Essay Sample on Recognition of Deferred Revenues

Introduction

Auditing is an essential requirement for official verification as well as an examination of the financial statements. Considering the case of a cable television company, it is important to audit the company to ensure that all the records are accurately represented in the transactions. FASB Accounting Standard Codification provides with a guideline on how auditing should be done for professional and accountable practices. Concerning the case of the television company, the case of deferred revenue as described in the FASB standards ASC 430. The codification in the ASC 430 guidance relates to the vendor sales incentives as claimed by the customers in the ASC 605-50-25-4. In this regard, I would use the guidelines of the ASC 430 in order to establish whether the company has correctly recognized some of the deferred revenues such as hookup revenues.

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Sales of Product Recognition

Sales return refers to the return of a merchandise by a customer. It should be noted that according to the contract terms of sale between the company and the customer, a product purchased can have a potential Right of Return. However, such a return must be accounted for by the company in accordance with the FASB principles. The principles are described in the ASC 605. ASC 605 of revenue recognition provides with the guidance regarding how a transaction should be conducted and accounted for regarding matters that generate activities. According to the revenue recognition regulations, when a product entails a Right of Return, a seller is obliged either to recognize or not all the revenue that is generated at the time of sale. In case the seller is able to estimate the rate of return of the product, he/she may record the sales revenue during the time of sale as described within ASC 605. However, in instances where the seller is not able to make a reasonable estimate, he/she should wait until the loss can be estimated.

Liability Recognition

Business balance sheets normally reflect on the historical cost of assets as well as liabilities of a company. Measuring the value of liabilities is, therefore, imperative in valuing the company. Considering the case at hand of the film entertainment company, the liabilities have already been recognized in the company's balance sheet. However, measuring the same requires knowledge of regulations stipulated by the FASB. According to the guidelines, valuing is explained under the ASC 820. The ASC guidelines place valuation that is stipulated at the three-tire hierarchy. The identical assets and liabilities for the active markets are placed at the first level. Similar liabilities are placed as second while the last is the unobservable inputs. Although liabilities are rarely transferred to the marketplace due to the contractual regulations that prevent the transfers, it is important to measure them in order to ascertain the value of the company. Doing so would follow closely the FASB regulations on ASC 820 and its amendments reported in ASU 2009-05. The amendments provide the cases of measuring liabilities as established under the ASU 820 regulations. Such regulations would be important in finding information of valuation and measuring of liabilities.

Business Combinations

Accounting for the income taxes related for business combinations is stipulated under the FASB regulations. To account for the income taxes of the company, I would analyze the requirements stipulated under the ASC 805. According to the ASC 805-10, a guidance of acquisition is provided that addresses various requirements including whether the transaction is indeed a business combination. Also, the guideline stipulates whether the validity of the acquirer and the acquisition date. The other explanations are stipulated in other stipulations including 805-20, 805-30, 805-40, 805-50, and 805-740. However, considering that some of the terms used cannot be easily understood, it is important to evaluate the FASB explanation of terms. In this regard, I would evaluate the FASB Glossary including the Accounting Standards Updates (ASU) of 2014-06. The updated glossary terms cover various topics in the codification. Information of the accounting terms may be found under the 4 subcategories of Section A, B, C, and D. Considering that the accounting for the income tax must adhere to the FASB guidelines, using the FASB glossary would ensure that the correct steps are undertaken.

Non-Monetary Transactions

Most business transactions involve the exchange of monetary assets or liabilities for the goods and services. In this regard, the use of monetary assets and liabilities provides the basis for easy valuation and accounting. However, some transactions such as the ones in question do not involve the exchange of cash. Such transactions can involve an exchange with another entity or transfer for the non-monetary assets. The case of software company involves the exchange of nonmonetary assets (reciprocal transfer). Regulations for the accounting of nonmonetary assets are stipulated by FASB under the ASC 845. According to the ASC-10 regulation, the primary issue of accounting in the nonmonetary transaction entails the determination of the amount that should be assigned to the assets or services being transferred. Considering that the organization and the customer are both exchanging nonmonetary services, the transaction would be recorded under the reciprocal transfer category.

Works Cited

FASB. Financial Accounting Standards. Retrieved from: https://asc.fasb.org/