Accounting Case study
The financial statements regarding the disclosures of the significant changes in accounting are not appropriate and adequate in real terms. This is because according to the provisions of the statement of position No. 97
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2, software revenue recognition a four part conjunctive test must be attained. One of the elements of this conju n ctive test is the compulsory exist ence of persuasive evidence.
This is in regard to paragraph 17 which states that even if all other requirements for revenue recognition are met, revenue should be recognized as persuasive evidence of an arrangement exists.
In the case of upstream persuasi ve evidence of contract does not exist as there is no objective and specific post contract customer support.
Another conju n ctive element that must be met is the fact that the vendor’s ( up stream) must be fixed or determinable for revenue recognition to be achieved. I n the case of upstream it is quite evident that there was no vendor specific evidence of fair value of the PCS on a standalone basis. This further ma kes the financial treatments inappropriate as this would lead to consequences such as extended p ayment or the right to cancellation of software contracts.
Therefore, to avert this it is prudent to include a predetermined fixed price in order for this conjunctive to be met
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The recognition of revenue on straight line basis in the upstream case is also not appropriate. This is because there is no existence of vendor specific objective in this contract. According to the provisions of the modification of SOP 97
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2 in AICPA statement of position no 98
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9
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the residual method must exist as there is evidence of undelivered elements and therefore revenue recognition should be deferred . In this case the residual method