Accounting Research Memorandum
To: Michael Braxton, Chief Accounting Auditor, California Supply Limited
Date: November 4, 2016
Re: Improving the Revenue Recognition Procedure
Revenue recognition is a crucial aspect of the California Supply Limited and it is an important element in checking its financial position and performance. This vitality is the reason why the US GAAP should be consistently applied in its calculation to ensure that only the correct amounts are fully accounted for as revenue. The purpose of this memorandum is to give guided information on improving the revenue recognition technique based on consultations from the US GAAP. This memorandum includes the identification of customer contracts, contract’s performance obligations, and determination of transaction prices. It also includes information on the allocation of prices of transactions based on performance obligations and recognition of revenue after satisfaction of performance obligations.
It is important to reduce the cost of all contract combinations to ensure that they are properly modified to fulfill the scope of various prices of products. This modification will place the contracts in a position of easily adapting to different business environments depending on the timing. Modification of contracts will as well bring in different classes of contracts based on additional services and goods. The emerging contracts will help in developing reliable selling prices that comply with the value of different goods and services offered.
Every contract has obligations that both the consumer and the retailer has to meet. Fulfilling these contracts should be supported by the identification of relevant obligations as given in every contract. The identification of obligation performance will aid in the identification of warranties, rights to return damaged products, all the consumers’ options, and all nonrefundable upfront fees. The determination of these obligations will ensure the clear flow of activities and proper allocation and calculation of revenue. In addition, it will be easy to establish a reliable revenue recognition technique.
Noncash consideration and time value for money are the factors that guide transaction price determination. This determination will cover both goods and services offered by the company. The transaction price is the variable or the fixed price of entities of business in the contracts. The price will be allocated to obligations of performance once they are fully satisfied. In addition to this, the price set should be equivalent to the value of the goods or services and all the obligations stated in the contract (Davies, Paterson, & Wilson, 2013).
Since contracts can include more than one obligation, the transaction should be allocated based on the number of performance obligations. The selling price is the factor that is used in the estimation of the allocation of obligations. The price is an estimation because it is not observable. The expected cost and margin method, adjustment free market valuation technique, and the residual market techniques should be used in estimating the best standalone selling price (Alexander, 2013).
Lastly, there is recognition of revenue, which mainly occurs after satisfaction of all performance obligations in a contract. Every entity can only recognize revenue if performance obligations have been satisfied and the necessary goods or services provided to customers. The quality of business should be maintained to enhance performance obligations, proper management, and increased profitability. Entities have a right to payment and payment of obligations is what generates revenue, therefore, fulfillment of obligations improves the overall performance of businesses.
To sum up, it is complicated for any business corporations to run without guidelines on meeting revenue recognition, which is the measure of financial positioning and performance. In addition, the program has to run in accordance with the accounting legislations set by accounting boards. It is important for the Chief Editor of California Supply to consider the memo and organize structures to implement the program. This program has the ability to improve the overall performance of California Supply limited in both the long term and short term.
Alexander, D. (2013). The recognition of revenue. Financial Reporting, 85-92. Doi: 10.1007/978-1-4899-7118-0_6
Davies, M., Paterson, R., & Wilson, A. (2013). Revenue recognition. UK GAAP, 129-175. doi:10.1007/978-1-349-13819-7_3