Option #2: Case Study: Revenue Recognition at TSA, Inc. – A Roller Coaster Ride
Read the attached case studystudy and then answer the following requirements:
- Consider the following excerpt: [A] recent survey of financial executives noted that the revenue recognition process is increasingly complex to manage, prone to error, and more material to financial statements than any other area in financial reporting. The report went on to note that revenue recognition is a top fraud risk and that regardless of the accounting rules followed (GAAP or IFRS), the risk of errors and inaccuracies in revenue reporting is significant (Kieso, Weygandt, and Warfield 2013, 1042). From the TSA case, provide one example of each assertion that the revenue recognition process is (a) complex to manage, (b) prone to error, (c) material to financial statements, and (d) a top fraud risk.
- In 2000, TSA stated in its footnote on revenue recognition that: The Company recognizes software license fees upon execution of the signed contract, delivery of the software to the customer, the determination that the software license fees are fixed or determinable, and determination that the collection of the software license fees is probable [TSAI 2000, 40; emphasis added]; emphasis added]
o Why is a judgment on the probable collection of accounts receivable an important element in determining whether revenue should be recognized? How is this feature addressed in ASU 2014-09 (refer to ASC 606-10-25-1(e))? Distinguish between the role of collectability and credit risk in your answer (refer to BC 42, 43, 260, and 265 in ASU 2014-09) and explain why their accounting differs. In the five-step process for revenue recognition, to which step(s) does this requirement pertain? Explain.
o For certain contracts for which revenue was recognized in fiscal years 2000 and 2001, it was later determined that collection was not probable at the contract’s inception. TSA later restated its year 2000 and 2001 financial statements to correct for this error. In the corrected financial statements, software license revenue was recognized when cash was received on contracts where collectability was not reasonably assured at inception. What would be the impact of this correction on (1) revenue and (2) bad debt expense in years 2000 and 2001 financial statements? Explain your answer. Consider only transactions for which the company failed to collect all or some of the license fees it initially recognized as revenues when collectability was not assured. TSA uses a balance sheet approach (percent of receivables) to estimate bad debt expenses. - Assume that TSA, Inc. entered into a contract with client Anon for $230,000 on January 1, Year 1, to transfer a software license and an additional $15,000 for installation of the software. The license entitles Anon to use the software in its current form over an unlimited period and does not include updates. Two years of customer support come free with the license. In recent stand-alone contracts with other customers for the same software, TSA has charged $200,000 for the software license, $40,000 for two-year customer support, and $20,000 for installation. The software is usable without customer support from TSA, and other vendors can install it. The installation is expected to take 250 hours, of which 150 hours will be required in Year 1 and the remainder in Year 2. The entire fee of $245,000 is collected on the contract date. Base your answers on the conceptual framework in ASC 606.
o Determine the number of performance obligations and the contract price to be allocated to each in the following situations:
The installation service does not modify the software.
Installation involves customizing the software to work seamlessly with other software used by the customer. As before, the installation can be performed by other firms as well.
o Explain why your responses in i and ii above differ, referring to ASC 606-10-55 (paras. 146 and 147) and 606-10-25 (paras. 14, 19, 20, and 21).
o How much revenue will be booked in Years 1 and 2 from the contract in each case? Assume that all conditions for revenue recognition other than those specified have been met in the situations above. - In ASU 2014-09, pages 7–8, FASB asserts that its new guidance on revenue recognition is principles-based, whereas prior standards in this area followed a rules-based approach.
o Explain why you consider that ASU 2014-09 is principles-based.
o Provide a counter-argument that the standard is not entirely principles-based
Submission Requirements:
• Write a paper of 10-12 pages, double-spaced in length, not counting the title and the reference pages, which you must include. Submissions in excess of 12 pages are acceptable.
• Copy and paste each one of the Questions into your paper in bold type (Questions are to be single-spaced) to ensure you have answered each of the Assignment Requirements.
• Use terms, evidence, and concepts from class readings, including professional business language.
• Cite at least 5 credible, academic or professional sources supporting your answers for this assignment. The CSU Global LibraryLinks to an external site. is a great place to find resources.
