More Essay Examples on IPhone Rubric Do they appear to be aligned with the revenue recognition criteria you described in part b, above? What are multiple-element contracts and why do they pose revenue recognition problems for companies? In general, what incentives do managers have to make self-serving revenue recognition choices?
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Multiple Deliverables Arrangements Essay Sample Introduction In recent years, business transactions have become more complex.
In order to be competitive, companies started packaging their products and services in such a way that maximizes revenue and customer satisfaction. While this appears to be sound business practice, it does raise several issues on proper accounting treatment. Issues The issues involved in single transactions or contracts which involve several o multiple deliverables to be delivered at different times are as follows: A Manufacturing Company which provides machineries and equipment which routinely enters into a contract involving the following products and services: All of these products are offered at a lump sum price, even if payments are staggered.
Any of this products and services can be provided by another source or in separate transactions, but the said Company, in order to maximize profits, packages them in one. How should the company recognize revenue from this transaction?
Proposed Treatments Arrangement is Not Segregated, Revenue is Recognized when All Deliverables are Delivered All this time, revenue recognition pronouncements from standard-setting bodies in the field of accounting has been focused on single deliverables.
The first proposed treatment assumes that there are no multiple deliverables. If this assumption is made, revenue recognition becomes a simple matter of applying the present revenue recognition principle.
Revenue from a transaction must meet both criteria in order to be recognized. Revenue is generally considered realized when cash is received for the sale of a product or performance of a service. Revenue generally becomes realizable when a promise to pay is received in exchange for the sale of a product or performance of a service.
The promise to pay could be verbal account receivable or written note receivable.
Revenue is generally earned when a legally enforceable exchange takes place e. Briner Example On the scenario given above, supposed that the Manufacturing Company enters into a contract which obligates it to deliver all four products and services mentioned above for one contract price which is payable at divided into four installments payable on dates stated in the contract.
Each deliverable by the Manufacturing Company will separately is not equivalent to any revenue, but the entire process of testing, delivery, installation and maintenance and support would be equivalent to the entire contract price.
Using the first proposed treatment, the Company only recognizes revenue after the obligation to provide maintenance and support has been fulfilled.
The advantage of this treatment is the ease by which it can be applied.
There is also need to create a different set of standards for contracts or transactions involving multiple deliverables. The problem with this treatment is that it is based on a false assumption and is not in accordance with the Generally Accepted Accounting Principles GAAP.
It is also ultra-conservative and maybe unacceptable to businesses as well. Contracts involving multiple deliverable may be have legal enforceability even if only one or some of the deliverables are performed, meaning that the company may demand payment for the performance of some of the deliverables even if it refuses or is not able to comply with the other deliverables.
In fact some contracts may provide for partial payment of the contract price and so that company will have no need for demand. It will simply not return the portion of the price received. Based on GAAP and as stated in the FASB Statement quoted above, revenue for the transaction should already be recognized since the company has complied with the two requirements: In the example given above, the company may already be obligated to recognize expense because it is already incurred but can is constrained, unnecessarily, from recognizing revenue.
Based on the above discussion, this proposal is not GAAP and may not be acceptable business practice for companies who, on a regular basis, enter these kinds of contracts or transactions. This proposal is not the preferred treatment for the transactions or contracts involving multiple deliverables.
This approach also maintains the simplicity of the first proposal but factors in the concern of businesses to be able to reflect a favorable result of operations. This approach is similar to the revenue recognition for long-term contract arrangements, so while there may be a need to come up with a separate standard, such standard will generally reiterate principle and contents of existing standards on long-term contract arrangements.
Some examples of this revenue recognition methods are Percentage of Completion Method for long-term construction contracts, Installment method used in installment sales and Cost Recovery Method used for installment sales when there is a high degree of uncertainty as to the collection of the receivables.
For example, the Percentage of Completion Method has the following requirements: Under certain conditions, GAAP permits a company to accrue revenue as the work is being done.
The entity has the ability to make reasonably dependable estimates of the extent of progress toward completion, contract revenues, and contract costs. The contracts executed by the parties clearly specify the enforceable rights regarding goods or services to be provided and received by the parties, the consideration to be exchanged, and the manner and terms of settlement.
The buyer can be expected to satisfy its obligations under the contract. The contractor can be expected to perform its contractual obligations.
Martin Example If the Manufacturing Company entered into the contract stated in the first example, the company will need to determine a reasonable basis to compute percentage of completion. If it chooses, for example, to use hours worked in the performance of the deliverables of the contract, it will need to provide for an estimate of the total hours of work necessary to fulfill all the deliverables in the contract.Scope If an arrangement includes deliverables for which there is other applicable guidance in the ASC on how to account for multiple-deliverable arrangements (e.g., software, leases), that guidance should be followed.
In other words, should the multiple deliverables be accounted for as one unit of accounting or as two or more separate units of accounting? Guidelines that assist with evaluating sales transactions that involve multiple deliverables can be found in subtopic , ‘‘Revenue Recognition—Multiple-Element Arrangements,’’ in the Codification.
on EITF Issue No. , “Revenue Arrangements with Multiple Deliverables.”2 For purposes of this white paper, we’ll refer to the new rules as EITF EITF supersedes the existing guidance on such arrangements and is effective for fiscal periods.
On Revenue Recognition in Multiple-Deliverable Arrangements. By. Stephanie Maeda. A THESIS. In situations involving multiple deliverables, revenue deliverables in such arrangements can be separated for accounting purposes. That evaluation shall be performed at the inception of the arrangement and as each item in the arrangement is delivered.
* “In an arrangement with multiple deliverables, the delivered item or items shall be considered a separate unit of accounting if both of the following criteria are met: * a. Absenteeism at Ono Inc. Case Essay Words | 4 Pages Case Absenteeism at ONO Inc.
ONO is a large auto-supply company that does a large volume of business with only eleven employees.