Staff Accounting Bulletin

SEC Staff Accountin" rel="nofollow">ing Bulletin" rel="nofollow">in No. 101 Revenue Recognition This assignment requires that you log onto the Securities and Exchange Commission’s web site (www.sec.gov). Once you are on the web site, scroll down to the section labeled “Staff Interpretations” and then click on the lin" rel="nofollow">ink titled “Staff Accountin" rel="nofollow">ing Bulletin" rel="nofollow">ins.” Then, on the next screen you should scroll to Staff Accountin" rel="nofollow">ing Bulletin" rel="nofollow">in (SAB) No. 101 and click on the file with the full version of SAB No. 101 dated December 3, 1999. If you cannot locate the document, click on the followin" rel="nofollow">ing lin" rel="nofollow">ink: http://www.sec.gov/in" rel="nofollow">interps/account/sab101.htm Read SAB No. 101 to answer these questions: • Accordin" rel="nofollow">ing to the background description of the COSO fraud study, Fraudulent Fin" rel="nofollow">inancial Reportin" rel="nofollow">ing: 1987-1997, An Analysis of U.S. Public Companies, how often is overstatin" rel="nofollow">ing revenues the cause of a fin" rel="nofollow">inancial statement fraud? • Based on a more recent report issued by the Center on Audit Quality (see http://www.thecaq.org/docs/reports-and-publications/deterrin" rel="nofollow">ing-and-detectin" rel="nofollow">ing-fin" rel="nofollow">inancial-reportin" rel="nofollow">ing-fraud-a-platform-for-action.pdf?sfvrsn=0) describe the central message resultin" rel="nofollow">ing from that study. • How does SAB No. 101 change existin" rel="nofollow">ing accountin" rel="nofollow">ing rules on revenue recognition? • Your Fin" rel="nofollow">inancial Accountin" rel="nofollow">ing course taught you that revenue is to be recognized when it is realized or realizable and earned. In the SEC staff’s view, what four thin" rel="nofollow">ings must occur for those conditions to be met? • Read Question 1 under the headin" rel="nofollow">ing “2. Persuasive Evidence of an Arrangement.” What primary reason does the SEC provide for why Company A cannot legitimately record the sale to Customer Beta in" rel="nofollow">in the first quarter? • Assume your client shipped goods to a customer. The customer has the right to return the product and the buyer does not pay for the goods at that time but agrees to pay for the goods at a later specified date. Your client has agreed to excuse payment until the buyer resells the product to one of their customers. What is the SEC’s view as to whether your client can record the revenue at the time of shipment? • Assume that a customer of your client ordered merchandise from your client. By year end, your client is ready to deliver the merchandise, but the customer is not yet ready to take delivery of it. So, your client has segregated that in" rel="nofollow">inventory in" rel="nofollow">in its warehouse to ensure that they don’t in" rel="nofollow">include it in" rel="nofollow">in physical in" rel="nofollow">inventory counts at year end, given that they have already recorded the sale in" rel="nofollow">in that year. What is the SEC’s view about whether the revenue recorded by the client should remain" rel="nofollow">in on the books? • Describe the major components of footnote disclosure in" rel="nofollow">information that is required with respect to revenue recognition? • The FASB recently issued a new pronouncement on revenue recognition. Log in" rel="nofollow">into the FASB website (http://www.fasb.org/cs/ContentServer?c=FASBContent_C&pagename=FASB%2FFASBContent_C%2FCompletedProjectPage&cid=1175805486538) and review the highlights of the new standard. Briefly describe 3 differences in" rel="nofollow">in how GAAP for revenue recognition will change due to the new standard. Do you believe SAB No. 101 will be necessary after the FASB standard becomes effective? Why?