ACCT 301 DB 1

Judgment Case 1-12

A new client, the Wolf Company, ask your advice concerning the point in time that the company should recognize revenue from the rental of its office buildings. Renters usually pay rent on a quarterly basis at the beginning of the quarter. The owners contend that the critical event that motivates revenue recognition should be the date the cash is received from renters. After all, the money is in hand and is very seldom returned.

Required:

Do you agree or disagree with the position of the owners of Wolf Company? Support your answer.

“Revenues are inflows of assets or settlements of liabilities resulting in providing a product or service to a customer.” (Spiceland, Sepe, Nelson, & Thomas, 2016, pg.28)

“The timing of revenue recognition is a key element of earnings measurement. Not adhering to revenue recognition criteria could result in overstating revenue and hence net income in one reporting period and, consequently, understating revenue and net income in another period.” (Spiceland, Sepe, Nelson, & Thomas, 2016, pg.28)

“On May 28, 2014, the FASB and the International Accounting Standards Board (IASB) issued converged guidance on recognizing revenue in contracts with customers.” (FASB, 2017)

“The objective of the new guidance is to establish principles to report useful information to users of financial statements about the nature, amount, timing, and uncertainty of revenue from contracts with customers.” (FASB, 2017) The new guidance provided therein included that of improving the comparability of the practices of revenue recognition across entities, industries, jurisdictions, and capital markets.

While taking in the consideration of the realization principle, which requires that two criteria be satisfied before the revenue can be recognized, I would have to say that the earnings process is complete or virtually complete.

I would have to disagree as the second critera necessary for revenue recognition has been satisfied. Yet, the earnings process is not entirely complete. Revenue should be recognized over the time period that the office buildings are being rented and not at the beginning of

“According to FAS 48, when a right of return exist, a seller may recognize the revenue from the sale of a product only if all of the following conditions are met” (Phillips, 2010, pg.619) This source then goes on to state all the requirements that must be met in order to recognize the revenue acquired in this situation. In reviewing those requirements I would feel more justified in disagreeing with the owners of Wolf Company as the office building could become vacant at any time proving to decrease revenue

References

FASB, Financial Accounting Standards Board. (n.d.). Retrieved August 29, 2017, from http://www.fasb.org/jsp/FASB/Page/ImageBridgePage&cid=1176169257359

Phillips, L. (2010). “The Implications of IFRS on the Functioning of the Securities Antifraud Regime in the United States.” Michigan Law Review, 108(4), 603-631. Retrieved from http://www.jstor.org/stable/40379826

Spiceland, J. D., Sepe, J. F., Nelson M. W., & Thomas W. B. (2016). Intermediate Accounting (8th ed.). Boston, MA: McGraw-Hill/Irwin.