UNLV Determining Performance Obligations in The Contract Questions

INSTRUCTIONS FOR CASES #2: Researching Financial Reporting Problems
1. WHAT DO YOU DO WHEN YOU ENCOUNTER AN ACCOUNTING ISSUE
FOR WHICH YOU DO NOT ALREADY KNOW THE ANSWER?
•
Determine the problem or issues.
This task might sound straight forward, but often people rush into the problem
before sitting down and thinking about the issue. To do this, it is often helpful to
sketch an event timeline or a “picture” of the problem. In other words, think
about what is going on from a BIG PICTURE perspective in the business and
about the underlying economics of the transaction before you think about the
accounting.
•
Determine possible solutions to the problem or issue. To do this, you can:
USE ACCOUNTING STANDARDS. Search the FASB Codification for
relevant accounting guidance. The FASB Codification should be your
primary source of information for Case #2. To find information, develop
relevant key words and search terms. Sometimes it helps to look for key words
within the case itself or within your textbook. Your textbook can sometimes be a
good tool to give you some ideas of what to search for. (NOTE: The textbook is
a good place to get ideas but should NOT be referenced as a source in your
paper!)
The more specific your search word or phrase is, the more likely you are to find
relevant accounting guidance in the Codification. For example, if you simply
search for “asset,” you’re likely to come up with a lot of guidance, but most of
it will be irrelevant.
FIND REAL WORLD REPORTING PRECEDENTS/EXAMPLES. Your
search terms also can be used to search for companies facing a similar
situation/issue in the real world. These types of searches would require the SEC’s
Edgar database. These searches are useful in that they give you an indication of
how other companies handled a similar situation. However, they are probably not
helpful in understanding the underlying logic for choosing that accounting
treatment, as companies do not often explain why they chose a particular
accounting treatment in the financial statements.
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REASON BY ANALOGY. This approach can be used when existing accounting
standards do not directly address your issue. Instead of giving up, you should
think about whether your problem is like a situation in another area of
accounting. That is, perhaps another seemingly unrelated area shares common
characteristics at an abstract level to your problem. If it does, you might think
about following the logic/concepts of the accounting prescribed for that other
area.
USE THE CONCEPTUAL FRAMEWORK. Using ideas and definitions
expressed in the concept statements to argue why an accounting treatment
should apply via the conceptual framework is often very helpful.
•
Decide what to do.
Following the approaches listed above often will lead you to more than one
alternative accounting treatment. Assuming you have multiple alternatives, one
way to choose among them is to list out the alternatives and then, for each, list out
the reasons that support and do not support the alternative (e.g., do a pro/con list
for each one). After considering the importance of the pros and cons for each
alternative, you can decide on the accounting treatment that is most appropriate
given the circumstances described in the case.
2. HOW SHOULD YOU WRITE UP YOUR CASE ANALYSIS?
In the first paragraph, briefly summarize the problems or issues that the company
faces. Get right to the problem; you should not spend time reiterating a lot of case
facts.
Next, describe the possible alternative accounting treatments that the company
could follow. For each alternative, explain why it could be considered a viable
alternative or why it may not be a viable alternative, given the case facts. Your
arguments should be supported by one or more of the following: accounting
standards (FASB Codification), conceptual framework, analogies, precedents,
consideration of bigger picture business factors, logic, etc.
Lastly, clearly state which alternative is the preferred accounting solution, and why
you prefer that alternative. Part of this discussion will include an explanation of
the factors that indicate why the alternatives that were not selected were not the
best choices, given the circumstances in the case.
If it helps, you may provide journal entries, supporting calculations, etc., but this
often is not necessary.
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BIG HINT: In the write-ups of these accounting cases, you should be able to discuss
more than one alternative, or I probably wouldn’t have selected it as an accounting
case. Your overall goal when writing up these cases is to (1) describe the alternative
accounting treatments, (2) provide authoritative support for the alternative
accounting treatments, and (3) convince me why your chosen accounting
treatment has merit given the facts of the case. (These tasks are what you will
have to do in practice, as financial reporting managers or auditors must think
through multiple problem solutions, select the “best” one, and then document
support for the preferred accounting treatment.)
