems adopted? Which of these policies are most likely to be impacted by SAB 101? Methods Adopted: * Product revenue is recognized upon shipment. * Unbundled service revenue is recognized upon amounts charged when sold separately from product, installation of maintenance services. * For certain contracts, percentage-of-completion method based upon efforts-expended revenue recognition model is used. * Changes to total estimated costs and anticipated...
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...executive officer (Leo Titan) has shed some light on possible accounting and audit practises that need to be looked at. There are notes that was taken during the meeting with Leo and observations which will be further analyzed. The appropriate reporting method used in the following analysis will be IFRS. Users/Stakeholders: There a many potential users of the financial statements prepared by WAL and they are: -Leo Titan – CEO, WAL - owners of, NSL - owners of, -Minority shareholders invested in WAL And NSL, Fabio and Fox accountants - they are audit partners, External users of the financial statements (such as potential investors), the government (many accounting issues that could violate standards). Analysis: First of all after the review of documents and as a result of various conversations there are a few issues that need to be addressed. The first issue is lenders to the arena are concerned that the arena could not generate special-use revenue and in turn risk their investment. This becomes an audit issue because the investors are providing a way to finance the arena but if the arena in turn cannot support the payment with its revenue streams it causes a possible situation where revenues are overstated to make the arena look good. This directly relates to the second issue as the mortgage lenders and minority shareholders want to see financial...
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...10.2308/iace-50029 A Series of Revenue Recognition Research Cases Using the Codification R. Mark Alford, Teresa M. DiMattia, Nancy T. Hill, and Kevin T. Stevens ABSTRACT: This series of four short cases is designed to help students develop the skills to research the Financial Accounting Standards Board’s (FASB) Accounting Standards Codification and other authoritative literature. It also is designed to help improve students’ ability to analyze and critique the complex issues that often surround the accounting for revenue recognition. The case scenarios describe transactions in which students must decide whether, when, and how much revenue to recognize. The issues analyzed involve bill-and-hold, multiple-element arrangements, gross versus net revenue reporting, and sales incentives. The cases are also designed to improve teamwork and communication skills. The sequence of cases is intended for use in an intermediate accounting class that covers revenue recognition, or in a capstone class that emphasizes critical thinking and research skills. Keywords: revenue; recognition; codification; research. INTRODUCTION evenue recognition is one of the top causes for financial statement restatements (Whitehouse 2010). In addition, revenue recognition is an area commonly questioned by the Securities and Exchange Commission (SEC) staff in their review of public filings and resultant comment letter process (Deloitte 2009). Furthermore, revenue recognition is often prey to financial fraud (PricewaterhouseCoopers...
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...INTRODUCTION Revenue recognition is one of the top causes for financial statement restatements. In addition, revenue recognition is an area commonly questioned by the Securities and Exchange Commission (SEC) staff in their review of public filings and resultant comment letter process. Furthermore, revenue recognition is often prey to financial fraud. Coverage of revenue recognition in intermediate accounting courses is typically limited to learning and applying the criteria for revenue recognition outlined in the Financial Accounting Standards Board’s (FASB) Statement of Financial Accounting Concepts No. 5, Recognition and Measurement in Financial Statements of Business Enterprises, to routine transactions and topics, such as long-term construction contracts and installment sales (FASB 1984). While these topics are important, there are literally hundreds of revenue-generating transactions that are not covered in the traditional financial accounting sequence. These are their stories (for any Law and Order fans): Case One: Facts Consumer Cleaning Products Corporation (CCPC) is a public company with a calendar yearend. CCPC manufactures detergent that is ultimately purchased (and used) by consumers. The supply chain consists of the following: * CCPC sells its detergent to a wholesaler; * The wholesaler sells the detergent to a retailer; and * The retailer sells the detergent to a consumer. CCPC launches a new detergent, Fresh & Bright, on September...
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...released the Exposure Draft: Revenue Recognition in Contracts with Customers which aims to replace the existing FRS 18 Revenue. The exposure draft aims to improve and streamline current revenue recognition methods and provide a more robust framework to do so. As a result, revenue recognition under the exposure draft is carried out differently in a number of ways. Maxis Berhad is an investment holding company which provides telecommunication, internet and corporate services. It engages in multiple activities and recognises revenue from these activities using the principles laid down in FRS 18. Revenue is recognised only when it can be measured reliably and the company is expected to receive economic benefits. The company also lays out particular conditions to apply revenue recognition to different activities. As a result, if the company is to implement the exposure draft it would have to face several changes in the way it recognises revenue. Specifically, activation fees for various subscription plans will have to be recognized as revenue over the expected contractual period of those plans, rather than allocated as part of the revenue for the included monthly service and handset. This would also require Maxis to determine an estimate for expected lifespan of customers’ contract, taking into account possible renewals. In addition, Maxis will also have to change the way it recognises revenue for its prepaid mobile starter packs. At present, revenue is recognised when the starter...
