...Required: How should revenue be recognized for sales of both the Ship Finder devices and service? According to FASB's Codification of Accounting Standards, a company should not recognize revenue until 1.“it has performed under the terms of the arrangement” and 2. “unless it will indeed receive and retain payment in a form that has value to the company,” (accountingresearchmanager.com) This means that the company has to perform the duty that they have agreed to in their contract and will receive a form of payment in return. The performance of the arrangement can be the delivery of goods, providing services, or providing information. Once a company performs the terms of the arrangement, the revenue is deemed as earned; however, at least part of the job must be fulfilled. In addition, the company should not recognize revenue even if their clients paid in advance to fulfillment of the agreement. Revenue is realized or realizable when “the seller receives cash or assets from the customer that is convertible into cash,” (accountingresearchmanager.com) This must occur before revenue is recognized. In the case, “Lighthouse”, the issue of how revenue should recognized for the sales of both Ship Finder devices and service arises. In this particular case, the company Lighthouse created a hardware unit which it installs in ships and provides the services for this unit. This device and service are utilized together in providing information to shipping companies on the ship location...
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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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...Business Accounting Revenue Recognition ACCOUNTING PRINCIPLE: REVENUE RECOGNITION This document describes the Revenue Recognition methods that are currently employed at ASB(ASB): Revenue Recognition Methods The ASB revenue recognition policy follows the definitions and principles stated in the Nokia Accounting Standards as well as the relevant International Financial Reporting Standards (IFRS) mainly IAS 11 "Construction contracts" and IAS 18 "Revenue". ASB´s main revenue recognition methods are contract accounting, general revenue recognition and service revenue recognition methods. Basic Revenue Recognition Criteria Revenue can be recognized for majority of ASB sales (regardless of revenue recognition methods) when all the following criteria have been met: 1. A contract is in place (binding obligation) 2. Delivery has occurred: a. IAS 11 (contract accounting); delivery has occurred and services performed according to the contract delivery terms, b. IAS 18 (general revenue recognition); the significant risks and rewards of ownership (as defined in the contract) have transferred to the customer. 3. Continuing managerial involvement usually associated with ownership and effective control have ceased, 4. The amount of revenue can be measured reliably (the fee is fixed or determinable), 5. It is probable that economic benefits associated with the transaction will flow to ASB (collectibility is probable) and 6. The costs incurred or to be incurred in respect of the transaction...
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...Revenue Recognition Analysis One of this biggest disputed problems faced by auditors is the recognition of revenue. According to the FASB, companies recognize revenue when “a performance obligation is satisfied.” In other words, companies recognize revenue when it is realized or realizable and earned. Yet, the timing of realizable and earned revenue is different among companies. Amazon.com, the largest Internet based retailer in the United States, sells a wide variety of consumer electronics produced both by themselves and other companies. The company recognizes revenue based on four criteria: credible evidence of the existence of an arrangement, delivery has occurred or services have been performed, selling price is fixed or determinable, and collectability is reasonably certain. Sale of Amazon.com’s digital devices are broken into multiple deliverables: the device, software upgrades, cloud storage, and free trial memberships. Although most of the revenue is recognized when the produces are delivered, some of the revenue is deferred on a straight-line basis to account for future deliverables of software upgrades and other non-software services that are likely to occur in the future. Revenue related to Amazon Prime memberships are recognized through multiple deliverables. Membership benefits include shipping benefits, instant video and music streaming, Prime Photo, and Kindle Owner’s Lending Library. Yet, some members might only use one or two of the benefits that have...
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...Question 4-20 ALLIDE CONSTRUCTION COMPANY REVENUE RECOGNITION FOR THE YEARS 2011, 2012 & 2013 THREE YEAR CONTRACT VALUED @ 64,000,000.00 EXPECTED COST 46,000,000.00 YEAR DEGREE OF COMPLETION REVENUE RECOGNISED EXPENSES RECOGNIZED PROFIT 2011 7,200,000.00 16% 10,017,391.30 7,200,000.00 2,817,391.30 2012 20,100,000.00 44% 27,965,217.39 20,100,000.00 7,865,217.39 2013 18,700,000.00 41% 26,017,391.30 18,700,000.00 7,317,391.30 TOTALS 100% 64,000,000.00 46,000,000.00 18,000,000.00 Question 4-22 The revenue recognition criteria for the sale of goods require the following conditions to be met before any revenue from the sale of an item can be recognised. They are as follows: • There has been transfer of the risk and rewards to the buyer. • The company no longer has managerial involvement or control over the goods sold. • Revenue can be easily measured. • It is likely that economic benefits from the transaction will flow to the seller • The cost incurred or to be incurred with respect to the transaction can be reliably measured. In this instance the seller has entered in to a “Layaway” agreement with the buyer which should run 6 months to a year; the agreement further state that a storage fee of $35 is payable and a possible default fee of $100.00 which will be used to reduce the final payment if all monthly payments are made...
