Revenue recognition is one of the most common issues that an auditor faces when working with companies. This is due to the differences in the products and services offered from companies to their customers. For example, revenue recognition for physical items is different than offered services where the company might be obligated to follow up on customer’s needs in a future date. a- According to the US Securities and Exchange Commission (SEC), there are general criteria on revenue recognition that companies need to follow. Auditors’ job is to confirm that companies are following the guidelines when they review the financial statements of companies across the nation. The following criteria must be met with regard to revenue recognition: * Persuasive evidence of an arrangement exists.
* Delivery has occurred or services have been rendered.
* The seller’s price to the buyer is fixed or determinable * Collectability is reasonably assured.
These are general statement and each case may need to be analyzed further as there are many guidelines to follow under these statements. b- Revenue Recognition Scenarios :
1- With the AOL scenario, it is important to note that this is a bundled service which includes the contract and the internet service. The internet service can not be operated without the contract and therefore according to SAB-101 “the delivery of an individual element is considered not to have occurred if there are undelivered elements that are essential to the functionality of the delivered element because the customer does not have the full use of the delivered element.” Therefore, it is not allowed to recognize 30% of the contract immediately since no service have been rendered at the time. There should also be additional information to note as for the return and cancelation of service policies to consider. Therefore, the company should only recognize the monthly $19.95 after the service have been...