Amanda Eng. Alipasha Ziaee's Revenue Recognition Case

ACCT 301­01 Carlos Briones
Revenue Recognition Case Amanda Eng
Alipasha Ziaee

1. Revenue Recognition for Multiple­Element Arrangements ­ The Case of Velocity
Cellular

a) According the ASC 605­25­25­5 there are two criteria that must be met in order to be considered a separate deliverable and a separate unit of accounting:
i. The delivered item or items have value to the customer on a standalone basis. The item or items have value on a standalone basis if they are sold separately by any vendor or the customer could resell the delivered item(s) on a standalone basis. In the
If the arrangement includes a general right of return relative to the delivered item, delivery or performance of the undelivered item or items is considered probable and substantially in the control of the vendor.
(
ASC 605­25­25­5) Criterion i. is met because activation cards have value to the customers on a standalone basis. Activation cards are sold by Velocity Cellular, as well as independent wireless retailers as a standalone product. Criterion ii. is met because there is no general rights of return relative to the delivered item contained in the prepaid plan, this makes criterion b. not applicable. The activation card is a separate deliverable and a separate unit of accounting in accordance with ASC 605­25.

b) The proper allocation of revenue between the activation card and prepaid voucher can be found in ASC 605­25­25­2 which states:
The principles applicable to this Subtopic are as follows:
a. Revenue arrangements with multiple deliverables shall be divided into separate units of accounting if the deliverables in the arrangement meet the criteria in paragraph
605­25­25­5
.
b. Arrangement consideration shall be allocated among the separate units of accounting based on their relative selling
The services are not essential to the functionality of any other element of the transaction. b. The services are described in the contract such that the total price of the arrangement would be expected to vary as the result of the inclusion or exclusion of the services.

b) If software requires modification or additional development, revenue for the software product should be based on the percentage­of­contract or the completed­contract method. This is based off ASC 985­605­25­88 and ASC
985­605­25­89.

Contract Accounting
25­88 If an arrangement to deliver software or a software system, either alone or together with other products or services, requires significant production, modification, or customization of software, the service element does not meet the criteria for separate accounting set forth in paragraph
985­605­25­78
. The entire arrangement shall be accounted for in conformity with the relevant guidance in Subtopic 605­35
. Nevertheless, transactions that normally are accounted for as product sales shall not be accounted for as long­term contracts merely to avoid the delivery requirements normally associated with product sales for revenue recognition. (ASC