Case Study Undergraduate 874 words

Legal Plan Services: Accounting Standards and Revenue Recognition

~5 min read

Abstract

This case study examines the accounting practices of Legal Plan Services, a provider of intangible legal representation membership plans. The paper addresses the nature of the company's product, applicable accounting concepts, and when revenues and expenses should be recognized. It identifies key problems with the company's current pro forma-based reporting approach — particularly its treatment of advance commissions and premature revenue recognition — and recommends a transition to Generally Accepted Accounting Principles (GAAP). Drawing on authoritative accounting literature, the paper argues that GAAP-based standards would improve earnings accuracy, reduce financial risk, and strengthen investor confidence.

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What makes this paper effective

The memo format is appropriate to the professional accounting context, organizing responses clearly around specific questions.
The paper contrasts pro forma and GAAP-based reporting in practical terms, grounding abstract accounting concepts in a real business scenario.
The recommendation section is supported by a cited empirical study (Street, 2000), lending credibility to the argument for adopting GAAP standards.

Key academic technique demonstrated

The paper demonstrates applied accounting analysis: taking theoretical concepts such as revenue recognition and matching principles, then evaluating how well a specific company's practices conform to established standards. Rather than merely defining GAAP, the student applies it critically, identifying where the company's current practices diverge and explaining the financial consequences of that divergence.

Structure breakdown

The paper follows a structured Q&A memo format. It opens by characterizing the product as intangible, then moves through accounting concepts, recognition timing, presentation methods, and journal entry considerations. The final two sections evaluate compliance and provide justified recommendations, making it a complete applied case analysis from diagnosis to prescription.

Introduction: Nature of Legal Plan Services' Product

To: [Recipient]
From: [Author]
Date: [Date]
Subject: Legal Plan Services — Accounting Analysis

Legal Plan Services sells legal representation for civil litigation. The company's approach is to provide customers with access to top-tier law firms through the purchase of a membership. The services are considered intangible because they cannot be physically held or possessed.

Applicable Accounting Concepts, Objectives, and Standards

The benefits that a client receives include the ability to consult, free of charge, with any attorney from one of the company's affiliate firms. This covers select practice areas including personal injury, tax, criminal, and civil matters. If a client exceeds a specified number of hours, the membership provides a 25% discount on the firm's standard hourly rate (Intangible).

The company should follow more traditional accounting standards when reporting future sales and recording advanced commissions. In these situations, the sales representative is paid a commission in advance for sales they have already closed. The problem is that the monthly fee charged to customers has not yet been collected. This increases risk, as a customer may choose to cancel their membership at any time.

When cancellations occur, a gap appears in the company's earnings, compounded by losses from the advanced commissions already paid to the sales force. If the company were to revise these objectives, its definition of profit margins would shift away from pro forma standards toward Generally Accepted Accounting Principles (GAAP) (Pro Forma, 2011).

Revenue and Expense Recognition Rules

Legal Plan Services should recognize revenues at the moment they are received — that is, as accrued revenues. The applicable rule of recognition is that revenues should be recorded when funds are actually collected (Briner). Adhering to this principle will provide greater stability to the firm's reported earnings.

Expenses should be recognized at the moment they are incurred. The recognition rules that apply include expenses that directly generate revenues, as well as those that will benefit the firm over both the short and long term. Applying this approach will help the company more accurately account for its liabilities (Generally Accepted Accounting Principles).

3 Locked Sections · 460 words remaining

Financial Statement Presentation · 90 words

"Dual GAAP and pro forma reporting for stakeholders"

Current Practices: Compliance and Misleading Elements · 200 words

"Problems with early revenue recognition and advance commissions"

Recommendations for Correct Recognition and Presentation · 170 words

"Switch to GAAP for accuracy and investor confidence"

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Key Concepts in This Paper

Revenue Recognition GAAP Standards Pro Forma Reporting Intangible Services Advance Commissions Accrued Revenue Matching Principle Financial Statements Membership Plans Earnings Accuracy