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Intermediate Accounting I - Spring 2013 Sessions 5-6 SCF Rev. Rec. Installment Sales Long-term Contracts Cash & Receivables
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Intermediate Accounting I - Spring 2013 Sessions 5-6 SCF Rev. Rec. Installment Sales Long-term Contracts Cash & Receivables.

Dec 18, 2015

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Page 1: Intermediate Accounting I - Spring 2013 Sessions 5-6 SCF Rev. Rec. Installment Sales Long-term Contracts Cash & Receivables.

Intermediate Accounting I - Spring 2013

Sessions 5-6SCF

Rev. Rec. Installment Sales

Long-term ContractsCash & Receivables

Page 2: Intermediate Accounting I - Spring 2013 Sessions 5-6 SCF Rev. Rec. Installment Sales Long-term Contracts Cash & Receivables.

Intermediate Accounting I - Spring 2013

Realization Principle

Process must be complete

Collection must be assured

Page 3: Intermediate Accounting I - Spring 2013 Sessions 5-6 SCF Rev. Rec. Installment Sales Long-term Contracts Cash & Receivables.

Intermediate Accounting I - Spring 2013

Revenue Recognition ASC 605-10-S99 (SAB 101)

C: collection must be assured

D: delivery must have occurred

E: persuasive evidence of an arrangement

F: fixed price

Page 4: Intermediate Accounting I - Spring 2013 Sessions 5-6 SCF Rev. Rec. Installment Sales Long-term Contracts Cash & Receivables.

Intermediate Accounting I - Spring 2013

Points of Recognition

At delivery--usual approach Before delivery--L/T contracts After delivery--installment sales

Page 5: Intermediate Accounting I - Spring 2013 Sessions 5-6 SCF Rev. Rec. Installment Sales Long-term Contracts Cash & Receivables.

Intermediate Accounting I - Spring 2013

Abusive Revenue Recognition

Bausch & Lomb Oracle Corporation “ship ahead” orders

Page 6: Intermediate Accounting I - Spring 2013 Sessions 5-6 SCF Rev. Rec. Installment Sales Long-term Contracts Cash & Receivables.

Intermediate Accounting I - Spring 2013

Class Discussion

Why all the concern over revenue recognition?

Page 7: Intermediate Accounting I - Spring 2013 Sessions 5-6 SCF Rev. Rec. Installment Sales Long-term Contracts Cash & Receivables.

Intermediate Accounting I - Spring 2013

General Considerations

See Graphic 5-3 in Chapter 5 Revenue recognition prior to delivery Revenue recognition at delivery Revenue recognition after delivery

Page 8: Intermediate Accounting I - Spring 2013 Sessions 5-6 SCF Rev. Rec. Installment Sales Long-term Contracts Cash & Receivables.

Intermediate Accounting I - Spring 2013

Installment Sales

Cash receipts Pro-rate using gross profit percentage

Cost recovery method: Defer until after costs are covered

Page 9: Intermediate Accounting I - Spring 2013 Sessions 5-6 SCF Rev. Rec. Installment Sales Long-term Contracts Cash & Receivables.

Intermediate Accounting I - Spring 2013

Special Revenue Issues

Right of return (distributors)

Consignment (transfer of risk)

Software and similar issues --ASC 985-605-25 (SOP 97-2) and ASC 605-25-25(EITF 08-1)

Page 10: Intermediate Accounting I - Spring 2013 Sessions 5-6 SCF Rev. Rec. Installment Sales Long-term Contracts Cash & Receivables.

Intermediate Accounting I - Spring 2013

Software Revenue Recognition

SOP 97-2 Pro-rata based on revenue measurement Give consideration to related costs as well

EITF 08-1 Expands SOP 97-2 to situations other than s/w

Page 11: Intermediate Accounting I - Spring 2013 Sessions 5-6 SCF Rev. Rec. Installment Sales Long-term Contracts Cash & Receivables.

Intermediate Accounting I - Spring 2013

Long-Term Contracts

Page 12: Intermediate Accounting I - Spring 2013 Sessions 5-6 SCF Rev. Rec. Installment Sales Long-term Contracts Cash & Receivables.

Intermediate Accounting I - Spring 2013

Long-term Contracts

Methodology Entries Key Accounts Special Conditions

Page 13: Intermediate Accounting I - Spring 2013 Sessions 5-6 SCF Rev. Rec. Installment Sales Long-term Contracts Cash & Receivables.

Intermediate Accounting I - Spring 2013

Key Accounts

Construction in progress-CIP

Billings (contra to CIP)

Cost of construction (similar to COGS)

Page 14: Intermediate Accounting I - Spring 2013 Sessions 5-6 SCF Rev. Rec. Installment Sales Long-term Contracts Cash & Receivables.

Intermediate Accounting I - Spring 2013

Methodology

Percentage of completion Completed contract Disclose in Summary of Significant Accounting

Policies

Page 15: Intermediate Accounting I - Spring 2013 Sessions 5-6 SCF Rev. Rec. Installment Sales Long-term Contracts Cash & Receivables.

Intermediate Accounting I - Spring 2013

Percentage of Completion

Determine costs to date Estimate total costs Calculate gross profit estimate

Page 16: Intermediate Accounting I - Spring 2013 Sessions 5-6 SCF Rev. Rec. Installment Sales Long-term Contracts Cash & Receivables.

Intermediate Accounting I - Spring 2013

Entries-I For both methods:

Record construction costs (actual payments) CIP XXX

Cash, etc. XXX Record progress billings (actual billings)

A/R XXX

Billings (contra) XXX Record cash receipts (actual cash)

Cash XXX

A/R XXX

Page 17: Intermediate Accounting I - Spring 2013 Sessions 5-6 SCF Rev. Rec. Installment Sales Long-term Contracts Cash & Receivables.

