Accounting Case 55

1
Accounting Case 5-5

• Boston Automation Systems and SAB 101

2
Group Members

• Shannon Barbour
• Jillian Kavanagh
• Jean Manning
• Steven Penney

3
Introduction

• Boston Automation Systems
• Old practice of recognizing revenue before it is
  earned
• Recognizes losses in the period when they are
  determined

4
SAB 101

• Revenue should not be recognized until it is
  realized and earned
• Stricter definitions of when a transaction is
  complete and when a product / service is delivered

5
SAB 101

• SAB 101 requires contractual customer provisions
  to be satisfied before revenue can be recognized
• Two exceptions
• the sellers remaining performance obligation is
  inconsequential or perfunctory
• a portion of contract revenue may be recognized
  when the seller has substantially completed or
  fulfilled the terms of a separate contact element
  

6
SAB 101

• contracts include customer acceptance provisions
• Under SAB 101, in most cases, revenue will be
  recognized after customers have accepted the
  product

7
Fishers Concerns

• organizations revenue recognition policy will
  need to be redeveloped to reflect the new
  guidelines
• guidelines are to be implemented no later than
  the fourth quarter of the 2000 fiscal year
• as of the third quarter Boston Automation Systems
  has not implemented any new policies

8
Fishers Concerns

• GAAP requires consistency
• Other three quarters of 2000 will need to be
  prepared according to new guidelines
• financial statements of at least previous year
  will need to be prepared with SAB 101 for
  comparison purposes
• Will have significant time and money costs to the
  company

9
Glendale Division

• Selected Transactions

10
Trycom, Inc.

• Equipment ordered is the standard model of the
  divisions main product
• Tested before leaving division
• No reason to believe that it would not work in
  customer facility
• Revenue can be recognized upon delivery

11
White Electronics Company

• Equipment ordered is a modified version of the
  standard product to fit in a specified space
• Division created a testing chamber
• Performance specifications were met
• Revenue recognized upon delivery

12
Silicon Devices, Inc.

• Equipment ordered is a modified version of the
  standard product to be integrated into assembly
  line
• Unable to be tested prior to shipping
• Customer acceptance required before revenue
  recognized

13
Advanced Technology Division

• Selected Transactions

14
Analog Technology, Inc.

• Technology previously developed by division
• Customer requires specific technical and product
  criteria
• Performance cannot be verified until installation
  occurs
• Payment terms 80 due 30 days after delivery and
  20 due 30 days after customer acceptance
• Revenue recognized in installments

15
Specialty Semiconductor, Inc.

• Customer requires specific technical and product
  criteria
• Performance can be verified before installation
• Payment due upon installation
• Revenue recognized upon customer acceptance

16
Micro Applications, Inc.

• Customer require specific technical and product
  criteria
• Specifications can be tested prior to shipment
• Customer obligated to pay 100 of the fee no
  later than 90 days after delivery
• Revenue is recognized upon delivery

17
XL Semi, Inc.

• Initial customer acceptance occurs at division
  before shipment
• Revenue recognized upon delivery

18
Technical Devices Division

• Selected Transaction

19
Distributors

• A sales strategy shift is occurring
• Discontinuing direct sales
• Sales will only occur through distributors
• Distributors will have to increase inventories
  significantly

20
Distributors

• To help financing distributors will make five
  small monthly payments and one large payment at
  end of six months
• Revenue will be recognized in installments
• Revenue recognition method may change if payment
  terms to distributors change

21
Do we agree with SAB 101?

• Yes.
• SAB 101 contains much more detail then the
  original revenue recognition policy.
• Detail helps to eliminate ambiguity with how and
  when to recognize revenue.

22
Is SAB 101 too detailed?

• No.
• The level of detail in SAB 101 is essential -
  financial statements are prepared by and for more
  than one person.
• Ambiguity in accounting guidelines can lead to
  misrepresentation of an organizations true
  economic health.

23
Should the standards be more general?

• No.
• General is easier to understand but leaves more
  room for individual interpretation.
• Individual interpretations can lead to
  misrepresentation of an organizations economic
  position.

24
Questions