lec9 - Receivables and Revenue Recognition 15.511 Corporate...

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1 Receivables and Revenue Recognition 15.511 Corporate Accounting Summer 2004 Professor SP Kothari Sloan School of Management Massachusetts Institute of Technology June 21, 2004
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Why do we care about revenue recognition? ± Revenue has a BIG impact on bottom-line profitability ==> managers may be tempted to manage revenue ± Large Sample Evidence: over 40% of SEC enforcement actions on accounting issues deal with Revenue Recognition 2
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Criteria for revenue recognition ± Under accrual accounting, a firm recognizes revenue when it has: ± Delivered goods and the title is transferred to the buyer ± Performed all, or a substantial portion of, the services to be provided. ± Incurred a substantial majority of the costs, and the remaining costs can be reasonably estimated. ± Received either cash, a receivable, or some other asset for which ± a reasonably precise value can be assigned ± collectibility is reasonably assured. ± Guidance on revenue recognition in SAB 101 (Details to those interested on the next slide) 3
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z Fuelled by recent accounting scandals z Issued by SEC: SAB 101 took effect in calendar year 2000. z In general, SEC said that the most common reasons for changes in revenue recognition policies to comply with SAB 101 were: z Deferral of revenue on product sales until such products are delivered, and title transfers to the customer. z Deferral of various up-front, or prepaid, fees for which the company had not completed a separate earnings process. z Deferral of revenue until certain non-perfunctory seller obligations (such as equipment installation) were completed. z Deferral of revenue that is contingent on the occurrence of some future event (such as the achievement by a lessee of certain minimum sales thresholds) until that event occurs. z Did the SEC over-react with SAB 101? Altamuro, Jennifer, Anne Beatty, and Joseph Weber. “Motives for Early Revenue Recognition: Evidence from SEC Staff Accounting Bulletin (SAB) 101.” 1 August 2002. 4
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lec9 - Receivables and Revenue Recognition 15.511 Corporate...

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