Question

Assessing Revenue Recognition Timing and Income Measurement Discuss and justify when each of the following businesses should recognize revenue and identify any income measurement issues that are likely to arise.

a. RealMoney.Com, a division of TheStreet.Com provides investment advice to customers for an up-front fee. It provides these customers with password-protected access to its website where customers can download certain investment reports. Real Money has an obligation to provide updates on its website.

b. Oracle Corporation develops general ledger and other business application software that it sells to its customers. The customer pays an up-front fee to gain the right to use the software and a monthly fee for support services.

c. Intuit Inc. develops tax preparation software that it sells to its customers for a flat fee. No further payment is required and the software cannot be returned, only exchanged if defective. d. A developer of computer games sells its software with a 10-day right of return period during which the software can be returned for a full refund. After the 10-day period has expired, the software cannot be returned.

Answer 1

a RealMoney.com can recognize the revenue when it has updated it's website and has provided it's customer with password protected access to it's website as and when both the conditions or or performance obligation are satisfied by it, it can immediately recognize the respective income in it's financial statements

The income measurement issue here can arise if it is not able to post update on its own website and password protected address is given for it's unupdated website.

b. It should be noted that revenue cannot be recognized on upfront payment and it can only be recognized only if performance obligation attached to the transaction are fulfilled by the company.

In the present case we can see Oracle corporstion is having two different performance obligation, one is concerned with development of general ledger and other business application software and the other is providing support services on the monthly basis.

Here as far as performance obligation with respect to development of software is concerned revenue relating to it should be recognized as and when respective milestones are completed and if there is no set milestones then income should be recognized when software is handed over to the clients.

For support services, revenue should be recognized on a monthly basis

Here the main measurement issue is whether the support service are provided as a bundled service alongwith the software. If it is the case then both the revenue will be recognized simultaneously.

C . Intuit inc. should recognize it's revenue when it sells those tax preparation software to the customer.

D . Developer of software should recognize revenue as soon as it sells or or handover the gaming software to it's customer and should not defer it to the 10 days, instead of can make provision for return of goods for that purpose.