CASE 3.3 Revenue Recognition Disclosures (A) revenue. By 2008, U.S. Generally Accepted Accounting Principles (GAAP) included more than 200 different revenue recognition guidelines, rules, and regulations. The most straightforward sale is a retail sale for cash, such as a consumer paying cash for gro- ceries. There is a slight chance the customer will return the goods because they are unsatisfactory, but in most cases there is clearly a sale. There is no uncertainty about the price, no uncertainty about whether the customer will pay for the purchase, no uncertainty about whether the customer has taken possession of the goods, and very low probability that the goods will be returned. The store would almost certainly rec- ognize revenue on the date the transaction occurred by debiting cash and crediting As business became more complicated, so did revenue recognition. Transactions involving multiple elements are common. A computer manufacturer may sell a pack- age of hardware, software, warranties, and telephone support. It is unclear how a one-time initial payment should be allocated among those four elements and un- clear how an initial payment-combined with a monthly fee over some period- should be allocated between the four elements. Sometimes products or contracts cover several years, such as large infrastructure projects or ships, so revenue may be recognized gradually over the production period. Sometimes there is a question as to whether a credit customer will pay the amount due. Sometimes there is a question about price because it may depend on the per- formance a product delivers. Sometimes revenue is recognized before a product is shipped because a customer wishes to secure a supply of a scarce item. There are also dozens of technical revenue recognition issues related to specific industries. During the late 1990s' Internet boom, many Internet start-ups devised highly un- usual revenue recognition methods. Some firms recognized revenue long before cash would be collected; others recognized revenue although no cash would ever be exchanged. In response, in December 1999, the SEC issued Staff Accounting Bulle- tin (SAB) 100 to express the SEC accounting staff's views on revenue recognition. In December 2003, the SEC issued a revised and expanded version of that bulletin, SAB 104, Revenue Recognition, Corrected Copy. Because it was issued by the SEC, SAB 104 is probably the most authoritative document on revenue recognition in the United States. The following is an overview of the general concepts covered by SAB 104. The selected text from SAB 104 includes four revenue recognition criteria that are widely quoted by U.S. firms in the revenue recognition note of their 10-Q and 10-K reports (see Exhibit 1) and are also widely quoted by other accounting rule-making bodies. Selected text, SAB 104: Revenue recogn cussions as well as cerddoseccordeoton sections within the The accounting literature rendere dades both broad concepts scope of specific authoritative in that proces recente recognition on addressing a specific arrangement or asperi indon the staff consider the that literature should be applied Home in the absence of authoritative ser existing authoritative accounting standards as well as the road recente reco criteria specified in the FASB's conceptual framework that contain basic guidelines revenue recognition Based on these guidelines, revenue should not be recognized until it is rea med realizable and earned. Concepts Statement 5. paragraph 83(b) states that an entry's or other activities that constitute its ongoing major or central operations, and te revenue-earning activities involve delivering or producing goods.rendering series enues are considered to have been earned when the entity has substantially accom- Paragraph 84(a) continues "the two conditions (being realized or realizable 200 plished what it must do to be entitled to the benefits represented by the revenues being earned) are usually met by the time product or merchandise is delivered or at time of sale (usually meaning delivery). In addition, paragraph 84d) states that activities and gains and losses from sales of other assets are commonly recozzed "If services are rendered or rights to use assets extend continuously over time for example, interest or rent), reliable measures based on contractual prices established in advance are commonly available, and revenues may be recognized as earned as time passes. The staff believes that revenue generally is realized or realizable and eamed when all of the following criteria are met: 1. Persuasive evidence of an arrangement exists, 2. Delivery has occurred or services have been rendered, 3. The seller's price to the buyer is fixed or determinable, and 4. Collectability is reasonably assured. Some revenue arrangements contain multiple revenue-generating activities. The stoff believes that the determination of the units of accounting within an arrangement should be made prior to the application of the guidance in this SAB topic by reference to the applicable accounting literature. Revenue recognition in practice The FASB Codification project now covers all U.S. revenue recognition rules-ACS 650 (Revenue Recognition). However, the FASB substantially simplified its revenue recognition rules for multiple-element sales that include software with Accounting Standards Update (ASU) 13, Multiple-Deliverable Revenue Arrangements-ASC Topic 650 (Revenue Recognition) and ASU 14. Certain Arrangements that include Software 1. The February 1999 AICPA publication Audit Issues in Ram the authoritative accounting liten indica REVENDE RECOGNITION DISCLOSURES (A) CASE 3.3 Elements -ACS Topic 985 (Software). Both ASDs became effective for firms whose fiscal year began after June 15, 2010, although early adoption was permitted for Exhibit 1 contains selections from the revenue recognition note for seven publicly traded U.S. firms. Those notes cover a wide range of revenue recognition issues, both ASUS Required For each note in Exhibit 1: 1. Explain the revenue recognition rules for each firm. As part of your explanation prepare journal entries for each described method. 2. For each firm, are the revenue recognition methods described in the note reasonable? Explain in detail. In most cases, IFRS accounting rules provide only general revenue recognition guidelines. For each firm, discuss whether detailed revenue recognition rules are needed