REVENUE RECOGNITION

1
REVENUE RECOGNITION
2
Some Highlights and Examples from SAB 101
3
(No Transcript)
4
(No Transcript)
5
(No Transcript)
6
(No Transcript)
7
(No Transcript)
8
(No Transcript)
9
(No Transcript)
10
(No Transcript)
11
(No Transcript)
12
(No Transcript)
13
(No Transcript)
14
(No Transcript)
15
(No Transcript)
16
(No Transcript)
17
(No Transcript)
18
(No Transcript)
19
(No Transcript)
20
(No Transcript)
21
(No Transcript)
22
(No Transcript)
23
(No Transcript)
24
(No Transcript)
25
(No Transcript)
26
(No Transcript)
27
(No Transcript)
28
(No Transcript)
29
(No Transcript)
30
(No Transcript)
31
(No Transcript)
32
(No Transcript)
33
(No Transcript)
34
(No Transcript)
35
More Applications of Revenue Recognition
36
(No Transcript)
37
(No Transcript)
38
(No Transcript)
39
Individual film forecast method
40
(No Transcript)
41
(No Transcript)
42
(No Transcript)
43
Tradecity.com Tradecity.com is an internet-based
retailer (e-tailer) with a high volume, low
margin business strategy. Among its means of
generating revenues is to sell ads to other
e-tailers. It advertises also, both through
traditional media, as well as key internet
sites. In recent months, Tradecity.com has been
in a tight liquidity situation, as have many
others in the industry. Consequently, it has
entered into several agreements to swap ads and
other products with its customers.
44
How should Tradecity.com recognize revenues on
these swaps?

1. Not at all.
2. It depends. On what?

45
Case 5-1 (pg. 268)
46
Requirement 1A bill and hold strategy
accelerates the recognition of revenue. In this
case, sales that would normally have occurred in
1998 were recorded in 1997. Assuming a positive
gross profit on these sales, earnings in 1997 is
inflated.
47
Requirement 2A customer would probably not be
expected to pay for goods purchased using this
bill and hold strategy until the goods actually
were received. Therefore, Receivables would
increase.
48
Requirement 3Sales that would normally have
been recorded in 1998 were recorded in 1997.
This bill and hold strategy shifted sales revenue
and, therefore, earnings from 1998 to 1997.
49
Requirement 4Earnings quality refers to the
ability of reported earnings (income) to predict
a companys future earnings. Sunbeams earnings
management strategy produced a 1997 earnings
figure that was not indicative of the companys
future profit-generating ability.
50
Case 5-8 (pg. 270)
51
Excerpts from SFAS 46 3. This Statement
specifies criteria for recognizing revenue on a
sale in which a product may be returned, whether
as a matter of contract or as a matter of
existing practice, either by the ultimate
customer or by a party who resells the product to
others. The product may be returned for a refund
of the purchase price, for a credit applied to
amounts owed or to be owed for other purchases,
or in exchange for other products. The purchase
price or credit may include amounts related to
incidental services, such as installation.
52
STANDARDS OF FINANCIAL ACCOUNTING AND
REPORTINGFactors that May Impair Reasonable
Estimates of Returns

• 8. The ability to make a reasonable estimate of
  the amount of future returns depends on many
  factors and circumstances that will vary from one
  case to the next. However, the following factors
  may impair the ability to make a reasonable
  estimate
• The susceptibility of the product to significant
  external factors, such as technological
  obsolescence or changes in demand
• Relatively long periods in which a particular
  product may be returned
• Absence of historical experience with similar
  types of sales of similar products, or inability
  to apply such experience because of changing
  circumstances, for example, changes in the
  selling enterprise's marketing policies or
  relationships with its customers and
• Absence of a large volume of relatively
  homogeneous transactions.
• The existence of one or more of the above
  factors, in light of the significance of other
  factors, may not be sufficient to prevent making
  a reasonable estimate likewise, other factors
  may preclude a reasonable estimate.

53
STANDARDS OF FINANCIAL ACCOUNTING AND
REPORTINGCriteria for Recognizing Revenue When
Right of Return Exists

• 6. If an enterprise sells its product but gives
  the buyer the right to return the product,
  revenue from the sales transaction shall be
  recognized at time of sale only if all of the
  following conditions are met
• The seller's price to the buyer is substantially
  fixed or determinable at the date of sale
• The buyer has paid the seller, or the buyer is
  obligated to pay the seller and the obligation is
  not contingent on resale of the product
• The buyer's obligation to the seller would not
  be changed in the event of theft or physical
  destruction or damage of the product
• The buyer acquiring the product for resale has
  economic substance apart from that provided by
  the seller
• The seller does not have significant obligations
  for future performance to directly bring about
  resale of the product by the buyer and
• The amount of future returns can be reasonably
  estimated (paragraph 8).

Sales revenue and cost of sales that are not
recognized at time of sale because the foregoing
conditions are not met shall be recognized either
when the return privilege has substantially
expired or if those conditions subsequently are
met, whichever occurs first.
54
Hewlett Packard Company

• Product is considered delivered, and revenue is
  recognized when title and risk of loss have been
  transferred to the customer. Under the terms and
  conditions of the sale, this may occur either at
  the time of shipment or when product is delivered
  to the customer.
• Revenue is reduced for estimated customer
  returns, price protection, rebates and other
  offerings that occur under sales programs
  established by HP directly or with HP's
  distributors and resellers.

55
Advanced Micro Devices, Inc.

• The Company recognizes revenue from product sold
  direct to customers when the contract is in
  place, the price is determined, shipment is made
  and collectibility is reasonably assured.
• The Company sells to distributors under terms
  allowing the distributors certain rights of
  return and price protection on unsold merchandise
  held by them. The distributor agreements, which
  may be canceled by either party upon specified
  notice, generally contain a provision for the
  return of the Companys products in the event the
  agreement with the distributor is terminated and
  the distributors products have not been sold.
• Accordingly, the Company defers the net gross
  margin, resulting from the deferral of both
  revenue and related product costs from sales to
  distributors with agreements that have the
  aforementioned terms until the merchandise is
  resold by the distributors.

56
Why the difference?

• Reasons for the difference in policies could
  relate to the types of products sold by the two
  companies, the distribution channels, and the
  actual agreements with customers.
• AMD sells semiconductors, a highly volatile
  industry. It may be more difficult for AMD to
  see through the distribution channels to
  reasonably estimate returns.
• The agreements with distributors of AMDs
  products may be more liberal than those of HP
  with respect to things like price protection and
  returns. For example, AMD might offer a longer
  time period for customers to return product than
  does HP.
• AMDs sales to distributors might be contingent
  on resale of the product to end users, one of the
  six criteria that must be met before revenue can
  be recognized when the right of return exists.