GAAP revenue recognition standards are based on broad principles rather than bright-line rules. This creates a certain amount of latitude in determining when revenue is earned. Assume a company that normally requires acceptance by its customers prior to recording revenue as earned, delivers a product to a customer near the end of the quarter. The company believes customer acceptance is assured but cannot obtain it prior to quarter-end. Recording the revenue would assure “making its numbers” for the quarter. Although formal acceptance is not obtained, the salesperson records the sale, fully intending to obtain written acceptance as soon as possible.

a. What are the revenue recognition requirements in this case?

b. What are the ethical issues relating to this sale?

c. Assume you are on the board of directors of this company. What safeguards can you put in place to ensure the company’s revenue recognition policy is followed?