Rsm221 Iap Case Study
RSM221 IAP Sample Solution – Tutorial January 2011
***Please note that this is a sample solution key – it is advised that the points below be elaborated (more complete sentences) when submitting your IAP. Please also refer to the ‘Case Primer’ in your Intermediate Accounting textbook for more tips/guidance to case approach*** Good luck with your first IAP! 1) OVERVIEW- clear, succinct summary 2) ISSUE ID AND ANALYSIS Identification: o The main issue is when to recognize the revenue with respect to the new subscriptions, keeping in mind the incentive of management to present the financial statements in the best possible light to facilitate the loan from the bank. o The bank is the user of the financial statements and will likely want statements prepared in accordance with GAAP or IFRS, as they are more reliable and relevant. …show more content…
Analysis: o Relates back to the foundations of the conceptual framework – recognition criteria.
o To recognize revenue, the risk and rewards of ownership must pass or there must be substantial completion of performance. o Related costs must be measurable and collection must be reasonably assured. o No historical company information to rely on in terms of cancellation rate (%). o Harsh economic environment may mean higher cancellation rates than normal for industry. o Leads to the need for a significant amount of professional judgement. o Management bias to accelerate the recognition of subscription revenue in order to improve return on assets ratio. o Management compensation may be tied to ability to grow the company, given the comments made by CEO. o Alternative #1: Recognize revenues as magazines are delivered o Credit to unearned revenue, with amortization to income as monthly edition is distributed. o Risks and rewards passed and revenue earned at point of distribution. o Cancellation rate based on competitor information so appears measurable (although not necessarily reliable). o To the extent that 20% cancellation rate is reasonable, can recognize revenue when distributed and
record a related reduction for expected cancellations.
o Alternative #2: Recognize all revenue at subscription signing o Collectability and measurability assured (customers paid) o However, performance not substantially complete since magazines delivered on a monthly basis. o Would distort asset return ratio. o Alternative #3: Do not recognize revenues until full refund period has elapsed. o Conservative approach. o If the return rate is high or uncertain, this may be the best approach to take since related costs not measurable. o Return estimate is based on competitor information and so there is no way to confirm this upfront. 3) CONCLUSION o It might be argued that, based on the facts, the transaction is measurable and the risks and rewards of ownership have passed to the customer at the point of delivery. Consequently, the best approach is to recognize revenue as each edition is distributed. 4) IFRS IMPLICATION (IF NOT MENTIONED ABOVE – IF APPLICABLE) o Other relevant point.
***Please note that this is a sample solution key – it is advised that the points below be elaborated (more complete sentences) when submitting your IAP. Please also refer to the ‘Case Primer’ in your Intermediate Accounting textbook for more tips/guidance to case approach*** Good luck with your first IAP! 1) OVERVIEW- clear, succinct summary 2) ISSUE ID AND ANALYSIS Identification: o The main issue is when to recognize the revenue with respect to the new subscriptions, keeping in mind the incentive of management to present the financial statements in the best possible light to facilitate the loan from the bank. o The bank is the user of the financial statements and will likely want statements prepared in accordance with GAAP or IFRS, as they are more reliable and relevant. …show more content…
Analysis: o Relates back to the foundations of the conceptual framework – recognition criteria.
o To recognize revenue, the risk and rewards of ownership must pass or there must be substantial completion of performance. o Related costs must be measurable and collection must be reasonably assured. o No historical company information to rely on in terms of cancellation rate (%). o Harsh economic environment may mean higher cancellation rates than normal for industry. o Leads to the need for a significant amount of professional judgement. o Management bias to accelerate the recognition of subscription revenue in order to improve return on assets ratio. o Management compensation may be tied to ability to grow the company, given the comments made by CEO. o Alternative #1: Recognize revenues as magazines are delivered o Credit to unearned revenue, with amortization to income as monthly edition is distributed. o Risks and rewards passed and revenue earned at point of distribution. o Cancellation rate based on competitor information so appears measurable (although not necessarily reliable). o To the extent that 20% cancellation rate is reasonable, can recognize revenue when distributed and
record a related reduction for expected cancellations.
o Alternative #2: Recognize all revenue at subscription signing o Collectability and measurability assured (customers paid) o However, performance not substantially complete since magazines delivered on a monthly basis. o Would distort asset return ratio. o Alternative #3: Do not recognize revenues until full refund period has elapsed. o Conservative approach. o If the return rate is high or uncertain, this may be the best approach to take since related costs not measurable. o Return estimate is based on competitor information and so there is no way to confirm this upfront. 3) CONCLUSION o It might be argued that, based on the facts, the transaction is measurable and the risks and rewards of ownership have passed to the customer at the point of delivery. Consequently, the best approach is to recognize revenue as each edition is distributed. 4) IFRS IMPLICATION (IF NOT MENTIONED ABOVE – IF APPLICABLE) o Other relevant point.