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Chapter 18: 2Q (page 1031)

What was viewed as a major criticism of GAAP as it relates to revenue recognition?

Short Answer

Expert verified

GAAP had numerous standards related to revenue recognition, but they were often inconsistent with one another.

Step by step solution

01

Introduction to Prior Standards  

According to asurvey,in prior standards,financial executives noted that the revenue recognition process is increasingly complex to manage, more prone to error, and more material to financial statements than any other financial reporting area.

The report noted that revenue recognition is a top fraud risk and that regardless of the accounting rules followed (GAAP or IFRS), the risk of errors and inaccuracies in revenue reporting is significant.

02

The explanation for lack of guidance

The FASB and the IASB have indicated that the state of reporting for revenue was unsatisfactory. IFRS was criticized because it lacked guidance in a number of areas.

IFRS had one general standard on revenue recognition plus some limited guidance related to certain minor topics. In contrast, GAAP had numerous standards related to revenue recognition, but many believed the standards were often inconsistent with one another.

Thus, the accounting for revenue provided a most fitting contrast of the principles-based (IFRS) and rules-based (GAAP) approaches.

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Most popular questions from this chapter

Manual Company sells goods to Nolan Company during 2017. It offers Nolan the following rebates based on total sales to Nolan. If total sales to Nolan are 10,000 units, it will grant a rebate of 2%. If it sells up to 20,000 units, it will grant a rebate of 4%. If it sells up to 30,000 units, it will grant a rebate of 6%. In the first quarter of the year, Manual sells 11,000 units to Nolan at a sales price of $110,000. Manual, based on past experience, has sold over 40,000 units to Nolan, and these sales normally take place in the third quarter of the year. What amount of revenue should Manual report for the sale of the 11,000 units in the first quarter of the year?

On what basis should the transaction price be allocated to various performance obligations? Identify the approaches for allocating the transaction price.

(Franchise Fee, Initial Down Payment) On January 1, 2017, Lesley Benjamin signed an agreement, covering 5 years, to operate as a franchisee of Campbell Inc. for an initial franchise fee of \(50,000. The amount of \)10,000 was paid when the agreement was signed, and the balance is payable in five annual payments of $8,000 each, beginning January 1, 2018. The agreement provides that the down payment is nonrefundable and that no future services are required of the franchisor once the franchise commences operations on April 1, 2017. Lesley Benjamin’s credit rating indicates that she can borrow money at 11% for a loan of this type.

Instructions

(c) Repeat the requirements for part (a), assuming that Campbell must provide services to Benjamin throughout the franchise period to maintain the franchise value.

What qualitative and quantitative disclosures are required related to revenue recognition?

Tablet Tailors sells tablet PCs combined with Internet service, which permits the tablet to connect to the Internet anywhere and set up a Wi-Fi hot spot. It offers two bundles with the following terms.

1. Tablet Bundle A sells a tablet with 3 years of Internet service. The price for the tablet and a 3-year Internet connection service contract is \(500. The standalone selling price of the tablet is \)250 (the cost to Tablet Tailors is \(175). Tablet Tailors sells the Internet access service independently for an upfront payment of \)300. On January 2, 2017, Tablet Tailors signed 100 contracts, receiving a total of \(50,000 in cash.

2. Tablet Bundle B includes the tablet and Internet service plus a service plan for the tablet PC (for any repairs or upgrades to the tablet or the Internet connections) during the 3-year contract period. That product bundle sells for \)600. Tablet Tailors provides the 3-year tablet service plan as a separate product with a standalone selling price of \(150. Tablet Tailors signed 200 contracts for Tablet Bundle B on July 1, 2017, receiving a total of \)120,000 in cash.

Instructions

(c) Repeat the requirements for part (a), assuming that Tablet Tailors has no reliable data with which to estimate the stand-alone selling price for the Internet service.
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