3 Case: Accounting for the Public Interest: A Revenue Recognition Dilemma Read the introduction (approximately 2.5 pages) of the case and answer the following questions in a graded discussion board post. Please comment on at least one of your classmate's posts for full credit. What is the main issue in the case? Accounting for the Public Interest: A Revenue Recognition Dilemma Arline Savage, Douglas C. Cerf, and Roberta A. Barra ABSTRACT: This case illustrates how accounting rules impact the public interest and vice versa. The setting is a gray area of accounting in which management, the external auditors, the SEC, and international accounting standard setters may have differing opinions about the accounting treatment. Students consider the situation in which an accounting rule leads to a business and societal problem. They gain an understanding of how this happens and how such problems can be addressed. The context for this case is a revenue recognition issue for bill-and-hold sales. It also provides students with the opportunity to consider the real-world implications of accrual- versus cash-based accounting. This case is useful for intermediate-to graduate-level financial accounting classes or an accounting capstone class. Keywords: revenue recognition; bill-and-hold sales; public interest; international accounting standards; cash versus accrual. Y INTRODUCTION ou are a newly promoted audit manager at a national CPA firm with international affiliates, and you are very excited about being part of the audit team of a major client of the firm: a large pharmaceutical corporation that participates in the U.S. government's Vaccine for Children Program (VCP). The VCP purchases its federal stockpile of pediatric vaccines from only a small, select group of major pharmaceutical companies deemed eligible to participate in this program. This vaccine stockpile is a strategic reserve in which vaccine makers maintain a six- month supply. Your appointment to this audit team bodes well for your long-term goal of becoming a partner at the firm. Your first task is to educate yourself about the vaccine industry, in compliance with AU 210.04. You prepare a brief overview of the industry (sce Appendix A) to discuss with the audit team Your personal interest in the vaccine case extends beyond that of an auditor. You remember Dades alla apparently has become a victim of a U.S. campaign against deceptive accounting practices" (Brown 2005a). Your appointment as a member of the audit team for one of the pharmaceutical firms involved in the controversy brings to mind the extreme anxiety experienced by your sister and her husband when their baby could not get a vaccine that she needed because of the vaccine shortage, which had resulted from an accounting dispute between the SEC and the vaccine makers and their auditors. As you sit at your desk, you ask yourself the following questions: Could a similar situation happen on my watch as an audit manager? What should an auditor do when accounting policy has significant adverse impacts on society or on some groups in a particular society? What takes precedence: accounting for economic substance or the public interest? Isn't accounting supposed to be in the public interest? Now that you think about it, one of your colleagues recently mentioned that the International Federation of Accountants (IFAC 2012) had recently finalized a Policy Position on A Definition of the Public Interest and that IFAC's concept of the public interest addresses a broader set of stakeholders than does the AICPA's Public Interest principle. IFAC defines the public interest as the net benefits derived for, and procedural rigor employed on behalf of all society in relation to any action, decision, or policy" (IFAC 2012; emphasis added). You decide that conducting an investigation and analysis of this topical issue, even if it includes use of your rather scarce personal time, provides you with an opportunity to become a better auditor who considers all aspects of an accounting issue. As part of your audit planning, you begin by reviewing U.S. generally accepted accounting principles (GAAP) revenue recognition concepts and criteria, followed by transaction-specific guidance that directly relates to pharmaceutical companies vaccine stockpiles, which are classified as bill-and-hold sales. You know that a bill-and-hold sale is a sale in which the buyer purchases products and requests that the seller hold the product to be delivered upon request at a future time. The seller can charge the buyer an inventory carrying cost. Sometimes, the buyer pays for the product before it is shipped, such as the VCP in which your client participates. The government prepays for the stockpiled vaccines, which are stored by the vaccine companies in their warehouses and are not delivered until the govemment--in this case, the Centers for Disease Control (CDC) request delivery. The vaccine makers are also required to rotate the inventory as the vaccines expire. After preparing a synopsis of U.S. GAAP revenue recognition concepts and criteria in general, you follow up with further research on the accounting treatment of bill-and-hold sales using the GAAP The Vaccine Makers' Perspective The development of a single vaccine by a pharmaceutical company can take 12 to 15 years and between $500 million and $1 billion in funding (Sloan et al. 2004). In late 1999, the SEC issued guidance in ASC 605-15-899-1. Prior to the issuance of ASC 605-15-899-1, vaccine makers recognized revenue once the government made the agreement to stockpile the vaccine and the vaccine company received payment and stockpiled the inventory. But because of ASC 605-15-899- America Accounting Asli Issues in Accounting Education Volume 28, No. 3, 2013 Accounting for the Public Interest: A Revenue Recognition Dilemina 693 1. stockpiled inventories of vaccines held in the companies' warehouses were officially considered unsold by the extemal auditors, stockholders, and Wall Street. Despite the significant amount of cash that the vaccine makers received up-front from the federal government stockpile program, they could no longer recognize revenue at the time the vaccines were placed in the stockpile, but had to wait until the vaccines were shipped upon government request. The vaccine makers' reactions to ASC 605-15-899-1 were generally negative. Although ultimately responsible for GAAP, the SEC does not set GAAP (having delegated that authority to the FASB). SEC guidance is authoritative in that it prescribes financial statement presentation formats and disclosures and accounting recognition and measurement principles that public companies are obligated to follow (Deloitte Global Services Limited 2012). So whereas the SEC did not "technically create a new accounting standard with ASC 605-15-899-1, an external auditor for the vaccine makers correctly opines that we expect the implementation (of ASC 605