To: Bruce Darling
From: Jordyn Peterson
Date: October 28, 2014
Subject: Revenue Recognition

The SEC provides criteria to help assess risks for the timing of revenue recognition. Recognizing revenue can be difficult to decide so auditors refer to the provided guidance to apply the concept that revenue should not be recognized until it is realized or is realizable and earned. The criteria to help decide when revenue should be recognized includes: * Pervasive evidence of an arrangement exists * Delivery has occurred or services have been rendered * The seller’s price is fixed or determinable * The collectability is reasonably assured
These criteria are just a simple guideline because depending on the client the recognition could be different. The auditor must further research a client’s transactions regarding aspects such as contracts, shipment of goods, passing of title, sales transactions and returns so they are able to make an informed judgment to determine when and how to recognize revenue.
Separate Deliverables
The key feature when determining revenue recognition in AOL’s software package is deciding if the sale of software and the monthly Internet services are separate deliverables. If they are not separate deliverables they should be combined and treated as a single unit of accounting. The auditor should gather information regarding if they sell the Internet service and the software separately and if the arrangement has a right to return the service and product by themselves. Based on the information given, AOL should recognize the $19.95 as one accounting transaction to record revenue from the software and the services as the services are provided because the collectability is reasonably assured.
Bill & Hold
The key feature to determine the recognition of revenue is that the product is being held waiting for the customer’s instructions to ship, known as bill and hold. The auditor needs to find what point in time to recognize this revenue because they have already built the machinery but the customer is having Modis hold the products until they finish rebuilding their factory. An auditor would want to gather information regarding when the risks of ownership have passed to the customer, if there is a scheduled delivery date, if there are any remaining duties Modis needs to complete and history of bill and hold transactions. Since the machinery is not being delivered we cannot recognize the full amount of revenue. Instead, a portion of revenue for holding the equipment should be recognized during this time and when the equipment is delivered the rest of the revenue should be recognized.
High Returns
The key feature to determine the recognition of revenue is there is a right of return within one year of purchase. This creates a problem to determine when to recognize revenue because the collectability is not reasonably assured if the customer returns the product. The auditor should research information regarding what epercentage of high-end stores returned the silverware and introduction of these products by competitors. Since they do not have a history of returns for the new products Standish is not able to make a reasonable estimate of the amount of future product returns so they should not recognize any revenue until the return privilege is expired or the loss can be estimated.
Special Deals
The key feature to determine revenue recognition is the special deal that Omer Technologies is allowing staff to include a price break and an increased commission in order to increase sales during the fourth quarter. Auditors should research past information regarding what percentage of sales included warranties or returns. In this case, revenue should be recognized once the customer buys the product from Omer Technologies, just as how they have recognized revenue in the past. They are able to estimate the amount of warranties and returns using past information because they are not offering an extension in the product warranty or the right to return the product.
Recognizing New Technology
The key issue to determine revenue recognition is Electric City allows a pilot-testing period for customers to try the new energy saving technologives. Auditors should gather more information on the amount of returns the technology has had in Europe and if the title passes once the customer starts the trial for testing the technology. They should also gather information regarding how the company determines that they are confident that the customers will buy the product after testing it out. Pervasive evidence of an arrangement does not exist because the customers are not actually purchasing the product. The revenue from the products should not be recognized until the customer has finished the 6 month trail period and the customer has decided if they would like to purchase the product or not.
Sale of Old Equipment
The key issue to determine revenue recognition is if Jackson Products should recognize the sale of existing equipment as revenue. Jackson Products id outsourcing it’s production and selling existing and newly ordered equipment to other companies as revenue The auditor should research additional information regarding how much existing equipment Jackson Products has, if they are going to keep selling existing equipment as a part of their product line and if the outsourced equipment and existing equipment is similar. With the information given, Jackson Products should record existing equipment and newly ordered equipment as revenue when sold because it applies to all the criteria provided by the SEC but should maybe be a separate revenue account such as revenue from sale of old equipment