Manufacturing Company
Phoenix, AZ
May 11, 2005
Attn: CEO:
The following is our Team C Accounting Firm's response to your questions
concerning recognition of revenue and expense and the expensing of stock options:
Revenue Recognition
Revenue recognition is a slippery issue in accounting, and an area that has proven ripe for fraud. The Financial Accounting Standards Board (FASB) has been wrestling with revenue recognition for years. They are in the midst of an extensive project to develop a comprehensive statement that is conceptually based and framed in terms of principles. According to a recent Financial Executive article, in summarizing its goal, FASB said it is "pursuing an approach that focuses on changes in assets and liabilities, and is not overridden by tests based on notions of realization and completion of an earnings process." It added that "earnings and realization have yet to be defined precisely, and in a manner that can be applied consistently across a range of industries and transactions.", and that "it is difficult to identify consistently when earning or realization occurs under multiple-element revenue-generating arrangements" (Marshall, 2004, p24).
In December 1999, the SEC issued Staff Accounting Bulletin (SAB) 101, "Revenue Recognition in Financial Statements," followed in October, 2000 by "Revenue Recognition in Financial Statements Frequently Asked Questions." SAB 101 was effective starting the fourth fiscal quarter for fiscal years beginning after December 15, 2000.
For revenue to be recognized under SAB 101 it must meet all of the following criteria:
· Persuasive evidence of an arrangement exists.
· Delivery has occurred or servic ...