Boston Automation Systems, Inc.
1.What is (are) Boston’s current revenue recognition policy (ies)?
As of 1999 annual report, the company recognizes the revenue upon shipment. But this will change with SAB 101. The company will wait until the delivery and customer acceptance to recognize the revenue In addition to that they also calculate the estimated warranty costs. The company recognizes the service revenues as the services are provided (not before the services are provided) The Company does not count in service revenue with other revenues (revenues from product sales and installation, maintenance) For long term certain contracts, the company uses percentage of completion method for revenue recognition.
Percentage completion da kullaniyolar.
2.Does this policy or the industry characteristics encourage manipulation of revenue recognition?
The company has 3 divisions and each division has large number of clients whose expectations from the company are different from each other. This company manufactures complex and expensive equipments. It is very natural that each customer has different needs in this industry. Sometimes they ask for customer acceptance clause, and sometimes they may ask for modifying the product to a specific product line. Some of them want to pay after the installation and test period and some of them pay before shipment. These characteristics encourage the manipulation of revenue recognition. You have to listen your clients because these are high-priced contracts and the company has to give what their products ask from them. Sometimes these contracts state that the customer will pay 90 days after the delivery even if the equipment is not installed, and sometimes these contracts state that there will be no payment until the installation and tests.
3.For each of the specific contracts described in the case, please describe the best revenue recognition policy considering the criteria in SAB 101.
A- Glendale Division
The Glendale Division’s current revenue recognition policy is almost consistent with SAB 101 right now. They have one standard product. Now they recognize the revenue upon shipment but their contracts include customer acceptance clause. If the company wants to implement the SAB 101, they will have to change their recognition policy. Title of the equipment passes on the delivery of the equipment but this is not enough for the company to recognize the revenue. The company has to wait until the customer acceptance. Customer has a right to ask for a refund, replacement or repair. In addition to that there has to be a written or electronic evidence for purchase authorization in the hands of the seller before revenue is recognized.
Trycom, Inc. placed an order for a standard product. The sales contract has already included a customer acceptance clause. The SAB 101 also states that, the company cannot recognize the revenue without customer acceptance. The Boston Company tested the equipment and according to them there was no reason to believe that equipment would not operate in the same way in the customer’s facility. But Trycom, Inc. claimed a failure about the equipment, the Boston Company cannot recognize the revenue until the customer acceptance. Because a seller should substantially complete or fulfill the terms specified in the sales arrangement, and there is an uncertainty about the acceptance right now. Or, if there was no claim (but also no sign off in 90 day period) although the contract includes a customer acceptance clause, acceptance is based on meeting division’s published specifications for a standard model. The division should consider the warranty costs and recognize the revenue upon delivery.
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