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...AFM recognized premium revenue at the time it received the policyholder’s up-front cash payment. The company’s accountants argued that since the level of up-front payments received from policyholders had been stable over the last few years, this method was an appropriate reflection of economic reality. For example, Fuji Computers entered into a five-year insurance contract with Tokyo AFM against earthquake damage to its headquarters building. As is customary, it paid the 100 million premiums for the five-year coverage up front in cash. Question: How would you recognize revenues associated with this type of catastrophe insurance contract? This case can be considered as premiums from short-duration insurance contracts, which are intended to cover expected claim costs resulting from insured events that occur during a fixed period of short duration. As of now the management is recognizing premium at the time it received policyholder’s up-front cash payment, but they should recognize the premium as earned revenue over time as the risk covered by the policy runs off. This is called a “deferral-matching approach”, as it attempts to defer recognition of any revenue or expense so that it can be matched with the timing of the incurred losses. Therefore, premiums from short-duration contracts are earned and recognized as earned revenue evenly as insurance protection is provided. In this case of Fuji computers the 100 million premiums being recognized as revenue evenly over the contract...
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...a different narrative for the company. The use of GAAP on financial statements allows external audiences, such as investors, regulations, and the like, to compare businesses, both intra and inter, using parallel measurements. Knowing that the same principles have to been applied enables for easier comparisons and analysis. Companies that produce non-GAAP financial statements may sometimes be required to submit a GAAP statement as well, as they illustrate a different perspective. The non-GAAP is intended for investors as well, providing a different image of the company, or it may be used internally to enhance operations within the company. Non-GAAP financial measures are used as a strategic asset to communicate clearly and effectively the financial performance of a company from the screening of management. They do not include operating or other statistics that are not financial in nature or based on GAAP requirements. Apple, in this case, uses non-GAAP measures because they believe that these measures, when taken together with the consolidated GAAP measures, provide incremental comprehension into the core factors affecting the company’s performance and future revenue potential. They believe this method increases the transparency of the current results, thus reflecting a better economic reality, and allowing investors to fully understand the trends in its current and future performance. While subscription accounting is required by GAAP, Apple recognizes...
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... CHAPTER 17 Advanced Issues in Revenue Recognition CONTENT ANALYSIS OF END-OF-CHAPTER ASSIGNMENTS NUMBER TOPIC CONTENT LO ADAPTED DIFFICULTY TIME EST. AACSB AICPA BLOOM’S Q17-1 Revenue Recognition Recognition of revenue when the earnings process is not complete 1 ! Easy 5 Analytic Measurement Comprehension Q17-2 Revenue Recognition Distinguish between the accounting terms recognition and realization 1 ! Easy 5 Analytic Measurement Comprehension Q17-3 Revenue Recognition Revenue recognition for a motion picture company; licensing rights; differences between GAAP and IFRS 1 ! Easy 5 Analytic Measurement Comprehension Q17-4 Revenue Recognition Differing timing on when to recognize revenue 2 ! Easy 5 Analytic Measurement Comprehension Q17-5 Revenue Recognition Conceptual factors associated with revenue recognition 2 ! Easy 5 Analytic Measurement Comprehension Q17-6 Revenue Recognition Alternatives Recognizing revenue for various recognition alternatives 2 ! Easy 5 Analytic Measurement Comprehension Q17-7 Revenue Recognition Recognition of revenue when the earnings process is not complete; discussion of revenue recognition method alternatives 3 ! Easy...
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...Professor Paul Zarowin - NYU Stern School of Business Financial Reporting and Analysis - B10.2302/C10.0021 - Class Notes Revenue Recognition - Special Issues In most cases, revenue recognition is straightforward. Revenue is recognized when two conditions are met: (1) it is earned (i.e., performance is complete), and (2) cash collection is (reasonably) assured. RCJ (pg. 46) refer to these as the critical event and the measurable conditions, respectively. In this module we will discuss some exceptions to the general case. We will focus on cases where either of the two assumptions breaks down. These cases fall into two categories. In the first category, performance takes place over more than one accounting period; thus, revenue must be allocated across the periods. This is referred to as Along-term contracting@. There are two accounting methods used in this case, the percentage of completion method and the completed contract method. In the second category, cash collection is uncertain, and revenue recognition defaults to a de facto cash basis. There are also two accounting methods used in this case, the installment method and the cost recovery method. The important point to remember in each situation is that the accounting method choice affects both the B/S and the I/S, and thus any performance measures or ratios constructed from the financial statements. Thus, analysts must understand how the accounting method choice affects the reported numbers. Percentage...
