Sab 104
CASE STUDY 3
SEC STAFF ACCOUNTING BULLETIN 104-REVENUE RECOGNITION
Required:
1. Access the SEC website, www.sec.gov, and open the Staff Accounting Bulletin (SAB) section to SAB104. Disregard the first 8 pages.
2. List the 4 criteria which the SEC decided was necessary to further clarify the basic revenue accounting concepts of “realized or realizable and earned”. • 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
3. Why do you believe it was necessary for the SEC to provide this detailed guidance beyond basic concepts? I believe that it was necessary for the SEC to provide this guidance, as the phrase/words “realized and earned” are extremely broad and open to interpretation. Just stating those two words leaves a large amount of room for manipulation by companies since they may all choose to realize and earn revenue whatever way that makes their financials look best. By providing more detailed guidance, companies report on a more comparable basis or level playing field.
4. In your own words using the examples provided, describe, in summary form, what concepts the SEC were attempting to clarify with each of the 4 items in 2 above.
Persuasive Evidence of an Arrangement • If an arrangement is subject to subsequent approval or execution of another agreement, revenue recognition shouldn’t occur until everything is completed • Written contracts, binding purchase orders from 3rd parties, or online authorizations that include terms of the sale and that are binding also provide persuasive evidence • Side Agreements o Could include cancellations, termination or other provisions that indicate the original agreement wasn’t final and shouldn’t be recognized as revenue • Consignment Basis o Products delivered aren’t sales because seller retains risk and rewards of
SEC STAFF ACCOUNTING BULLETIN 104-REVENUE RECOGNITION
Required:
1. Access the SEC website, www.sec.gov, and open the Staff Accounting Bulletin (SAB) section to SAB104. Disregard the first 8 pages.
2. List the 4 criteria which the SEC decided was necessary to further clarify the basic revenue accounting concepts of “realized or realizable and earned”. • 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
3. Why do you believe it was necessary for the SEC to provide this detailed guidance beyond basic concepts? I believe that it was necessary for the SEC to provide this guidance, as the phrase/words “realized and earned” are extremely broad and open to interpretation. Just stating those two words leaves a large amount of room for manipulation by companies since they may all choose to realize and earn revenue whatever way that makes their financials look best. By providing more detailed guidance, companies report on a more comparable basis or level playing field.
4. In your own words using the examples provided, describe, in summary form, what concepts the SEC were attempting to clarify with each of the 4 items in 2 above.
Persuasive Evidence of an Arrangement • If an arrangement is subject to subsequent approval or execution of another agreement, revenue recognition shouldn’t occur until everything is completed • Written contracts, binding purchase orders from 3rd parties, or online authorizations that include terms of the sale and that are binding also provide persuasive evidence • Side Agreements o Could include cancellations, termination or other provisions that indicate the original agreement wasn’t final and shouldn’t be recognized as revenue • Consignment Basis o Products delivered aren’t sales because seller retains risk and rewards of