Question:
As part of its crackdown on earnings management, the SEC issued Staff Accounting Bulletins No.s 101
and 104 to provide additional guidance on when revenue should be recognized. Consider the following
situations posed by the SEC and, for each, discuss whether or not you believe it is appropriate to
recognize revenue. You might gain access to this literature through the FASB Codification Research
System via the FASB website ( www.fasb.org ), the SEC ( www.sec.gov ), your school library, or some
other source.
1. Facts: Company M is a discount retailer. It generates revenue from annual membership fees it charges
customers to shop at its stores and from the sale of products at a discount price to those customers. The
membership arrangements with retail customers require the customer to pay the entire membership fee
(e.g., $35) at the outset of the arrangement. However, the customer has the unilateral right to cancel the
arrangement at any time during its term and receive a full refund of the initial fee. Based on historical
data collected over time for a large number of homogeneous transactions, Company M estimates that
approximately 40% of the customers will request a refund before the end of the membership contract
term. Company M’s data for the past five years indicates that significant variations between actual and
estimated cancellations have not occurred, and
Company M does not expect significant variations to occur in the foreseeable future.
Question: May Company M recognize revenue for the membership fees and accrue the costs to provide
membership services at the outset of the arrangement?
2. Facts: Company Z enters into an arrangement with Customer A to deliver Company Z’s products to
Customer A on a consignment basis. Pursuant to the terms of the arrangement, Customer A is a
consignee, and title to the products does not pass from Company Z to Customer A until Customer A
consumes the products in its operations. Company Z delivers product to Customer A under the terms of
their arrangement.
Question: May Company Z recognize revenue upon delivery of its product to Customer A?
As part of its crackdown on earnings management, the SEC issued Staff Accounting Bulletins No.s 101
and 104 to provide additional guidance on when revenue should be recognized. Consider the following
situations posed by the SEC and, for each, discuss whether or not you believe it is appropriate to
recognize revenue. You might gain access to this literature through the FASB Codification Research
System via the FASB website ( www.fasb.org ), the SEC ( www.sec.gov ), your school library, or some
other source.
1. Facts: Company M is a discount retailer. It generates revenue from annual membership fees it charges
customers to shop at its stores and from the sale of products at a discount price to those customers. The
membership arrangements with retail customers require the customer to pay the entire membership fee
(e.g., $35) at the outset of the arrangement. However, the customer has the unilateral right to cancel the
arrangement at any time during its term and receive a full refund of the initial fee. Based on historical
data collected over time for a large number of homogeneous transactions, Company M estimates that
approximately 40% of the customers will request a refund before the end of the membership contract
term. Company M’s data for the past five years indicates that significant variations between actual and
estimated cancellations have not occurred, and
Company M does not expect significant variations to occur in the foreseeable future.
Question: May Company M recognize revenue for the membership fees and accrue the costs to provide
membership services at the outset of the arrangement?
2. Facts: Company Z enters into an arrangement with Customer A to deliver Company Z’s products to
Customer A on a consignment basis. Pursuant to the terms of the arrangement, Customer A is a
consignee, and title to the products does not pass from Company Z to Customer A until Customer A
consumes the products in its operations. Company Z delivers product to Customer A under the terms of
their arrangement.
Question: May Company Z recognize revenue upon delivery of its product to Customer A?
