Revenue Recognition

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The issue of revenue recognition practices is an area that has received a lot of attention from regulators. Whenever there is a report of financial restatements or negative earnings, regulators pay extra attention to review the financial statements in order to verify that that there are not any indications of financial fraud or that the organization overstepped their boundaries in the area of managed earnings. The reason that regulators have taken a special interest in financial accounting and potential fraud is due to the collapses of companies such as Enron, WorldCom and Tyco. Regulators and those in the accounting profession are focusing their efforts on the causes of fraud as well as the steps that can be taken to effectively detect…show more content…
Questions 1 and 2 of SAB address the topic of Persuasive Evidence of an Arrangement and highlight how a seller could be tempted to bend the rules of revenue recognition in order for a more favorable time in which the sale is reported. The first question exhibited the case in which Company A required each sale to be supported by a written sales agreement signed by an authorized representative of both the customer and Company A. This issue was if Company A could recognize the revenue in the current quarter even if the sales agreement would not be signed until a few days after the quarter had ended. This question highlighted the need for companies to have strong internal controls and the need to a reliable system to be in place for processing contracts. Without a strong internal control structure as well as clearly documented procedures, there is a possibility of managers becoming tempted to adjust how revenue is recognized based on the needs of the quarter. Questions 3 and 4 reviewed the issue of ownership of goods and when the transfer had effectively taken place. Question 4 reviews the case of Company R that is a retailer that offers layaway sales to its customers.

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