Wareham SC Systems Over the Case Study

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What revenue recognition accounting is required by the facts of each of the sale transactions reviewed by Soma Desai? Justify your conclusions.

The revenue recognition accounting method would be GAAP standards. The reason why, is because these transactions are not booked when the actual services were provided. Under SAB 101, the company is going to be forced to comply with these standards. As result, the way the revenue is accounted for will have to be adjusted. A good example of this can be seen with XL Semi, where they would pay for 90% of services once they were delivered and the other 10% after acceptance. This is problematic because, it is booking the transaction over the course of time vs. when it was received. At which point, it makes complying with SAB 101 more difficult and it could cause the company to have possible earnings shortfalls (based upon the way they are booking the transaction.)

Would your answer to Question 3 change if you applied lAS No. 18 rather than SAB 101?

Explain.

No. The reason why is because one of the basic principles of IAS Number 18 is: that the amount of revenues must be able to be measured reliably. The fact that the new structure will involve five small payments and one large balloon payment increases the risk. The reason why, is because if there are sudden changes in customer demand or to the economy, Wareham SC can be left with a number of accounts in default and no way to collect. In this aspect, the fact that revenues cannot be reasonably determined, underscores how they are unreliable during times of business or economic uncertainty.

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As a result, this strategy would not comply with IAS Number 18.

What administrative actions should Sonia Desai take to prepare Wareham SC Systems for the adoption of SAB 101? Be specific.

The first actions she should take are: to inform management that there is the possibility of a financial disaster facing the company (if the new strategy for services is implemented). The reason why, is because it increases the divisions risks and does not comply with SAB 101. As result, management must redesign a payment strategy for services that will comply with SAB 101. At the same time, Soma must make everyone aware of when the new changes that will be implemented and ensure that all divisions are in compliance with the regulation. This can be accomplished by reviewing all the policies and procedure for booking revenues. Those divisions that are not in compliance would need to be made aware of the fact that this is a new regulatory requirement. If Soma can take the above administrative actions before the adoptions of these new standards, she will help prepare the company for the changes that are taking place.

Clearly, accounting standards are evolving based upon booking revenues when they are actually delivered. This is important, because it shows how many organizations want to be able to have more clarity in determining revenue reliability. As a result, this kind of standard will help organizations be able to achieve this objective and reduce the underlying risks at the same time......

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