In: Accounting
Background
Getswift Ltd (“Getswift”) is a newly listed company involved that provides a software distribution solution. The board has heard that a new revenue standard has been issued and as none of the board has a financial background, they are unsure what it means for them. They have heard though that the impact of the new standard on most businesses will be significant.
As a result, they have engaged your consultancy firm to provide them with a letter of advice to explain the impact that the new standard will have on the income recognition of Getswift.
REQUIRED
You are required to provide a letter of advice to the board of Getswift explaining the requirements of the new revenue standard with a focus on how it will impact their particular revenue recognition.
In addition, you are required to write a short transmittal email enclosing the letter of advice.
Important Additional Information
You are expected to research this company and gain an understanding of what they do so that you understand the nature of their revenue. The 2016/2017 annual report should be used as a starting point but you are expected to go further than this.
This assessment requires much more than copying the requirements from the new standard and those students that just do this will be marked poorly. The majority of the marks will be for the application of the standard to Getswift’s revenue sources. Therefore, you need an understanding of what they do.
The language of your letter of advice should be tailored to the audience and their level of financial literacy.
Required Format and additional requirements
You are required to produce:
1. A transmittal email to the Board
2. A Letter of Advice, addressed to the Board, which includes references
This is the website for Getswift Financial Report year ended 30 June 2017:
https://www.asx.com.au/asxpdf/20170831/pdf/43lxn9xg34pp4q.pdf
The Accounting Standards Update (“ASU”) could have a major effect on the bottom lines of companies in the software industry. Under ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), software companies will have to recognize more revenue when the sale occurs. However, companies in the software industry have long-term arrangements with customers, meaning revenue is usually recognized over the life of the contract.
One software company already feeling the impact is Microsoft, which was an early adopter of the standard. Under the new rules, Microsoft recorded revenue of over $96.5 billion for its fiscal year ending June 30, 2017. According to its annual filing, Microsoft would have recorded $89.9 billion in revenue using the old guidance.
Revenue results under ASU No. 2014-09 could differ among other companies in the software industry. The standard eliminates nearly 200 pieces of industry-related revenue accounting rules, and introduces a single standard for recognizing the top line in a company’s income statement. For instance, the standard erases the need for a company in the software industry to show “vendor-specific objective evidence” for undelivered elements of a contract, which means revenue from such elements cannot be recognized. An August 23 report by Calcbench and Radical Compliance says the elimination of this requirement will allow companies to immediately recognize additional revenue from a long-term contract. As a result, companies will likely recognize revenue from a contract faster, but earnings could become more unpredictable between each period.