Intermediate Accounting I - Spring 2013

Entries-II For percentage of completion:

Record est. annual gross profit CIP XXX

Cost of constr. XXX

Revenue XXX Close out accounts

Billings XXX

CIP XXX

Page 18: Intermediate Accounting I - Spring 2013 Sessions 5-6 SCF Rev. Rec. Installment Sales Long-term Contracts Cash & Receivables.

Intermediate Accounting I - Spring 2013

Entries-III For completed contract:

Record total gross profit CIP XXX

Cost of construction XXX

Revenue XXX Close out accounts

Billings XXX

CIP XXX

Page 19: Intermediate Accounting I - Spring 2013 Sessions 5-6 SCF Rev. Rec. Installment Sales Long-term Contracts Cash & Receivables.

Intermediate Accounting I - Spring 2013

Special Conditions

Losses Single period: change in accounting estimate

Period amount Overall: change in accounting estimate

Total amount

Page 20: Intermediate Accounting I - Spring 2013 Sessions 5-6 SCF Rev. Rec. Installment Sales Long-term Contracts Cash & Receivables.

Intermediate Accounting I - Spring 2013

Time Value of Money

On your own!!!

Page 21: Intermediate Accounting I - Spring 2013 Sessions 5-6 SCF Rev. Rec. Installment Sales Long-term Contracts Cash & Receivables.

Intermediate Accounting I - Spring 2013

Cash and Receivables

Page 22: Intermediate Accounting I - Spring 2013 Sessions 5-6 SCF Rev. Rec. Installment Sales Long-term Contracts Cash & Receivables.

Intermediate Accounting I - Spring 2013

Cash & Receivables

Cash Receivables Discounts & Returns Notes Receivable

Page 23: Intermediate Accounting I - Spring 2013 Sessions 5-6 SCF Rev. Rec. Installment Sales Long-term Contracts Cash & Receivables.

Intermediate Accounting I - Spring 2013

Cash Most liquid asset Focal point on internal controls

Segregation of duties Cash equivalents--90 day rule Bank reconciliation Cash restrictions

Restricted cash Compensating balances Overdrafts

Page 24: Intermediate Accounting I - Spring 2013 Sessions 5-6 SCF Rev. Rec. Installment Sales Long-term Contracts Cash & Receivables.

Intermediate Accounting I - Spring 2013

Bank Reconciliations

Balance per bank statement Add: deposits in transit Less: outstanding checks Equals corrected balance

Adjust your checkbook to the corrected balance

Page 25: Intermediate Accounting I - Spring 2013 Sessions 5-6 SCF Rev. Rec. Installment Sales Long-term Contracts Cash & Receivables.

Intermediate Accounting I - Spring 2013

Accounts Receivable Value at net realizable value

Use the allowance for doubtful accts. Cash discounts--gross or net

Gross is preferred due to simplicityA/R xxx

Sales xxxCash xxxSales discount xxx

A/R xxx

A/R, net xxxSales, net xxx

Cash xxxA/R xxxInterest Revenue xxx

Gross

Net

Page 26: Intermediate Accounting I - Spring 2013 Sessions 5-6 SCF Rev. Rec. Installment Sales Long-term Contracts Cash & Receivables.

Intermediate Accounting I - Spring 2013

Sales Returns

Provide an allowance if materialA/R xxx

Sales xxx

COGS xxx

Inventory

Sales Returns xxx

A/R xxx

Inventory xxx

COGS xxx

Sales Returns xxx

Allowance for Returns xxx

Invent.-Est.Rtns xxx

COGS xxx

Page 27: Intermediate Accounting I - Spring 2013 Sessions 5-6 SCF Rev. Rec. Installment Sales Long-term Contracts Cash & Receivables.

Intermediate Accounting I - Spring 2013

Doubtful Accounts

Provide an allowance if materialBad Debt Exp. xxx

Allowance xxx

Allowance xxx

A/R xxx

A/R xxx

Allowance xxx

Cash xxx

A/R xxx

Income Statement:

•% of Credit Sales Approach

Balance Sheet:

•Aging Approach

Page 28: Intermediate Accounting I - Spring 2013 Sessions 5-6 SCF Rev. Rec. Installment Sales Long-term Contracts Cash & Receivables.

Intermediate Accounting I - Spring 2013

Notes Receivable

Interest bearing…accrue interest Non-interest bearing…discount interest Use allowance to reflect bad debts

Page 29: Intermediate Accounting I - Spring 2013 Sessions 5-6 SCF Rev. Rec. Installment Sales Long-term Contracts Cash & Receivables.

Intermediate Accounting I - Spring 2013

Financing Options Assigning and pledging

Assigning requires recording of the transaction Pledging requires disclosure

Factoring and securitization With and without recourse Securitization: purchase of A/R and resale as a security

Sales conditions: surrender of control

See Graphic 7-17

Page 30: Intermediate Accounting I - Spring 2013 Sessions 5-6 SCF Rev. Rec. Installment Sales Long-term Contracts Cash & Receivables.

Intermediate Accounting I - Spring 2013

Discounting (transferring) the Note

Accrue interest at transfer date Add interest to maturity Deduct discount to determine cash See Illustration 7-18

Treat as sale or loan Sale treatment is preferred See Graphic 7-19

Page 31: Intermediate Accounting I - Spring 2013 Sessions 5-6 SCF Rev. Rec. Installment Sales Long-term Contracts Cash & Receivables.

Intermediate Accounting I - Spring 2013

Monitoring A/R

Aging

DSO

Cash Conversion Cycle