Question

Explain why Ford would be violating U.S. GAAP if it recognized all related revenue at the time cash was received from customers, rather than recording any as deferred

Answer 1

IN THIS CASE OF FORD, THEY ARE FOLLOWING CASH BASIS OF ACCOUNTING.

CASH BASIS ACCOUNTING IS AN ACCOUNTING SYSTEM THAT RECOGNIZES AND RECORDS INCOME AND EXPENSES AS THEY ARE RECEIVED/PAID IN CASH.

GAAP DICTATES THAT BUSINESSES CANNOT USE THIS SYSTEM OF ACCOUNTING, INSTEAD THEY MUST USE THE ACCRUAL BASIS OF ACCOUNTING THAT RECOGNIZES REVENUES AND EXPENSES WHEN THEY ARE EARNED/OCCUR.

CASH BASIS OF ACCOUNTING VIOLATES THE MATCHING PRINCIPLE, TIME PERIOD PRINCIPLE AND DOES NOT REFLECT THE ACTUAL COMPANY PERFORMANCE OR FINANCIAL STATUS. COMPANIES ARE USED TO FOLLOW THIS SYSTEM ONLY FOR INTERNAL PURPOSES.

NOW MOVING ON TO REVENUE RECOGNITION STANDARDS AS PRESCRIBED BY US GAAP.

WE SHALL FIRST UNDERSTAND THAT REVENUE RECOGNITION FOR SALES OF NEW/ USED VEHICLES FOLLOW GAAP SPECIFIED BY FINANCIAL ACCOUNTING STANDARDS BOARD ( FASB ) CONCEPTS STATEMENT, RECOGNITION AND MEASUREMENT IN FINANCIAL STATEMENT OF BUSINESS ENTERPRISES.

HERE, THE PASSING OF TITLE ORDINARILY IS EVIDENCE OF CHANGE IN OWNERSHIP, WITH THE DEALERSHIP RENDERING TO THE CUSTOMERS " TEMPRORARY " TITLE.THE REVENUE IS REALIZED AND EARNED WHEN THE PRODUCT IS SOLD / DELIVERED TO THE CUSTOMER, ACCOMPANIED BY THE LEGAL EVIDENCE OF OWNERSHIP.

THE NEW REVENUE RECOGNITION STANDARD ( TOPIC 606/ IFRS 12 ) OUTLINES A SINGLE COMPREHENSIVE MODEL FOR ENTITIES TO USE IN ACCOUNTING FOR REVENUE ARISING FROM CONTRACTS WITH CUSTOMERS. THE CORE OF THE STANDARD IS THAT ENTITY SHALL RECOGNIZE REVENUE TO DEPICIT THE TRANSFER OF PROMISED GOODS/SERVICES TO CUSTOMERS IN AN AMOUNT THAT REFLECTS THE CONSIDERATION TO WHICH THE ENTITY EXPECTS TO BE ENTITLED IN EXCHANGE FOR THESE GOODS/SERVICES.

ADDING FURTHER ACCRUAL SYSTEM REQUIRES A HIGH DEGREE OF ACCOUNTING KNOWLEDGE AND SKILL TO OPERATE AND ACCOUNTING SKILLS DO NOT COME CHEAP. MOREOVER CASH ACCOUNTING IS COMPROMISED ACCOUNTING SYSTEM THAT CAN BE USED EASILY.