For the purpose of providing you with this letter, other than as set out herein, we have carried out the audit and review of the Company's financial information
Report
Based solely on the procedures set out in the engagement letter dated October 9, 20X5 (see Attachment 1) we confirm that the Company is in compliance with all of its restrictive debt covenants with the Lender.
Our report as set out herein is confidential to the addressees of this letter and should not be made available to any other party without our written consent.
Yours faithfully
Charles Adam
Partner cc Chairman of the Board of Directors, Keystone Computers & Networks, Inc.
Memo
To FILES
From Warren Love
Karren West
Date November 14, 20X5
Subject Keystone Computers & Networks, Inc.
Revenue recognition - Accounting for the sale of extended warranty contracts
ISSUE:
When to recognize revenue from sale of extended warranty contracts?
At what amount should revenue from sale of extended warranty contracts be recognized?
RESOLUTION:
FASB and IASB had a joint revenue recognition project wherein they...
Key decisions used as basis for this approach are enumerated below:
Revenue recognition should be based on changes in assets and liabilities
Contractual obligations arise when the customer is committed to pay for the deliverables
These contractual obligations should be measured at fair value.
EXAMPLE:
If KCN sells a microcomputer for $300 and also charges $100 for its extended warranty contracts, and related warranty servicing cost is at $30, what amount should be recorded as revenue when the full amount of the purchase price and warranty fee is collected in full?
The asset and liability approach measures the assets and liabilities incurred at fair values. KCN receives cash of $400 and has a liability for the warranty servicing of $30 (regardless if the warranty servicing will be outsourced or not). The excess of assets received over liabilities incurred represents revenue. Therefore, revenue of $370 would recognize.
Please change as applicable.