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...Revenue recognition practices are one of the most common reasons for accounting restatements. Many would believe that it is a basic principle: when a sales transaction occurs, revenue is recorded. Unfortunately, there are many different sales and services that make revenue recognition a much more complex issue. It is difficult to develop guidelines applicable to all industry transactions to record revenue. There are two basic guidelines to follow when decided if a company should recognize revenues. “According to GAAP, revenue is recognized at the earliest moment in time that both of the following conditions are satisfied: The critical event in the process of earning the revenue has taken place, and the amount of revenue that will be collected is reasonably assured is measurable with a reasonable degree of reliability.” There are two main ways companies recognize revenue. Most companies meet the requirements for recognizing revenues at the point of sale, or delivery. The other method used is called revenue recognition before delivery, and there are two methods used: Percent-of-Completion Method and Completed-Contract Method. “At the point of sale” seems like a simple concept when you deliver a service or item and you recognize revenue. This is not always the case. There are a few departures that can occur from the sales basis of recognizing revenue. One is to recognize revenue earlier than the time of the sale or service, which is appropriate if you have a high degree...
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...To Recognize or Not to Recognize Revenue – That is the Question. Revenue recognition issues are the subjects of headlines in our daily newspapers, primarily because major corporations have recognized revenues that did not actually exist. Just when we think we have all the bad news, another corporation is restating earnings for prior years. For a cash only business, revenue recognition is a simple process. A sale equals revenue. The more complex the business, the more specialized the industry, the more difficult the decision becomes for that business as to when to recognize earnings. On its mission to establish and improve standards of financial accounting and reporting for the guidance and education of the public, including issuers, auditors and users of financial information, the Financial Accounting Standards Board (FASB) added to its agenda in 2002 a project designed to develop a comprehensive Statement of Financial Accounting Standards that will focus on revenue recognition that will apply to all industries. Revenue recognition guidance exists throughout accounting literature, accounting and audit guides and audit risk alerts for specific industries and the SEC's SAB 104. Yet there is no one comprehensive source. FASB issued WHY IS REVENUE RECOGNITION SO IMPORTANT? In its October 2002 Report on Financial Statement Restatement, the GAO said that restatements for improper revenue recognition resulted in larger drops in market capitalization than any...
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...The proposed revenue recognition principle would require companies to restate prior years financial statements to reflect treatment under the new standard. The current revenue recognition principle recognizes revenue when the earnings process is complete and there is reasonable assurance that the company is going to collect on the asset. The main principle in the new standard says that a company is going to recognize revenue when the goods or services are transferred and the amount recognized is the amount that reflects what the company expects to be entitled to. What a company expects it’s going to earn is different from what the company actually collects. There are a few steps that need to be followed in order to apply this new standard. One of the keys steps its to properly identify the contract with the customer, whether implicit or explicit contract. The next is to identify the performance obligations in the contract. This is really to establish what goods or services are being transferred. A performance obligation is accounted for separately from other performance obligations if it is distinct. The obligations are distinct if the goods or services can be used separately and independently from everything else. The next step is determining the transaction price. Complications arise in determining the transaction price when there is variable consideration or time value of money. Variable consideration includes discounts, rebates, refunds, credits, etc. Current GAAP says...
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...Revenue Recognition: Where it Will Take Us By Robert Bloom and Jacob Kamm Financial Executive • SUMMER 2014 FINANCIAL REPORTING Since 2008, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) have collaborated on a converged revenue recognition standard. Current U.S. Generally Accepted Accounting Principles (GAAP) standards related to revenue recognition are essentially rules-based, containing over 200 specific requirements related to revenue recognition. In FASB's news release of May 28th, Chairman Russell Golden stated "the [new] revenue recognition standard represents a milestone in our efforts to improve and converge one of the most important areas of financial reporting. It will eliminate a major source of inconsistency in GAAP, which currently consists of numerous disparate, industry-specific pieces of revenue recognition guidance." The wide-ranging converged standard eliminates detailed industry-specific codification contained in GAAP and streamlines revenue recognition guidance by superseding numerous standards issued by the FASB, the Securities and Exchange Commission (SEC), the Emerging Issues Task Force (EITF), and the American Institute of Certified Public Accountants (AICPA). The converged revenue recognition standard acts as a roadmap on how standard setters will approach other issues, including leasing. SUMMER 2014 • FinancialExecutive Fundamental to the new standard is that revenue...
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...Revenue Recognition: Converge between U.S. GAAP and IFRS While the basic revenue recognition model under US GAAP and IFRS share some similarities, if we make a comparison under two systems, we may find quite a few differences. In general, IFRS has much less industry-specific guidance than does US GAAP. First, one of the main differences lies in timing of revenue recognition with respect to contracts criteria such as long-term construction or contingency. According to US GAAP, revenue must be realized or realizable with certainty. The revenue recognition criteria may lead to deferrals in recognition. On the contrary, IFRS just defines the revenue recognition as “when it is possible that future economic benefits will flow into the enterprise and can be measured reliably”. Second, as for the long-term contracts revenue recognition, if reliable estimate cannot be made, GAAP allows completed contract method. It differs from that of the IFRS, which allows the cost recovery method. Third, US GAAP provides a much more detailed guidance about separation and allocation of multiple-deliverable arrangements in comparison to the guidance of IFRS. The US GAAP does not allow revenue recognition if a company fails to deliver remaining elements. Under IFRS, an entity can recognize its revenue if delivery is probable. The new ASU entitled “Revenue from Contracts with Customers” definitely leads to some important changes from current GAAP. There are core revenue recognition principle and five...
