Hello,

In was hoping you can guide me on how to answer these questions.

How did the Starbucks10-K follow the five-step revenue recognition model.

The article - Refer to the article "Revenue Recognition Guidance and the Potential for Fraud and Abuse" and how did the five-step revenue recognition model may prevent Starbucks from committing financial statement fraud.

Can you give me some ideas on these please?

Starbucks 10k report- https://investor.starbucks.com/financial-data/sec-filings/default.aspx

Article below-

New Revenue Recognition

Guidance and the Potential

for Fraud and Abuse

FASB had many goals in issuing Accounting

Standards Codification (ASC) Topic 606,

"Revenue Recognition from Contracts with

Customers," including removing inconsistencies

in multiple sources of guidance,

providing a more robust comprehensive framework

for addressing revenue recognition issues, and

improving the comparability and usefulness of financial

information. Concern about fraud was also one

of the original motivations for the project, as illustrated

in the sidebar, Timeline of How Revenue

Fraud and Abuse Motivated the New Guidance.

Improper revenue recognition has been a major

source of restatements and prominently identified in

SEC enforcement actions. Given this concern, CPAs

might ask how the new guidance will affect revenue

recognition fraud or abuse.

This article explores that issue, including both the

positive and negative impacts of the new guidance

on potential fraud and abuse. While Topic 606

reduces the risk related to several types of revenue

recognition frauds perpetrated previously, it also

introduces other new risks.

Rejected and Adopted Models

FASB's concern with reducing fraud and abuse is

apparent in its rejection of two approaches that would

have increased opportunities for such in the recognition

of revenue. Specifically, FASB rejected an activities

model for revenue recognition because revenue

could have been accelerated at the end of a reporting

period simply by increasing activities, such as production

of inventory.

FASB also rejected the measurement of performance

obligations assumed in a contract with a customer directly

at current exit prices. This approach could have resulted

in recognizing revenue at the very inception of a

contract when, as is typical, the transaction price included

an amount to recover the cost of obtaining the contract.

Instead, FASB chose to measure those obligations at the

same amount as the contract rights at inception, that is,

allocating the transaction price to performance obligations.

By doing so, FASB precluded one possible

approach to upfront recognition of revenue prematurely

before performance. Thus, FASB seems to have been

well aware of the potential for revenue fraud and abuse

and to have deliberately avoided a model that would

invite improper revenue recognition.

Instead, FASB adopted a five-step model for revenue

recognition that is compared to the four-criteria model

the SEC staff presented in Staff Accounting Bulletin

(SAB) 101, Revenue Recognition in Financial

Statements, in the sidebar, Comparison of FASB ASC

606 with SAB 101/104. The SEC's model was directed

specifically at combatting frauds and abuses in revenue

recognition; thus, a comparison of the two models provides

a useful background to assess how the new

accounting guidance may affect the potential for same.

IN BRIEF By Douglas R. Carmichael

Now that FASB's new revenue recognition standard

is effective, it is worth considering how

well the guidance meets the goals originally set

by the board. One of the original motives for the

standard was to prevent fraud and abuse in the

recognition of revenue. The author examines the

standard in light of its potential impact on fraud,

noting where it closes off some avenues for

abuse and where it leaves others open.

MARCH 2019 / THE CPA JOURNAL 37

38 MARCH 2019 / THE CPA JOURNAL

The three primary points of comparison

are contract existence (including structuring

and combining contracts), identification

and satisfaction of performance

obligations, and determination and allocation

of transaction price. This article

weighs each on the fraud scale, describes

previous frauds of the type associated

with that point, and considers the implications

for combatting fraud and abuse.

Contract Existence

FASB concluded that revenue from a

contract with a customer cannot be recognized

until a contract exists. [FASB's

conclusions can be drawn from the

"Background Information and Basis for

Conclusions" issued with ASU 2014-09,

Revenue from Contracts with Customers

(Topic 606); the conclusions cited here

and below are drawn from that source.]

Topic 606 specifies five criteria for contract

existence. The first four criteria

approval and commitment of the parties,

identification of rights, identification of

payment terms, and commercial substance

require an entity to "assess

whether the contract is valid and represents

a genuine transaction." The fifth criterion,

establishing a collectability

threshold, is also relevant to contract existence

because assessing a customer's

credit risk is part of determining whether

a contract is valid.

