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Wareham Sc Systems, Inc.

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Wareham SC Systems, Inc.

  1. What is(are) Wareham’s current revenue recognitions policy(ies)?
  • Product revenue is recognized upon shipment.
  • Unbundled service revenue is recognized upon amount charged once sold individually from product sales and installation and maintenance services.
  • For certain contract, revenue is recognized using the percentage-of-completion technique based upon an efforts-expended method.
  • Charges to total estimated costs and anticipated losses are recognized in the period in which determined

  1. Using the limited information in the case, do the industry characteristics or the current revenue recognition policies encourage manipulation of revenues? If so, how could Wareham manipulate its earnings?

Yes, current revenue recognition policies may encourage manipulation of revenues as follow,

  • Wareham SC Systems, Inc. revenue recognition policy states that revenue for products are recognized upon shipment. Since most products come with a sanction, the warranty is realized at the time revenue is recognized. However, under the SAB 101 gridline, revenue can only be recognized when the “Delivery of the ordered goods has occurred”, which mean Wareham cannot recognize revenue when they ship the product.
  • The company also estimated on cost to fulfilling those warranties, which was subtracted from the total revenues for shipped products. Since this figure is an estimation, it can be overstated or understated by making adjustment to make it favorable to company.
  • For certain contract, such as service contract uses the percentage-of-completion accounting method. The determination of percentage of work is completed is by estimating how much the service generally costs. Ones determining the actual percentage completed, this may leave room for manipulation of revenues.
  • Revenue recognition for service occurs at the time of the service or over the length of the service contract. Wareham unbundle services and maintenance that were not activated at the same time, there for the company cannot recognize the revenues until the installed equipment has met all specifications.

  1. For each of the specific contracts described in the case, please describe the best revenue recognition policy considering the criteria in SAB 101. (Onsetcom, Cataument, Sandham, XL Semi, Technical Devices and Ashaban)

The SAB 101 guideline term ‘the seller’s price to the buyer is fixed or determinable’ still leaves room for manipulation of revenues.

  • Onsetcom, Inc. requires the revenue recognition that persuasive evidence of an order arrangement exists because the specific contract has included all the requirements. For example, revenue can be recognized when product has been delivered because customer’s acceptance clause has been fulfilled.
  • Cataument Devices, Inc. requires the revenue recognition that the seller’s price to the buyer is fixed or determinable because customer may reject the product and return. Cannot recognize revenues if of the partial of the sales agreement has been achieved or if it could not satisfactorily integrated into the new assembly line.
  • Sandham, Inc. requires the revenue recognition after meeting all criteria under the

customer-acceptance provisions because customer may ask the company for the refund. If more than 30days passed without acceptance, Wareham cannot recognize 80% of revenue because customer can still return the product and get money back under the payment term of 80% due 30days after delivery, and 20% due 30days after customer acceptance.

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