Session Solutions

If the company adopted FIFO on January 1, 2008, how would this affect the financial statements?In the “as if’ income statements prepared by James Column, the costs of mower units and transportation were rising for 2007 and 2008. How would the company’s deliberations be affected if inventory purchase prices and transportation costs had been stable or falling over the two-year period? Read the case, Avail Corporation-?Revenue Recognition and FOB Sales Accounting, the press release, and the excerpted items below and answer the following questions. Guidance’s-Quarter-Results 1.Assume the solution to item 1 in the case is approximately 20%. Prepare a brief memo that answers items 2 and 3, 2. Download Viola’s 6-K statements for Q and Q of 2003 from the Valiant Pharmaceuticals website (Avail merged with Valiant), What do you observe regarding the firm’s revenue recognition and receivables disclosures? An excerpt from the Securities and Exchange Commission’s Staff Accounting Bulletin 104 is included on this page.Refer to the relevant “bill and hold” sections in the Canadian and LIST documents and discuss the bill and hold arrangement: http://www. Soc.

Ova. On. Ca/documents/en/Proceedings/set_20090210 _crop m Bibb PDF http;m. Sec. Gowned/press/ICC/ICC-C.

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HTML 3. Briefly discuss the company’s actions in light of the SAAB 104 excerpt below. 4. What inferences can you draw about management’s ethics when its accounting in one area is aggressive? 5.

What happened to the Avail CEO? Delivery and performance a. Bill and hold arrangements Facts: Company A receives purchase orders for products it manufactures, At the end of its fiscal quarters, customers may not yet be ready to take delivery of the reduces for various reasons.These reasons may include, but are not limited to, a lack to available space tort inventory, having more than sufficient inventory in their distribution channel, or delays in customers’ production schedules, Question: May Company A recognize revenue for the sale of its products once it has completed manufacturing if it segregates the inventory of the products in its own warehouse from its own products? May Company A recognize revenue for the sale if it ships the products to a third- part/ warehouse but (1) Company A retains title to the product and (2) payment y the customer is dependent upon ultimate delivery to a customer-specified site?Interpretative Response: Generally, no. The staff believes that delivery generally is not considered to have occurred unless the customer has taken title and assumed the risks and rewards Of ownership Of the products specified in the customer’s purchase order or sales agreement. Typically this occurs when a product is delivered to the customer’s delivery site (if the terms of the sale are “FOB destination”) or when a product is shipped to the customer (if the terms are “FOB shipping point”).The Commission has set forth criteria to be met in order to recognize revenue when delivery has not 1 7 occurred, These include: 1. The risks of ownership must have passed to the buyer; 2.

The customer must have made a fixed commitment to purchase the goods, preferably in written documentation; 3. The buyer, not the seller, must request that the transaction be on a bill and hold basis. The buyer must have a substantial business purpose for ordering the goods on a bill and hold basis; 4.

There must be a fixed schedule for delivery of the goods.The date for delivery must be reasonable and must be consistent With the buyer’s business purpose (e. G. , storage periods are customary in the industry); 5. The seller must not have retained any specific performance obligations such that the earning process is not complete; See In the Matter of Stewart Partners, ARE 108 (August 5, 1986); SEC v. Bollixing Industries, Inc. , et al, LAIR 15093 (September 30, 1996); In the Matter of Laser Photonic, Inc. , MERE 971 (September 30, 1997); In the Matter to Cypress Bioscience Inc.

ARE 817 (September 19, 1996).Also see Concepts Statement S, paragraph 84(a). And SOP 97-2, paragraph 22. Such requests typically should be set forth in writing by the buyer, 6.

The ordered goods must have been segregated from the seller’s inventory and not be subject to being used to fill other orders; and 7 _ The equipment [product] must be complete and ready for shipment. The above listed conditions are the important conceptual criteria that should be used in evaluating any purported bill and hold sale.This listing is not intended as a checklist.

In some circumstances, a transaction may meet all factors listed above but not meet the requirements for revenue recognition. The Commission also as noted that in applying the above criteria to a purported bill and hold sale, the individuals responsible for the preparation and filing Of financial statements also should consider the following factors: 1. The date by which the seller expects payment, and whether the seller has modified its normal 20 billing and credit terms for this buyer; 2.The seller’s past experiences with and pattern of bill and hold transactions; 19 See Note 17, supra. Such individuals should consider whether Opinion 21 pertaining to the need for discounting the related receivable, is applicable.

Opinion 21 paragraph (a), indicates that the requirements of that Opinion to record receivables at a discounted value are not intended to apply to “receivables and payable arising from transactions With customers or suppliers in the normal course Of business which are due in customary trade terms not exceeding approximately one year” (emphasis added).Whether the buyer has the expected risk of loss in the event off decline in the market value of goods; 4. Whether the seller’s custodial risks are insurable and insured; 5. Whether extended procedures are necessary in order to assure that there are no exceptions to the buyer’s commitment to accept and pay for the goods sold (i. E. , that the business reasons for the hill and hold have not introduced a contingency to the buyer’s commitment).