FASB required that a contract have

commercial substance for revenue to be

recognized in order to preclude entities

from artificially inflating revenue by

transferring goods or services back and

forth to each other for little or no cash

consideration. FASB made this requirement

applicable to all contracts, not just

those with nonmonetary exchanges; in

other words, it "decided that all contracts

should have commercial substance before

an entity can apply the other guidance in

the revenue recognition model" (ASU

2014-09, BC 41).

FASB's intent in establishing the five

criteria was "to filter out contracts that may

not be valid and that do not represent genuine

transactions" (BC 48). Recognizing

revenue for arrangements that do not meet

the criteria "would not provide a faithful

representation of such transactions" (BC

48). Thus, the requirements for contract

existence are relevant to the large number

of cases of improper revenue recognition

involving fake contracts or contracts that

were not legally enforceable.

Frauds and abuses. Manipulation of

contracts has been a common element in

revenue recognition frauds. Some cases,

such as those against ZZZZ Best and

Satyam, have involved fictitious contracts.

Gemstar purportedly used expired and

disputed as well as nonexistent contracts;

others, such as Computer Associates,

MicroStrategy, and Autonomy, backdated

contracts to prematurely recognize revenue.

In other instances, such as the matter

of Peregrine Systems, material

contingencies added in oral or concealed

written side agreements resulted in nonbinding

arrangements. No accounting

guidance can prevent fraudulent contract

practices, but Topic 606 should focus significant

renewed attention on establishing

the existence of a valid contract.

Implications of new guidance. The

increased focus in the accounting guidance

on contract existence should enable

auditors to better exercise professional

skepticism and provide a basis for obtaining

more persuasive evidence of whether

there is a valid contract with a customer.

Management will need to ensure that the

controls over the contracting process provide

assurance that contracts meet the five

criteria for contract existence, and auditors

will need to understand and test those

controls. Auditors will be able to obtain

a deeper understanding of entities' contracting

processes and customary business

practices. Because contract terms may be

oral or implied by customary practices,

auditors will need to understand both

explicit and implicit contract terms. As a

result, auditors may need to apply procedures

specifically directed to contract

existence beyond reading written contracts,

such as confirmation with customers

of contract terms, approvals,

acceptance, and the absence of written or

oral side agreements.

Accounting guidance by itself cannot

eliminate the risk of fake contracts, backdated

contracts, or undisclosed side agreements,

but the first step in FASB's model

puts the spotlight on whether there is persuasive

evidence that a valid, genuine

contract exists. FASB's specific requirements

for evidence of contract existence

should result in management and auditors'

renewed attention to controls and

procedures to provide reasonable assurance

that revenue is recognized only on

contracts that actually exist.

Contract Structure and Combination

of Contracts

One of FASB's objectives in developing

the new guidance on revenue recognition

was that accounting for a contract

should depend on an entity's rights and

obligations rather than how the entity

structures the contract. As part of this

concern, FASB requires that contracts

entered into at or near the same time must

InFocus

FASB's specific requirements

for evidence of

contract existence should

result in renewed

attention to controls and

procedures to provide

reasonable assurance that

revenue is recognized

only on contracts that

actually exist.

be combined when one or more of three

criteria are met. The three criteria are:

negotiation as a package with a single

commercial objective, price interdependence,

and interdependence of promised

goods or services. This is a significant

change from prior guidance, in which the

combination of contracts was voluntary

and permitted only in certain circumstances.

This change seems to be aimed

at precluding fraud or abuse, such as

round-trip transactions.

Frauds and abuses. In a round-trip

transaction, an entity recognizes revenue

in one transaction with the customer

and, in a separately structured transaction,

provides the consideration to the

customer that offsets the amount to be

received in the revenue transaction.

Some well-known examples are Qwest

and Global Crossing buying and selling

line capacity between them in what was,

in substance, a nonmonetary exchange.

In other examples, AOL inflated online

revenue recognized by paying counterparties

more than the fair value of software,

hardware, or other operating

equipment acquired, and Peregrine

Systems paid for its customers' software

purchases by investing stock or cash in

them contemporaneously.

FASB has headed off a possible argument

that in a round-trip transaction

structured as two separate contracts, the

counterparty is a customer on the revenue

side while a vendor or supplier on

the other side. FASB defines a customer

as "a party that has contracted with the

entity to obtain goods or services that

are an output of the entity's ordinary

activities." FASB notes that the counterparty

is a customer if it meets the

definition of a customer "for some or

all of the terms of the arrangement."

Topic 606 would thus require combination

of the contracts, because

investees were