Wareham SC Systems Over the

Wareham SC Systems Over the last several years, the issue of how revenues and expenses are accounted for has been continually evolving. Part of the reason for this, is because there has been a push among the business community to embrace universally accepted standards of accounting. In the case of Wareham SC Systems, the company has been wrestling with changes in accounting standards. As their business model and structure are having an impact upon how various revenues are booked, resulting in the company utilizing a different standard (in some way).

To determine how changes in accounting standards are affecting the company requires: examining the company's SAB 101 pre-revenue recognition methods, what issues make Soma Desai concerned about the implementation of SAB 101, the revenue recognition accounting standard that should be utilized, if IAS Number 18 would have an impact on this standard and the specific actions that Soma Desai should be preparing for when implementing SB101. Together, these different elements will provide the greatest insights as to how accounting standards are evolving.

What pre-SAB 101 revenue recognition methods has Wareham SC Systems adopted? Which of these policies are most likely to be impacted by SAB 101? Given the fact that SAB 101 requires that all revenue is recorded when it is earned, means that certain divisions of the company could be embracing pre-SAB 101 practices. A good example of this can be seen with the Advanced Technology Division and the contract they have with Sandham Inc.

What is happening is any kind of services that are delivered, by the Advanced Technology Division are honored as actual products that are provided (with a warranty for any work that they perform for the customer). Under SAB 101 methods, these services would be reported as revenues once the actual business transaction occurred. However, some customers prefer that they could be given greater flexibility in making their payment to the company. In the case of Sandham, these transactions are not paid upon completion of delivering the services.

As 80% is due 30 days after the delivery of services and the other 20% is payable 30 days after customer acceptance. The policy that would most likely be affected by these changes is: the payment plans and flexibility that the company offers to customers. Where, the traditional structure would allow many businesses to make payments vs. having to pay for the services upfront. Why might Soma Desai be concerned about the impact of SAB 101 on Wareham SC System's revenue recognition practice? Be as specific as possible.

The reason why Soma Deasi would be concerned about the impact of SAB 101 is because of the new sales strategy that has been implemented (by the Advanced Technology Division). Where, they will allow customers to pay for the services in five small payments and then one balloon size payment (at the end of the six months). This is problematic, because this new policy will make it difficult for the company to report services that are being delivered as actual revenue.

Where, if the company reports the amounts as real time revenues received they could have an earnings shortfall (in the event that a customer does not complete all six payments). At the same time, Ashaban Industries is bringing into questions the credit worthiness of some customers (especially when they have trouble obtaining any kind of bank or government financing). When you put these two elements together, this highlights how Soma would have realistic concerns about overbooking possible revenues and then having to restate (if the customer defaults on their payments).

What revenue recognition accounting is required by the facts of each of the sale transactions reviewed by Soma Desai? Justify your conclusions. The revenue recognition accounting method would be GAAP standards. The reason why, is because these transactions are not booked when the actual services were provided. Under SAB 101, the company is going to be forced to comply with these standards. As result, the way the revenue is accounted for will have to be adjusted.

A good example of this can be seen with XL Semi, where they would pay for 90% of services once they were delivered and the other 10% after acceptance. This is problematic because, it is booking the transaction over the course of time vs. when it was received. At which point, it makes complying with SAB 101 more difficult and it could cause the company to have possible earnings shortfalls (based upon the way they are booking the transaction.) Would your answer to Question 3 change if you applied lAS No.

18 rather than SAB 101? Explain. No. The reason why is because one of the basic principles of IAS Number 18 is: that the amount of revenues must be able to be measured reliably. The fact that the new structure will involve five small payments and one large balloon payment increases the risk. The reason why, is because if there are sudden changes in customer demand or to the economy, Wareham SC can be left with a number of accounts in default and no way to collect.

In this aspect, the fact that revenues cannot be reasonably determined, underscores how they are unreliable during times of business or economic uncertainty. As a result, this strategy would not comply with IAS Number 18. What administrative actions should Sonia Desai take to prepare Wareham SC Systems for the adoption of SAB 101? Be specific. The first actions she should take are: to inform management that there is the possibility of a financial disaster facing the company (if the new strategy for services is implemented). The reason why,.