(Evaluating when a partnership of lawyers should recognize revenue, LO 1, 2, 3, 6, 7) Elnora and Partners is a recently formed partnership of lawyers. The partnership has ten partners (all of whom are practising lawyers) and 15 associate lawyers

(lawyers who work for the partnership but who are not partners), along with 12 other employees. The partnership’s financial statements will be used to determine:

e the amount of income tax that each partner pays (remember, partners, not the partnership, pay income tax).

e the amount of money that is paid to each partner, based on the net income of the partnership.

e the amount that a new partner pays to join the partnership and the amount a departing partner is paid for his or her partnership interest. In addition, the financial statements are provided to the bank because the partnership has a large line of credit available to it.

The partnership’s September 30 year end has just passed and the managing partner of the firm has asked for your advice on how to recognize revenue. The managing partner provides you with the following information on how the partnership generates revenue:

i. Some clients are billed at the completion of a case, based on the number of hours lawyers worked on the case. (Each lawyer has an hourly billing rate.)

Lawyers keep track of the time they spend on each case and report the number of hours each month to the accounting department, which keeps track of the hours spent on each case by each lawyer. The amount actually billed to a client may differ from the actual charges generated by the lawyers who worked on the case. (That is, the amount billed may differ from number of hours worked multiplied by the hourly billing rate.) The final amount billed is based on the judgment of the partner in charge of the case. Clients have 60 days from receipt of their bill to pay.

ii. Some clients pay only if their cases are successful. The partnership receives a percentage of the settlement if the client wins the case. It can be difficult to determine whether a client will win a case and the amount that will be received if the client does win.

iii. Some clients pay amounts called retainers, which is an amount paid to the partnership before services are provided. The retainer is used to pay for legal services as they are provided. If the amount of retainer is not used by the end of the year, the remaining amount is applied against future years’ legal services.

iv. Clients who wish to have legal advice available to them 24 hours a day, seven days a week, pay a fee of $10,000 per year for the service. (The $10,000 fee is simply for the privilege of having a lawyer available all the time. These clients then have to pay the lawyer’s hourly rate for the advice given.)

Required:

a. What are the possible objectives of financial reporting? Explain each objective that you identify. Are there any conflicts among the objectives? Explain.

b. Rank the objectives in order of importance. Explain your ranking.

c. When should the partnership recognize its revenue? Explain your recommendations fully. Make sure to discuss constraints, facts, and objectives in your answer.