In July 2002, Qwest Communications International Inc., a large provider of Internet-based communications services, announced that it was under investigation by the SEC. Its share price immediately fell by 32 percent. In February 2003, the SEC announced fraud charges against several senior Qwest executives, alleging that they had inflated revenues during 2000 and 2001 in order to meet revenue and earnings projections. One tactic used was to separate long-term sales of equipment and services into two components. Full revenue was immediately recognized on the equipment component despite the obligation to honour the service component over an extended period. A related tactic was to price services at cost, putting all profit into the equipment component, which, as just mentioned, was immediately recognized as revenue, despite a continuing obligation to protect the customer from risk of obsolescence on the equipment "sold." Yet another tactic was to recognize revenue from the sale of fibre-optic cable despite an ability of the purchaser to exchange the cable at a later date. In retrospect, Qwest's revenue recognition practices were premature, to say the least. In June 2004, the SEC announced settlements with some of the officers charged. One officer, for example, repaid $200,000 of "ill-gotten gains," plus a penalty of $150,000, and agreed to "cease and desist" from any future violations. 6. Refer to the revenue recognition practices of Qwest Communications outlined in Theory in Practice 1.1. Required a. Use the concept of relevance to argue that firms should record revenue as earned as early as possible in their operating cycles. Was Qwest's revenue recognition policy relevant? Explain. b. Use the concept of reliability to argue that firms should wait until the significant risks and rewards of ownership are transferred to the buyer, and there is reasonable assurance of collection, before recording revenue. Was Qwest's revenue recognition policy reliable? Explain. c. When is revenue recognized under ideal conditions? Why