231 FINANCIAL REPORTING CASE Ask the Oracle. “Good news! I got the job,” she said, closing the door behind her. Your roommate, a software engineer, goes on to explain that she accepted a position at Oracle Corporation, a world leader in enterprise software, computer hardware, and cloud-computing services. “The salary’s good, too,” she continued. “Plus, Mr. Watson, my supervisor, said I’ll be getting a bonus tied to the amount of revenue my projects produce. So I started looking at Oracle’s financial statements, but I can’t even understand when they get to recognize revenue. Sometimes they recognize it all at once, sometimes over time, and sometimes they seem to break apart a sale and recognize revenue for different parts at different times. And sometimes they recognize revenue before they are even done with a project, according to the percentage they have completed so far. You’re the accountant. What determines when Oracle gets to recognize revenue?” By the time you finish this chapter, you should be able to respond appropriately to the questions posed in this case. Compare your response to the solution provided at the end of the chapter. 1. Under what circumstances do companies recognize revenue at a point in time? Over a period of time? (p. 234) 2. When do companies break apart a sale and treat its parts differently for purposes of recognizing revenue? (p. 237) 3. How do companies account for long-term contracts that qualify for revenue recognition over time? (p. 257) What is revenue? According to the FASB, “Revenues are inflows or other enhancements of assets of an entity or settlements of its liabilities (or a combination of both) from delivering or producing goods, rendering services, or other activities that constitute the entity’s ongoing major or central operations.” 1 In simpler terms, we can say that revenue generally is the inflow of cash or accounts receivable that a business receives when it provides goods or services to its customers. For most companies, revenue is the single largest number reported in the financial statements. Its pivotal role in the picture painted by the financial statements makes measuring and reporting revenue one of the most critical aspects of financial reporting. It is important not only to determine how much revenue to recognize (record), but also when to recognize it. A one-year income statement should report a company’s revenues for only that one-year period. Sometimes, though, it’s difficult to determine how much revenue to recognize in a particular period. Also, you can imagine that a manager who is evaluated according to how much revenue she generates each period might be tempted to recognize more revenue than is appropriate. In fact, the SEC has cracked down on revenue-recognition abuses in the past, and its enforcement division continues to do so. 2 1 “Elements of Financial Statements,” Statement of Financial Concepts No. 6 (Stamford, Conn.: FASB, 1985, par. 78). 2 For SEC guidance that provides examples of appropriate and inappropriate revenue recognition, see FASB ASC 605–10–S99: Revenue Recognition–Overall–SEC Materials (originally “Revenue Recognition in Financial Statements,” Staff Accounting Bulletin No. 101 (Washington, D.C.: SEC, December 1999) and Staff Accounting Bulletin No. 104 (Washington, D.C.: SEC, December 2003)). QUESTIONS
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