Each of the following situations concerns if and how to recognize revenue.
1. A cell phone provider sells phone hardware and associated voice and data services. The typical contract includes a $200 upfront initial charge and $50 per month for the next two years for voice and data services. The company proposes to recognize 50 percent of revenue immediately, 25 percent at the end of the first year, and 25 percent at the end of second year.
2. Heavy Duty Construction Equipment Builders builds custom machinery for construction companies. Currently, it is producing machinery for a customer construction company for $25 million. The contracted date to complete the machinery was October, and the company met the contract date. It is now December, and the customer acknowledges the contract and confirms the amount; however, the customer construction company has requested that Heavy Duty Construction hold the machinery as the construction site where the equipment will be used is not yet under development. Expected start has been delayed and will be sometime within the next 6 to 18 months.
3. Bakers Appliances have developed a new line of business where they will be selling bakeware appliances over the internet. The other lines of business have no return policy, hence no return allowance has ever been set by the company. However, since this is a new line of business, website sales grant each purchaser the right of return for a full refund within one year of date of purchase if the customer is unhappy with the product or finds the product defective.
4. Burer Technologies is a high-growth company that sells custom photographic software, which is a very rapidly changing industry. In order to achieve growth, management has empowered the sales staff to make special deals with clients (discounts and payment terms) to increase sales in the fourth quarter of the year. The sales deals include a price break and an increased salesperson commission.
REQUIRED
For each of the situations 1 through 4:
a. Discuss the key issues to address in determining whether or not revenue should be recognized.
b. Identify additional information required or audit procedures to be performed by the auditor to quantify or otherwise audit the issues identified in part (a).
c. Use revenue recognition criteria for IFRS to explain how the client should recognize revenue.