Note: Cases that render opposite conclusions can still get the same grade if
they are both convincing. I will grade these cases on a relative basis—relative to
the other groups in the class.
WRITING TIP: The easier it is to follow your arguments, the more your
arguments will be understood by the reader (me, an audit manager, etc.) …and the
better your grade will be. If it is too difficult to understand your thoughts, your
grade will be lower. Don’t assume I have the FASB Codification memorized (I
don’t!) – explain to me what Codification says and what that guidance means for
the issue described in the case. Write clearly and concisely.
Formatting/Page Limit: The solution for Case 2 is limited to three double spaced
typed pages (i.e., they can be shorter than 3 pages, but no longer). Also, please use
1” margins and either 11- or 12-point font (using either Times New Roman or
Arial). Note: You can have one additional page (i.e., a fourth page) for exhibits
only. Exhibits might include excerpts from financial statements if you have any
precedents (from other companies) that you would like to exhibit, or journal
entries if applicable. You may also include a reference list, but this often is not
necessary since most of your support should come from the Codification. This one
additional page should have NO additional discussion on it – all discussion should
occur on the first three pages.
Make sure you answer all parts of all questions indicated in the case. You
might want to organize your write-up into sections – one for each question.
Spelling and Grammar: I will take spelling and grammar into account when grading
the cases. Construct your three-page write-up as if you were planning to give it to a
client or a supervisor. As an accountant, you must communicate in writing
constantly (email messages, memos, etc.). Multiple spelling and grammatical errors
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immediately lead someone to question the accuracy of the content of your write-up.
Therefore, it is imperative that you give the write-up itself the same effort and level
of detail that you give your research.
Work Independently: Each team’s case solution should be independently prepared.
Each team should not refer to other students or teams or to solutions prepared in
previous semesters/by third parties. All questions on cases should be brought to my
attention. Violations of this policy will be treated as a violation of academic
integrity.
Group Participation: It is your responsibility to be an active team member!! That is,
PARTICIPATE in the case activities. There is a team member evaluation at the end
of the semester. This evaluation mechanism is designed to prevent a noncontributing member from receiving credit on a case they did not contribute to. This
should be a strong incentive for members to fully participate. If they do not, I will
adjust grades due to legitimate complaints, as documented on the group evaluation
forms.
Submitting Your Case Solution: Each group will need to submit their case
solution to me via Web Campus by 11:59pm on the due date stated in your
course syllabus. The following page contains a checklist that you should use when
evaluating your write-up prior to submission. These are the factors that I will be
considering when grading your cases.
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Effective Research Report Checklist
1. Accounting content
________ Accounting issues identified and addressed (e.g., displayed a clear understanding of
the issue(s) in the case and cited relevant sections of the FASB Codification)
________ Logical analysis of the issues (e.g., discussion of accounting options available,
discussion of the pros/cons of each potential accounting treatment)
________ Conclusions supported by appropriate accounting concepts and authoritative literature
(e.g., provide a persuasive and well-supported recommendation)
________ Correct use of technical accounting terminology
________ Responsiveness to the requirements of the question (i.e., addressed all parts of all
questions in the case)
2. Appropriateness for the reader
________ Written appropriately for the reader: technical level, knowledge of the situation, tone
(IMPORTANT: You should assume your reader has a basic level of accounting
knowledge but may not be familiar with more difficult accounting concepts and the
standards surrounding them.)
3. Concise – no unnecessary words, sentences, paragraphs – Get to the point and stay on topic!
4. Clear and readable style
________ Sentences constructed so they are clear and easy to read.
________ Word choices precise and appropriate
5. Coherent organization
________ Main ideas/conclusions summarized near the beginning or end of a section/paragraph.
________ Paragraphs well organized and focused
________ Logical, organized report structure (e.g., use of headings or clear identification of case
question being addressed)
6. Professional, polished presentation
________ Neat, organized document design
________ Grammatical and mechanical errors are minimal and do not distract the reader.
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Research Case: Custom Tech’s Revenue Recognition
Custom Tech Software (“Custom Tech”) is contracted by a bank (the “Bank”) to
provide a customized online platform for the Bank’s mortgage loan applications
(the “Loan Platform”). Bank customers will use the Loan Platform to complete
online mortgage applications, which involves inputting relevant information (e.g.,
name, address, employment, income, assets) and uploading supporting documents
(e.g., tax returns, bank statements). The Loan Platform enables both the Bank and
the applicants to retrieve necessary information and documents as well as track the
status of the lending process in real time.
