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Oracle Systems Corporation Essay

Decent Essays
Oracle Systems Corporation
1. What factors might have led analysts to question Oracle Systems’ method of revenue recognition in mid-1990? Are these legitimate concerns?

Analysts might have been led to question Oracle’s method of revenue recognition because of revenue recognition timing, quality of receivables, and aggressive sales practice. These were all legitimate concerns.

Oracle recognized licensing and sublicensing revenues on the date of contract rather than upon delivery when certain conditions were met. The company justified the practice stating its contractual obligation had been substantially performed at the time of signing the agreement. The concerns over this accounting method is legitimate because the company obviously
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Therefore, the period between contract signing and delivery is equal to 40 days. So, we adjusted revenues to remove this 40 day early recognition. This resulted in a decreased, but more conservative, amount of revenue recognized per fiscal year. (See appendix)

Question 3: What accounting or communication changes would you recommend to Oracle’s Board of Directors?

The following accounting and communication changes are recommended to the Oracle Board of Directors to accurately recognize revenue in accordance to actual business performance and common industry practice:

Revenues for license fees should be recognized when the product is delivered. This practice is in accordance with common industry practice and provides a more accurate accounting of when revenue is earned by the company. The current policy for recognizing revenue when the contract is signed as an accurate time period indicator is clearly contradicted by the associated receivables being outstanding in excess of 160 days. As industry norms indicate an average of a 62 day collection period, this indicates that the contract date is not a reasonable basis for estimating the degree of collectability for the receivable and that more accurate estimate measures exist.

The non-refundable portion of the license fee specified in the agreements should be recognized either upon delivery of the product or at the time
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