The decision of when to record revenue can be difficult. The timing of revenue recognition has been used over the years to manipulate earnings of a company. Being aware of the current revenue recognition standard as well as practices that misstated earnings in the past are important components of understanding how to record revenue appropriately.
In the late 1990’s, Sunbeam Corporation faced financial woes and attempted various strategies to boost its reported earnings. In 1997, three strategies appeared to be working; revenues had risen by 18%. However, by April 1998 Sunbeams stock was downgraded by investment analysts after noticing unusually high accounts receivables, massive increases in electric blankets in the third quarter 1997, which usually sell best in the fourth quarter, as well as unusually high sales of barbecue grills for the fourth quarter. Soon after, Sunbeam announced a first quarter loss of $44.6 million, and Sunbeams stock prices fell 25%. Sunbeam then faced a lawsuit by shareholders and an investigation by the Securities and Exchange Commission (SEC).
You are the controller for a company that is considering becoming publicly-traded in the next few years, and the board of directors wants to be sure the company is properly following GAAP in regards to revenue recognition. They have heard that there is a new accounting standard in place for revenue recognition that they want to comply with, but they also want to be sure that the company does not repeat the errors that Sunbeam and other companies have made.
Prepare a memo to the board summarizing the goals and requirements of the new revenue recognition standard ASC 606. Be sure to address the key criteria that FASB focused on as to when revenue should be recognized.
Include in your memo to the board summaries of the various revenue and earnings manipulations that Sunbeam Corporation committed in the late 1990s.
Read the Module 3 Case SEC Document that details the SEC Administrative Proceeding against Sunbeam Corporation. Also research other sources you can find regarding Sunbeams violations. When appropriate, compare these manipulations to the requirements of the new revenue recognition standard, and note which part of the new standard was violated by these actions. Terms such as channel stuffing, cookie-jar reserves, big bath accounting and earnings quality as well as any others you come across should be defined and described in your memo.
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