Case 04-7 Lighthouse
I. Succint
Lighthouse provides a ship tracking service for shipping companies to locate their ships at sea, as well as knowing their speed and the weather they are facing. Lighthouse does a contract for the delivery and installation of the physical device that is capable of achieving this through a tracking service that calls for a second contract. The price for the dedicated hardware (exclusive to Lighthouse services) and installation is a single nonrefundable amount of $10,000 payable at completion of installation and acceptance by client. When this is done, the location service can be provided. The service contract which is generally for one year is paid monthly at $300 per month. Customers may cancel the service contract at anytime. Some discounts are available based on volume of units purchased.
II. Financial reporting issues
a. Should Lighthouse recognize revenue for the sale of the equipment at the moment of sale?
b. Should Lighthouse recognize revenue from the service provided separately from the sale of the equipment?
c. Should the revenue for sale of the device and sale of the service be recognized differently when there is a Multiple-Element Arrangement?
III. Authoritative basis for the alternatives to the financial reporting issues
605 - Revenue Recognition
10 - Overall
05 - Overview and Background
General
05-1 The Revenue Recognition Topic provides guidance for transaction-specific revenue recognition and certain matters related to revenue-generating activities that are not addressed specifically in other Topics. Other Topics may contain transaction-specific revenue recognition guidance related to transactions in those Topics. This Topic includes the following Subtopics:
a. Overall. The Overall Subtopic provides guidance on the following:
1. Revenue and gains
2. Installment and cost recovery methods of revenue recognition.
b. Products. The Products Subtopic provides guidance on the following:
1. Sales with a
Lighthouse provides a ship tracking service for shipping companies to locate their ships at sea, as well as knowing their speed and the weather they are facing. Lighthouse does a contract for the delivery and installation of the physical device that is capable of achieving this through a tracking service that calls for a second contract. The price for the dedicated hardware (exclusive to Lighthouse services) and installation is a single nonrefundable amount of $10,000 payable at completion of installation and acceptance by client. When this is done, the location service can be provided. The service contract which is generally for one year is paid monthly at $300 per month. Customers may cancel the service contract at anytime. Some discounts are available based on volume of units purchased.
II. Financial reporting issues
a. Should Lighthouse recognize revenue for the sale of the equipment at the moment of sale?
b. Should Lighthouse recognize revenue from the service provided separately from the sale of the equipment?
c. Should the revenue for sale of the device and sale of the service be recognized differently when there is a Multiple-Element Arrangement?
III. Authoritative basis for the alternatives to the financial reporting issues
605 - Revenue Recognition
10 - Overall
05 - Overview and Background
General
05-1 The Revenue Recognition Topic provides guidance for transaction-specific revenue recognition and certain matters related to revenue-generating activities that are not addressed specifically in other Topics. Other Topics may contain transaction-specific revenue recognition guidance related to transactions in those Topics. This Topic includes the following Subtopics:
a. Overall. The Overall Subtopic provides guidance on the following:
1. Revenue and gains
2. Installment and cost recovery methods of revenue recognition.
b. Products. The Products Subtopic provides guidance on the following:
1. Sales with a