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Revenue Recognition Policy

Essay by   •  February 22, 2011  •  Research Paper  •  1,218 Words (5 Pages)  •  1,474 Views

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Revenue Recognition Policy (Note 2):

A. Sale of goods Revenue Recognition

According to the annual report's financial statement notes, CV Technologies (CVT) recognizes revenue when the title of goods is passed on to the customer, and when reasonable assurance exists regarding the measurement and collection of the consideration given. This means that once CVT ships its goods to their reliable customers, they will account for those goods as sold, and recognize the contract amount as revenue. This policy, although it is slightly aggressive, does adhere to GAAP, but it does require a look at other financial statement accounts for its efficiency and suitability for the company. Since CVT is operating on credit, it is imperative that the clients are accountable for debt payments, and their risk is assessed on a continuous basis. As it states in the annual report, the risk of bad debts is mitigated by proactive credit management policies that include regular monitoring of the debtor's payment history and performance. Furthermore, since revenue is recognized prior to any cash received, the accounts receivable and bad debts expense accounts must be analyzed to assess the appropriateness and effectiveness of this policy. As per the financial statements, CVT exhibits a low ratio of bad debts expenses to accounts receivable, meaning they are collecting on most of their sales, and therefore we can safely assume that their revenue recognition policy is apt for their needs.

John doesn't need to be concerned with these accounting policies as they are pretty standard for the industry, and because CVT is very efficient and proactive in the collection process.

B. License Revenue and Other Revenue

The license revenue is recognized on an accrual basis and matches revenues and expenses to appropriate periods. This method is very conservative, and preferable by GAAP, and is efficient for CVT's purposes. This revenue is not a large chunk of the total revenue for CVT so the recognition policy here is not very useful for John's purposes.

C. Research and Development Assistance

This is a policy not accounting for actual "revenue", but actually accounts for the assistance that CVT received from two outside sources AVAC and NRCC. The company recognizes this money as a decrease in their expenses, rather than an increase in revenue. Although it has the same net effect on the financial statements as revenue, it is not really revenue as it has a repayment aspect that is discussed later in commitments and contingencies. The effect on John and the discussion of the treatment is also done in the commitments and contingencies section.

Deferred Development Costs (Note 2):

This section deals with the research and development costs that have been incurred, but instead of the typical manner of expensing them, they have been capitalized, and found under the assets section of the balance sheet. The capitalization of these development costs was done because the company believes that there is profit to be made with the technological breakthroughs achieved from this research. Perhaps the easiest way of explaining this is to compare this to your repair class that was accounted for under assets, because it was safe to assume that there was a potential market for the skills you had acquired and the future benefit associated with the cost of the class. However, it is important to understand that capitalization of these costs is misleading on the financial statements. Although experts analyzed the profitability of these costs, it is possible that the company may not generate any income from the research, which is why there is also an option of expensing these costs. Accounting for the costs as assets disguises the assets, exaggerates the net income and does not portray an accurate financial position of the company.

John should be very concerned with these intangible assets on the balance sheet, since they are classified as assets, but actually have no real value until they can generate some revenue. If the newer products based on these developmental costs fail, the financial stability of the company will be very weak. If John wishes to invest, it is crucial that he researches new product releases and their profitability.

Stock Option Compensation (Note 2 and Note 13):

The stock option compensation notes deal with the new CICA standards that has forced CVT to recognize and disclose stock option compensation expenses. Prior to the new standards, CVT could potentially

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