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...CHAPTER 5 Revenue Recognition and Profitability Analysis Part A: Introduction to Revenue Recognition I. Revenue Recognition in General A. FASB definition: “Revenues are inflows or other enhancements of assets of an entity or settlements of its liabilities (or a combination of both) from delivering or producing goods, rendering services, or other activities that constitute the entity’s ongoing major or central operations.” In other words, revenue tracks the inflow of net assets that occurs when a business provides goods or services to its customers. (T5-1) B. To determine how much revenue to recognize and when to recognize it, we apply the core revenue recognition principal: Companies recognize revenue when goods or services are transferred to customers for the amount the company expects to be entitled to receive in exchange for those goods or services. (T5-2) 1. Key concept: the seller has one or more performance obligations. a. Performance obligations are promises to transfer goods or services to the customer. b. Revenue recognition is tied to satisfaction of performance obligations. C. Five steps are used to apply the principle: (T5-2) 1. Identify the contract with a customer. 2. Identify the performance obligation(s) in the contract. 3. Determine the transaction price. 4. Allocate the transaction price to each performance obligation. 5. Recognize revenue when (or as)...
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...© 2000 American Accounting Association Accounting Horizons Vol. 14 No. 2 June 2000 pp. 235-250 Earnings Management: Reconciling the Views of Accounting Academics, Practitioners, and Regulators Patricia M. Dechow and Douglas J. Skinner Patricia M. Dechow is an Associate Professor and Douglas J. Skinner is a Professor, both at the University of Michigan. SYNOPSIS: We address the fact that accounting academics often have very different perceptions of earnings management than do practitioners and reguiators. Practitioners and reguiators often see earnings management as pervasive and probiematic—and in need of immediate remediai action. Academics are more sanguine, unwiiiing to beiieve that earnings management is activeiy practiced by most firms or that the earnings management that does exist should necessarily concern investors. We explore the reasons for these different perceptions, and argue that each of these groups may benefit from some rethinking of their views about earnings management. INTRODUCTION Despite significant attention on earnings management from regulators' and the financial press,^ academic research has shown limited evidence of earnings management. While practitioners and regulators seem to believe that earnings management is For example, SEC Chairman Levitt delivered a major speech on earnings management in the fall of 1998 in which he advocated a niunber of initiatives to improve the quahty of financial reporting (Levitt 1998). As part...
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...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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...CHAPTER 18 REVENUE RECOGNITION MULTIPLE CHOICE—Conceptual AnswerNo.Description c1.Revenue recognition principle. b2.Definition of "realized." a3.Definition of "earned." d4.Recognizing revenue at point of sale. d5.Recording sales when right of return exists. c6.Revenue recognition when right of return exists. d7.Revenue recognition when right of return exists. b8.Appropriate accounting method for long-term contracts. c9.Percentage-of-completion method. b10.Percentage-of-completion method. c11.Classification of progress billings and construction in process. b12.Calculation of gross profit using percentage-of-completion. a13.Disclosure of earned but unbilled revenues. c14.Revenue, cost, and gross profit under completed contract. b15.Disadvantage of using percentage-of-completion. a16.Loss recognition on a long-term contract. c17.Accounting for long-term contract losses. d18.Criteria for revenue recognition of completion of production. a19.Completion-of-production basis. c20.Presentation of deferred gross profit. c21.Appropriate use of the installment-sales method. b22.Valuing repossessed assets. b23.Gross profit deferred under the installment-sales method. b24.Income recognition under the cost-recovery method. b25.Income recognition under the cost-recovery method. d26.Cost recovery basis of revenue recognition. d*27.Allocation of initial franchise fee. a*28Recognition...
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...General Instructions There are ten cases included in this packet (Cases #1 through #9). You are responsible for reading all nine cases prior to class on Monday, October 7th. In addition, your group is responsible for informally presenting the solution to one case on that date. The case assigned to each group corresponds to your group number. Your presentation should take the form of “teaching” the rest of the class the material related to the case. Keep in mind that for exam purposes all groups are responsible for the content and solutions to all cases so your group’s effectiveness at teaching the material is invaluable to your classmates. How you can best accomplish your task is up to you but you should, at a minimum, include the following in your presentation: • An overall summary of the case facts; • An explanation of the key accounting issue(s); • An identification and discussion of the relevant sections of the FASB Accounting Standards Codification; • A demonstration as to how the relevant authoritative accounting literature was interpreted and used to address the facts in your case; • A discussion of the accounting conclusions reached; and • Any required journal entries In addition to the in-class informal presentations, your group is also responsible for preparing a memo which includes a summary of: • The case facts so that the reader knows the background and the substance of the accounting issues in your case; • The relevant...
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