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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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...CASE 2-1 Revenue and Expense Recognition—Orthodontic Centers of America CASE OBJECTIVES The objective of this case is to evaluate the revenue and expense recognition methods used by the company. INTRODUCTION The following information was extracted from the 1999 and 2000 annual reports of Orthodontic Centers of America [OCA]. The company provides practice management services to orthodontic practices in the United States. OCA acquires and develops orthodontic centers and manages the business operations and marketing aspects of affiliated orthodontic practices. At December 31, 2000, there were 592 orthodontic centers, of which the company developed 306 and acquired 361 (75 were consolidated into another center). The affiliated orthodontists control the orthodontic practices, determine which personnel, including orthodontic assistants, to hire or terminate, and set their own standards of practice in order to promote quality orthodontic care. A typical patient receives an initial consultation and preliminary procedures (teeth impressions, x-rays, and the placing of spacers between the teeth for braces) in advance of the next appointment. The patient signs a contract for treatment in the event the orthodontist recommends orthodontic treatment. Generally, braces are applied two weeks later and subsequent adjustments to the braces are made every four to eight weeks. The contract specifies the terms and the length of the treatment as well as the total fees. The average contract length...
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...Statement Notes Page 4 – Related Article Summary Page 1 – Textbook Problem Page 2 – Supporting References Page 3 – Financial Statement Notes Page 4 – Related Article Summary Revenue Recognition Target & Walmart Revenue Recognition Target & Walmart 1. Textbook Problem (a) – What is the authoritative literature addressing revenue recognition when right of return exists? (b) – What is meant by “right of return”? Per FASB Accounting Standards Codification (ASC) topic 605-15-05-2 (right of return): ”It is the practice in some industries for customers to be given the right to return a product to the seller under certain circumstances. In the case of sales to the ultimate customer, the most usual circumstance is customer dissatisfaction with the product. For sales to customers engaged in the business of reselling the product, the most usual circumstance is that the customer has not been able to resell the product to another party. (Arrangements in which customers buy products for resale with the right to return products often are referred to as guaranteed sales.)” (c) – When there is a right of return, what conditions must the company meet to recognize the revenue at the time of sale? If a transaction is made that includes a right to return, for the selling company to recognize the revenue at the time of the sale the following six conditions must be met: 1. The seller’s price to the buyer is substantially fixed or determinable at the date of sale 2. The...
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...Revenue recognition – the accounting term for determining the amount of revenues to be “booked” for purposes of calculating a firm’s earnings in a given period – is an important, complex and controversial issue. The importance of revenue recognition stems from the accountant’s approach to calculating earnings, which is to first calculate recognized (“booked”) revenues, and then deduct the accounting costs of earning those revenues (a process known as “matching costs with revenues”). Consequently, revenue recognition directly affects reported earnings and indirectly affects balance sheet numbers and several important financial ratios. Generally Accepted Accounting Principles (GAAP) includes some general revenue recognition principles as well as many specific rules for recognizing revenues in particular circumstances. Even then, there frequently is scope for interpretation and judgment by the company’s managers and auditors. For various reasons managers can be expected to have preferences for the amount of reported earnings, so when the rules provide some latitude they can be expected to exercise judgment in a fashion that reflects those preferences. In addition, when there are rules that provide explicit revenue recognition guidance, managers sometimes knowingly or unknowingly violate them. Not surprisingly, approximately 60 per cent of all accounting malfeasance involves revenue recognition issues. Revenue recognition is particularly important in the software industry,...
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...Proposed Revision for Revenue Recognition Xin Yan Introduction Since 2002, the International Accounting Standard Board (IASB or collectively the boards) and the Financial Accounting Standards Board of US (FASB or collectively the boards) have been working together on a project to revise and converge IFRS and US GAAP on revenue. Consequently, the Boards have jointly issued two exposure drafts outlining proposed changes. The latest one was published in November 2011 with public comments received in March 2012. If adopted, it will substitute all revenue standards prescribed by IFRS including IAS 11 Construction Contracts and IAS 18 Revenue and relevant interpretations and most of the revenue recognition requirements and related guidance in US GAAP. This paper, first of all, will provide a brief background of the joint project. Then it will highlight proposed changes and its implications in key areas. Finally, it will discuss effective date, early adoption and transition of the new standards and offer some alternative view. Background While the definition of revenue in IFRS seems clear, revenue requirements in IAS 11 and IAS 18 actually could be problematic to be applied to complicated transactions. Additionally, some application guidance on critical issues such as revenue for multiple element agreements is quite limited. Therefore a number of entities have established their IFRS accounting guidelines by resorting to parts of US GAAP. However, US GAAP consists...
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