Case 04-7: Lighthouse

Live bills received that are not set up need to be sent back to the Client contact (identified by the client, usually a Regional) for coding of gl, vendor, and property

To determine these agreements should be accounted for separately or as a single arrangement, we would consider in ASC 605-25 Revenue Recognition to Multiple-elements agreements

For each of the specific contracts described in the case, please describe the best revenue recognition policy considering the criteria in SAB 101. (Onsetcom, Cataumet, Sandham, XLSemi, Technical Devices and Ashaban)

During our last meeting, you requested that I review LabCo’s accounting policy over the revenue treatment for your contract with Halibut Inc. After reviewing the various requirements of the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 250-10 and 605-35, I conclude that:

In order to meet this condition, the identified benefit must be sufficiently separable from the recipient’s purchase of the vendor’s products such that the vendor could have entered into an exchange transaction with a party other than a purchaser of its products or services in order to receive that benefit.

The second requirement that needs to be fullled by the parties in the contract is the

IN CONSIDERATION OF THE COVENANTS and agreements contained in this Sales Agreement the parties to this Agreement agree as follows:

Records will be identified by unique control numbers as appropriate for each classification of form. When available, Finance will use numbers generated by the accounting system for documents. A manual system will be used where the system is unable to assign unique numbers.

There are currently four criteria for recognizing revenue: evidence of an existing arrangement, delivery has occurred, price is determinable, and there is a reasonable assurance of payment (SEC Topic 13: Revenue Recognition). According to GAAP, it is appropriate for DSY to recognize revenue before the date that the cable is delivered. Revenue is realizable because there has been a sale and all the criteria are met of a bill and hold agreement. A business can decide when it has fulfilled its performance obligation to transfer a product based on if the customer has control of that product. Depending on the contract, control is transferred when the product is delivered to the customer or when the product is shipped. The customer has control until

Yeaton (2015) research titled “A New World of Revenue Recognition” about the discussion of the new revenue recognition standard, jointly issued by FASB and IASB, which is effective after December 15, 2016 for public companies and after December 15, 2017 for private companies and non-profit organizations (p.50). Yeaton identified that the new revenue recognition standard will supersede most, if not all existing revenue standards (p.50). Yeaton summarized the purpose of the GAAP and IFRS converged standards on revenue recognition to provide consistent guidance to replace or remove the transaction and industry or geographic specific guidelines, to simplify or streamline current revenue criterion, and to enhance disclosure statement to demonstrate the nature, timing, amount and uncertainty of cash flow and revenue (p.50). Yeaton implied that the new standard of recognizing revenue will have significant impact on real estate and telecommunications companies, however it will provide variable impact on all companies, and in order to capture, to align and to justify business decision on revenue measurement, it could potentially require substantial changes on its existing process, policies and frameworks (p.50). Yeaton recognized the need of additional or frequent use of judgement and estimation to comply with the new requirements under the new principles of revenue recognition (p.50).

SAB 104 lays down the following conditions that should all be fulfilled to enable revenue recognition in cases on non-delivery of goods: (1) The risks of ownership need to have been transferred to the purchasers, (2) The customers have made commitments, preferably written, to procure the goods, (3) The purchasers call for the ‘bill and hold’ transactions, (4) The buyers should be

Seller has clear and marketable title to the equipment being sold except as may be noted elsewhere in this Agreement, is duly authorized and empowered to convey said assets, and will deliver the Assets free and clear of any and all accrued liabilities.

Term/Jargon that I am unfamiliar with  Billing Terms to retailers (pg. 2, middle of paragraph 2)     My guess of what it means  Conditions attached to a sale?    

Construction contracts are formulated in a number of ways which, for the purposes of this Standard, are classified as fixed price contracts and cost plus contracts. Some construction contracts may contain characteristics of both a fixed price contract and a cost plus contract, for example in the case of a cost plus contract with an agreed maximum price. In such circumstances, a contractor needs to consider all the conditions in paragraphs 23 and 24 in order to determine when to recognise contract revenue and expenses.

d. Each installment is treated as hire charges so that if default is made in payment of any installment, the seller becomes entitled to take away the goods, and