Essay --

Under U.S. GAAP, entities can generally recognize revenue when it is realized or realizable and earned. 1. Revenue can be recognized when it is realized or realizable. For revenue to be realized, a company must receive cash or claims to cash in exchange of goods, services, or other assets. Similarly, for revenue to be realizable, the firm’s goods, services, or other assets must be exchanged for other assets that are â€Å"readily convertible to known amounts of cash or claims to cash† (605-10-25-1). This means that the entity’s assets were not exchanged for cash or claims to cash, but instead, for another company’s assets, such as short-term investments and government securities. 2. Revenue can be recognized when earned. Entities can earn revenue if the firm has â€Å"substantially accomplished what it must do to be entitled to the benefits represented by the revenues† (605-10-25-1). For example, when companies substantially completed (a) provision of professional services, (b) delivery or production of goods, or (c) other activities that constitute its ongoing major or central operations, revenues is earned. Issue 2 (â€Å"Bill and Hold†) Question: One of the issues faced by TerraSure relates to revenue recognition of finished goods that have not yet been delivered to customers due to inadequate storage space in customer’s warehouses. TerraSure has engaged in two different methods to deal with this situation. With the first method, TerraSure segregates the inventory within its own finished goods warehouse. In the second method, TerraSure ships customer’s inventory to a third party warehouse, where customers directly pick up their inventory. Background: Regarding â€Å"bill and hold† inventory, the SEC Staff Guidance states that these ... ...ordance with the terms of the arrangement, has been delivered or is available for immediate and unconditional delivery. 3. The license period of the arrangement has begun and the customer can begin its exploitation, exhibition, or sale. 4. The arrangement fee is fixed or determinable. 5. Collection of the arrangement fee is reasonably assured (926-602-25-1) Responses: Since TerraSure does not allow its customers to show the films until after its promotional activities begin, it cannot recognize revenue at the point of sale. To correctly recognize revenue for the film licensing contracts, customer must have all rights to exploit, exhibit, or sale (926-602-25-10). Even though the film is delivered to the customer, TerraSure must recognize revenue from licensing agreements not at the point of sale, but after the marketing department begin its promotional activities.