Please read the articles onMonster BeverageandBally's. Why did Monster Beverage and Bally's each get into trouble for revenue recognition? What should they have been doing differently?

Monster's article

https://www.reuters.com/article/us-monsterbeverage-lawsuit/monster-beverage-in-16-25-million-channel-stuffing-settlement-idUSBREA3G1K620140417

Bally's article:

From the Forensic Accounting Club:

InFebruary of2008,the U.S.Securities andExchange Commission(SEC)filed financial fraud charges against Bally Total Fitness Holding Corporation (Bally), a nationwide commercial operator of fitness centres, alleging that Bally violated the antifraud, reporting, books and records, and internal control provisions of the federal securities laws (United States Securities and Exchange Commission v. Bally Total Fitness Holding Corporation). According to the SEC, from at least 1997 through 2003, Bally's financial statements were tainted by more than two dozen accounting improprieties. The alleged improprieties caused Bally to overstate its originally reported year-end 2001 stockholders' equity by $1.8 billion, or more than 340 percent; to understate its originally reported 2002 net loss by $92.4 million or 9341 percent; and to understate its originally reported 2003 net loss by $90.8 million, or 845 percent. Bally settled the charges with the SEC in February of 2008 and emerged from bankruptcy proceedings under new, private ownership.

Later, in December of 2009, the former Bally CFO and former controller were charged for their roles in the accounting violations, as were Bally's independent auditor, Ernst & Young, LLP (E&Y), and six E&Y partners. According to the SEC, Bally's former CFO and former controller were responsible for the fraudulent financial accounting and disclosures, and the unqualified audit opinions issued by E&Y were false and misleading as the auditors knew or should have known about the fraud. All parties charged settled with the SEC without admitting or denying the charges.

Bally's alleged improprieties involved fictitious revenues, timing differences, concealed liabilities and expenses, improper disclosures, and improper asset valuations. The following is a summary of just some of the many financial statement schemes employed by Bally.

Bally employed a number of inappropriate accounting tricks to overstate its revenue:

Rather thanrecogniserevenuefrominitiationfeesovertheentireestimatedgym membership life as was required by U.S. GAAP, Bally chose to inappropriately recognise these fees over a shorter period of time.

Bally elected, in violation of U.S. GAAP, to recognise as revenue the entire amount of prepaid dues in the month payment was received, instead of deferring the prepaid dues and recognising them as earned.

Bally recognised hypothetical membership reactivation fees as revenue anticipated (up to three years in the future). U.S. GAAP prohibited Bally from recognising revenue from reactivation fees until after the reactivating members had entered into binding contracts.

Bally recognised revenue from unpaid dues on inactive memberships, a practice that was in violation of U.S. GAAP.

Under U.S. GAAP, Bally was to account for revenue from its bundled packages

(consisting of gym memberships, nutritional products, and personal training services) as a single element, unless it met certain exceptions (which Bally did not meet). Bally failed to comply with U.S. GAAP, accounting for each item in the package as a separate element and prematurely recording revenue.

U.S. GAAPrequiredthatrevenuefromprepaidpersonaltrainingservicesbe recognised when earned; that is, when the services were actually provided. Bally recognised revenue related to prepaid personal training services before it was actually earned.

Bally prematurely recognised revenue from the sale of future receivables by accountingfor these sales as sales of financial assets. Under U.S. GAAP, Bally was required to account for these transactions as debt.

Bally was equally creative when it came to using accounting improprieties to understate its expenses and liabilities:

Bally deferred as "membership acquisition costs" costs that were not directly related tothe acquisition of membership contracts. Under U.S. GAAP, these costs were to be expensed as incurred.

Bally failed to include interest expense associated with a liability on bonds, in additionto improperly removing the bond obligation from its statement of financial position. Both actions were in violation of U.S. GAAP.

Under U.S. GAAP, Bally was to expense advertising expenses no later than the firsttime the advertising took place. Bally violated U.S. GAAP by deferring recognition of the production costs of its advertisements over the estimated life of the advertisements.

When Bally acquired other health clubs, it was required under U.S. GAAP toallocate a portion of the purchase price to certain separately identifiable intangible assets and to conduct impairment analysis of goodwill. Bally failed to do either, which resulted in an overstatement of goodwill and an understatement of expenses.

Additionally, Bally carried out various improprieties to understate its accumulated deficit:

In accounting for its leased facilities, Bally was not in compliance with U.S. GAAP for several reasons: (1) Bally improperly failed to recognise rent expense on club leases with escalating rental obligations using the required straight-line rent method; (2) Bally improperly reflected tenant allowances as a reduction of property and equipment on the statement of financial position and improperly amortised these amounts and the related leasehold improvements to depreciation expense; (3) Bally improperly reflected tenant allowances as a component of cash flows from investing activities in its statement of cash flows; and (4) Bally improperly failed to depreciate leasehold improvements over the lesser of the asset's economic life, with a maximum of 15 years, or the contractual term of the lease, excluding all renewal options.

At times, Bally temporarily closed various clubs while it undertook construction andremodelling in preparation for use by members. Bally still incurred rent costs during the construction periods, which, under U.S. GAAP, Bally was to recognise as expenses when incurred unless certain requirements were met. Bally didn't meet those requirements, but nonetheless improperly deferred recognition of the rent costs.

While clubswereclosedforremodellingandconstruction,Ballyincurredcertain internal compensation costs, which, under U.S. GAAP, were required to be expensed when services were rendered. Bally improperly capitalised and deferred these costs and recognised them as expenses in later periods.

Under U.S. GAAP, Bally was required to periodically analyse whether the value ofits fixed assets had been impaired, and if it had, to recognise the amount of the impairment as an expense. Bally failed to identify the existence of events that should trigger an asset impairment analysis, and failed to measure the related impairment charges.