To create a Loan Platform that meets the Bank’s specifications, Custom Tech is
contractually required to perform the following specific software development
activities (the “Software Services”):
1. Conduct interviews with Bank personnel to understand the Bank’s system
requirements and determine how to establish interfaces needed for the Bank
to integrate the Loan Platform with its existing systems.
2. Test the Loan Platform in a test environment using dummy transactions.
3. Add custom functionalities to the Loan Platform (e.g., Bank-specific
underwriting and reporting features, integration with the Bank’s customer
service).
4. Customize the design of the Loan Platform (e.g., Bank’s logo, branding,
color scheme, preferred button placement).
Loan applicants will access the Loan Platform through the Bank’s website and will
be unaware that Custom Tech is operating the Loan Platform. The Bank does not
have the ability to direct the use of the Loan Platform during the Software Services
period and is not allowed to run the Loan Platform on Bank hardware at any time.
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Instead, after the Software Services are completed, Custom Tech hosts the Loan
Platform on its own servers, which allows the Bank and its loan applicants to
access the software online to process loan applications (the “Processing Services”).
Custom Tech has no obligation to perform further work on the Loan Platform (e.g.,
customization, upgrades) after the Software Services are completed. Because the
Loan Platform runs on Custom Tech’s proprietary technology, no other vendor can
perform the Software Services or Processing Services. The Loan Platform is
delivered to the Bank as a service in the form of the Processing Services (i.e.,
online access to loan processing services hosted by Custom Tech). That is, no
software license is transferred to the Bank.
The Software Services begin on July 1, 2022, and continue through December 31,
2022. The Processing Services begin on January 1, 2023, and continue for a term
of five years. The contract requires the Bank to pay Custom Tech a nonrefundable
fee of $3 million at the time the Software Services begin (i.e., on July 1, 2022) and
$3 million over the period in which Custom Tech will provide the Processing
Services (i.e., equal monthly installments between January 1, 2023, and December
31, 2027). Neither party has a unilateral option to extend the contract, but the
parties are free to negotiate an extension if desired. Any such extension would be
priced at the standalone selling price.
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Custom Tech concludes the following:
● The arrangement is within the scope of ASC 606-10 and meets the criteria in
ASC 606-10-25-1 to be considered a contract with a customer.
● Custom Tech’s customer, as defined in ASC 606-10, Revenue from
Contracts with Customers — Overall is the Bank (as opposed to the
mortgage loan applicants).
● Any explicit or implicit activities and/or promises other than the Software
Services and the Processing Services are immaterial in the context of the
contract and need not be considered.
● The total transaction price, as described in ASC 606-10-32-2, is the sum of
the contractually stated fees (i.e., $6 million).
● The Software Services are required to be performed to create the customized
Loan Platform that Custom Tech will use to provide the Processing Services
to the Bank.
● The Bank does not derive value from the Software Services; rather, it
derives value from the Processing Services. However, the Processing
Services cannot begin until the Software Services are complete (i.e., until a
Loan Platform that meets the Bank’s specifications has been developed).
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Required:
1. How many performance obligations are included in the contract between
Custom Tech and the Bank? You should discuss at least two possibilities
you considered regarding the number of performance obligations included in
the contract. Be sure to support your reasoning using guidance from ASC
606-10.
2. When should Custom Tech recognize the $6 million transaction price as
revenue (i.e., at what point in time and/or over what period)? Be sure to
explain your answer using guidance from FASB ASC 606-10.
See the Research Case Instructions posted within WebCampus for detailed
instructions on how you should complete and submit your write-up.
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