Both types of swaps are exchange of nearly identical

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ously, purchasing excess capacity from that competitor. Both types of swaps are exchange: of nearly identical services; they do not provide income or create an expense for either party. Further, these transactions do not represent a culmination of the normal earning process and. thus, the "earned" revenue recognition criterion is not met. Case 3: Mischaracterizing transactions as arm's-length. Transfers of inventories or other assets to related entities are typically not recognized as revenue until arm's-length sales occur. Sometimes, companies disguise non-arm's-length transactions as sales to unrelated entities. This practice is improper when the buyer is related to the seller, or the buyer is unable to pa~ for the merchandise other than from its resale. Revenue should not be recognized unless the sales process is complete, that is, goods have been transferred and an asset has been created (future payment from a solvent, independent party). Case 4: Pending execution of sales agreements. Sometimes companies boost current-period profits by recording revenue for goods delivered for which formal customer approval has yet to be received. The SEe's position is that if the company's practice is to obtain sal authorization, then revenue is not earned until such approval is obtained, even though product delivery is made and customer approval is anticipated. Case 5: Gross versus net revenues. Some companies use their distribution network to sell other companies' goods for a commission. There are increasing reports of companies that inflate revenues by reporting such transactions on a gross basis (separately reporting both sales and cost of goods sold) instead of reporting only the commission (typically a percentage of sales price). The incentives for such reporting are high for some dot.com companies and
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Module 5 I Revenue Recognition and Operating Income 5-8 :-up that believe the market prices of their stocks are based on revenue growth and not fitability. Reporting revenues at gross rather than net could have enormous impact on aluations of those companies. The SEe prescribes that such sales be reported on a net z., see Business Insight on next page). 6: Sales on consignment. Some companies deliver goods to other companies with the ..ICi:ersumdingthat these goods will be ultimately sold to third parties. At the time of delivery, does not pass to the second company, and the second company has no obligation to make _ ent to the seller until the product is sold. This type of transaction is called a consignment _The SEC's position is that a sale has not occurred, and revenue is not to be recognized e original company, until the product is sold to a third party. Further, the middleman ignee) cannot report the gross sale, and can only report its commission revenue. e: : Failure to take delivery. Some customers may not take delivery of the product by - -end. In this case, revenue is not yet earned. The earning process is only complete once product is delivered and accepted. An example is a layaway sale. Even though the product
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