Cola Wars HBR Essay example

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Five-Step Approach to Unstructured Problems 1. Succinct Statement of the Financial Reporting Issue(s) When has a company completed its side of an arrangement, allowing it to record a sale and related loss contingencies (recall product costs), while still conforming to GAAP? 2. Brief Summary of the Economic Purpose of the Transaction To better match revenues and expenses, Frequent Fixer has proposed recognizing all of its recall product costs at the time of sale to match its competitors. Currently, Frequent Fixer only recognizes “small campaigns” (projected product recall costs of less than $100,000) at the time of sale and delays recognizing “major campaigns” until occurrence. 3. List of Alternative Ways to Report…show more content…
All campaigns are based on future product recall costs, which are the result of sales “incurred at the date of the financial statements”. Due to the historical evidence and the industry norm of product recall losses, it appears that it is “probable that one or more future events will occur confirming the fact of the loss”. For ASC 450-20-25-2 Condition B, it appears that the amount of loss is “reasonably estimable” for small campaigns due to the industry practice of recognizing product recall losses at the time of sale but the reasonableness of these estimates cannot be determined based on the information provided in the case. For the major campaigns, however, it appears the estimation is not met. From 2001-2004, it appeared that recall losses were increasing at a predictable rate of $500,000/year plus the increase of the prior year. However, during 2005 and 2006, the costs increased at unpredictably high rates. This shows unpredictability in recall costs. Therefore, Condition B cannot be met. For ASC 980-405-25-1, the recall losses resulting from regulator-imposed liabilities can only be recognized and taken to income “when the associated costs are incurred”. Alternative A does not meet this criterion. Alternative B For ASC 450-20-25-2 Condition A is met because all recall product

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