Cola Wars HBR
Five-Step Approach to Unstructured Problems
1. Succinct Statement of the Financial Reporting Issue(s)
When has a company completed its side of an arrangement, allowing it to record a sale and related loss contingencies (recall product costs), while still conforming to GAAP?
2. Brief Summary of the Economic Purpose of the Transaction
To better match revenues and expenses, Frequent Fixer has proposed recognizing all of its recall product costs at the time of sale to match its competitors. Currently, Frequent Fixer only recognizes “small campaigns” (projected product recall costs of less than $100,000) at the time of sale and delays recognizing “major campaigns” until occurrence.
3. List of Alternative Ways to Report the Transaction
A. Recognize all contingent liabilities (recall product losses) at the time of sale for all campaigns.
B. For all campaigns disclose information on the contingencies in the footnotes at the time of sale and recognize all contingent liabilities (recall product losses) at the time of occurrence.
C. Recognize the contingent liabilities (recall product losses) at the time of sale for small campaigns and at the time of occurrence for major campaigns (while still recording estimates in the footnotes at the time of sale).
D. Do not recognize a sale until the warranty period has expired (3 years) and subsequently recognize the recall product losses for the major campaigns.
E. Do not recognize any sale subject to recall product costs, until the warranty period has expired (3 years) for all campaigns.
4. Neutral Discussion of the Major Alternatives, Citing Relevant Authoritative Literature and Theoretical Concepts
Alternatives A-C Support:
ASC 450-20-25-2: Contingent Liability Requirements
“An estimated loss from a loss contingency shall be accrued by a charge to income if both […] conditions are met:
a. Information available before the financial statements are issued […] indicates that
1. Succinct Statement of the Financial Reporting Issue(s)
When has a company completed its side of an arrangement, allowing it to record a sale and related loss contingencies (recall product costs), while still conforming to GAAP?
2. Brief Summary of the Economic Purpose of the Transaction
To better match revenues and expenses, Frequent Fixer has proposed recognizing all of its recall product costs at the time of sale to match its competitors. Currently, Frequent Fixer only recognizes “small campaigns” (projected product recall costs of less than $100,000) at the time of sale and delays recognizing “major campaigns” until occurrence.
3. List of Alternative Ways to Report the Transaction
A. Recognize all contingent liabilities (recall product losses) at the time of sale for all campaigns.
B. For all campaigns disclose information on the contingencies in the footnotes at the time of sale and recognize all contingent liabilities (recall product losses) at the time of occurrence.
C. Recognize the contingent liabilities (recall product losses) at the time of sale for small campaigns and at the time of occurrence for major campaigns (while still recording estimates in the footnotes at the time of sale).
D. Do not recognize a sale until the warranty period has expired (3 years) and subsequently recognize the recall product losses for the major campaigns.
E. Do not recognize any sale subject to recall product costs, until the warranty period has expired (3 years) for all campaigns.
4. Neutral Discussion of the Major Alternatives, Citing Relevant Authoritative Literature and Theoretical Concepts
Alternatives A-C Support:
ASC 450-20-25-2: Contingent Liability Requirements
“An estimated loss from a loss contingency shall be accrued by a charge to income if both […] conditions are met:
a. Information available before the financial statements are issued […] indicates that