Question

Address the following items in a memo:

1. Describe the five steps of the revenue recognition model. Specifically provide an explanation and example as to what signifies a performance obligation.

2. Provide an overview of Krispy Kreme's business model and summarize the unethical accounting and business practices at the company as detailed. Specifically, report on the company's channel stuffing business procedures.

3. Summarize the facts presented in Krispy Kreme's stock value.

4. Explain the relationship between the company's unethical accounting practices and the decrease in value of its stock.

Answer 1

Question 1: Describe the five steps of the revenue recognition model. Specifically provide an explanation and example as to what signifies a performance obligation.

Answer: Revenue Recognition take place when an entity stosfies a perfirmance obligation by transferring either a good or a service to customer in exchange of consideration the entity is entitled to receive or expected to receive.

The five step approach is as follows:

Step 1: Identification of contract with the customer>>

Revenue is only recognized when a contract meets the below conditions :

(a) All parties have approved the contract and have committed to perform their obligation.

(b) The rights of each party regargding contracted goods ore services are identifed.

(c) Payment terms can be identfied.

(d) the contract had commercial substance like cash flows, risk and timings are expected to change due to contract.

(e) It is proable that the entity will collect all the consideration due under the contract.

Step 2. Idetntify the separate performance obligations in the contract:

A performance obligation is a promise to transfer a good or a service to a customer. The transfer
can be either an individual good or service (or a bundle of goods or services) that is distinct, or
a series of goods or services that are substantially the same and are thereby transferred in the
same manner.

A transfer of a good or service is separately identifiable if the entity does not integrate the good
or service with other goods or services in the contract; the good or service does not customize
or modify another good or service in the contract; or the good or service does not depend on or
relate to other goods or services promised in the contract.

Step 3: Determine the Transaction Price:

The transaction price represents the amount of consideration that an entity can expect to be
entitled to receive in exchange for transferring promised goods or services to a customer.

The transaction price should be determined based on considering the effects of: variable
consideration (and any constraining estimates), significant financing if applicable, noncash
considerations, and any consideration payable to the customer.

Variable Consideration: Probability weighted average = (lots of options) and Most likely = Few options.

Significant Financing: Time value of money should be an adjustment to the transaction price if the timing of the
payments per the contract provides either the customer or the entity with a significant benefit
in regard to financing the transfer of goods or services. Revenue should be recognized based on
the price that would have been paid in cash by the customer at the time of transfer.

Noncash Consideration: Noncash consideration should be measured at fair value at contract inception.

Consideration Payable to a Customer: Any consideration (cash, credits, vouchers, etc.) that is payable to a customer should be treated
as a reduction in the transaction price and revenue recognized by the entity unless the entity is
receiving goods or services transferred by the customer.

Step 4:

Allocate the Transaction Price to the Performance Obligations in the Contract

If there is more than one performance obligation within a contract, the transaction price should
be allocated to each separate performance obligation based on the amount of consideration
that would be expected for satisfying each unique obligation. The stand-alone selling price (and
any applicable discount or variable consideration) of each distinct good or service underlying
each performance obligation should be determined at contract inception.

Stand-alone Selling Price: The price an entity would sell the promised good or service to a customer on a stand-alone basis.

Discounts: A discount exists when the sum of the stand-alone prices for each obligation within a contract
exceeds the total consideration for the contract. A discount should be allocated proportionally to
all obligations within the contact.

Variable Consideration: If applicable, variable consideration may be attributable to the entire contract, individual
performance obligations within a contract, or distinct goods or services within a single
performance obligation.

Transaction Price Changes:

If the transaction price changes after contract inception, the change should be allocated to the
performance obligations in the contract on the same basis that was used at inception. Changes
in stand-alone selling prices after inception should not be reallocated.

Step 5:

Recognize Revenue When (or as) the Entity Satisfies a Performance Obligation

Transfer of Control:

An entity should recognize revenue when the entity satisfies a performance obligation by
transferring the good or service to the customer, who thereby obtains control of the asset.
Control implies the ability to obtain the benefits from and direct the usage of the asset while also
preventing other entities from obtaining benefits and directing usage. Performance obligations
may be satisfied either over time or at a point in time.