Revenue Arrangements With Multiple Deliverables

Running Head : MULTIPLE DELIVERABLES ARRANGEMENTS

Revenue Recognition for

Multiple Deliverables Arrangements

Name

School /University

Introduction

In recent years , business transactions have become more complex . In to be competitive , companies started packaging their products and services in such a way that maximizes revenue and customer satisfaction Indeed , why allow other companies to encroach on already conquered market by not offering all products and services related to the company 's field of specialization ? While this appears to be sound business practice , it does raise several issues on proper accounting

treatment

Issues

The issues involved in single transactions or contracts which involve several o multiple deliverables to be delivered at different times are as follows

How /When should revenue from arrangements involving multiple deliverables be segregated (Criteria for segregation , and

How /When should revenue be recognized in arrangements or contracts involving multiple deliverables (Criteria for revenue recognition

Consider this scenario

A Manufacturing Company which provides machineries and equipment which routinely enters into a contract involving the following products and services : testing of equipment , delivery of equipment , installation of equipment , and recurring annual maintenance and support . All of these products are offered at a lump sum price , even if payments are staggered . Any of this products and services can be provided by another source or in separate transactions , but the said Company , in to maximize profits , packages them in one . How should the company recognize revenue from this transaction ? How should the staggered payments be recorded in the company 's books

Proposed Treatments

Arrangement is Not Segregated

Revenue is Recognized when All Deliverables are Delivered

All this time , revenue recognition pronouncements from standard-setting bodies in the field of accounting has been focused on single deliverables . The first proposed treatment assumes that there are no multiple deliverables . All products and services are treated as one so that performance of first or some of the deliverables constitutes only partial performance on the part of the company . If this assumption is made , revenue recognition becomes a simple matter of applying the present revenue recognition principle . FASB Statement of Financial Accounting Concepts No . 5 states that

[R]evenue is recognized when a transaction occurs and 1 ) the revenue is realized or realizable and 2 ) the revenue is earned . Revenue from a transaction must meet both criteria in to be recognized . Revenue is generally considered realized when cash is received for the sale of a product or performance of a service . Revenue generally becomes realizable when a promise to pay is received in exchange for the sale of a product or performance of a service . The promise to pay could be verbal (account receivable ) or written (note receivable . Revenue is generally earned when a legally enforceable exchange takes place (e .g consideration has been tendered and the buyer takes possession of the product or benefits from the performance of a service (Briner 2001 Example

On the scenario given above , supposed that the Manufacturing Company enters into a contract which obligates it to deliver all four products and...