Atletico Cicero Incorporated
Nat are the accounting issue(s) and the relevant components of the authoritative literature? Ere case focuses on a sales agreement with multiple deliverables. The critical issue is determining whether there are separate units of accounting in the sales agreement. In other words, should the multiple deliverables be accounted for as one unit of accounting or as two or more separate units of accounting?
Guidelines that assist with evaluating sales transactions that involve multiple deliverables can be mound in subtopic 605-25, “Revenue Recognition?Multiple-Element Arrangements,” in the Codification.
Requirement 2: What are the separate units of accounting in the sales agreement between III and COM? Use the authoritative literature to explain your answer. As the explanation below illustrates, the multiple deliverables sold by III to COM should be treated as two separate units of accounting (the assembly line system and its Installation).
FAST ACS 605-2525-5 presents specific criteria that must be met for the multiple deliverables in revenue-generating arrangements to be treated as separate nits of accounting. The questions essentially posed by these criteria are the following: 1 . Does the delivered item(s) have value to the customer on a standalone basis? 2. Does a general right of return exist for the delivered item(s) and, if so, is delivery or performance of the undelivered item(s) considered probable and substantially in the control of the vendor? Question 1 above, “Do the delivered item(s) have standalone ‘alee? Needs to be considered as each item is delivered to the customer (provided there are still items to be delivered).
The first deliverable consists of the mixer segment and the molding segment (mixer/molding segment deliverable). III must consider whether this deliverable has value to the customer on a standalone basis :absent the packaging segment and the installation services). As discussed in FAST ACS 605- 2525-AAA, standalone value exists if the deliverable can be sold separately by any vendor or if the customer could resell the deliverable on its own.
The case facts indicate that neither of these circumstances exists with respect to the mixer/molding segment deliverable. In other words, III does not sell the mixer/molding segment Introit also selling the packaging segment because all three components are needed for the assembly line system to function properly. Are Sais’s assembly line components are compatible with any of Sais’s competitors’ assembly line systems.
Given the facts in the case (I. E. , the individual components do not function Independently of one another), we assume that they are not.
For these reasons, it is reasonable to assume that the customer cannot resell the mixer/molding segment on its own, so there is no resale market for these components. The mixer/molding segment deliverable does not represent a separate unit of accounting and must be ¶endued together Witt at least the packaging component deliverable.
The next deliverable consists of the packaging component, which completes the assembly line system. III must consider whether the complete assembly line system has value to the customer on a standalone basis (absent the installation services).
The case facts indicate that III sometimes sells the assembly line system without the installation services. For this reason, the complete assembly line system (the delivered item) has ‘alee to the customer on a standalone basis. As a result, it should be treated as a separate unit of accounting.
Ere final deliverable is the installation services. Because there are no remaining items to be delivered after the installation services, III does not need to consider Neither the installation services have value to the customer on a standalone basis.
As a result of this portion of the analysis, III concludes that its agreement with COM consists of two Alfred, Dementia, Hill, and Stevens 120113 OR Athletic Oakland Analysis 2 separate units of accounting: (1) assembly line system, and (2) installation services. Question 2, above, is not relevant and need not be considered because there is no general right of return provided by III in its agreement with COM. Requirement 3: How much of the arrangement consideration should be allocated to each unit of accounting? Be sure to identify any other issues that must be resolved to determine how revenue should be allocated.
III must now allocate the arrangement consideration between the two separate units of accounting. As discussed in FAST ACS 605-25-30-2, arrangement consideration should be allocated using the relative selling price method. The case asks to “identify any other issues that must be resolved to determine how revenue should be allocated. ” To apply the relative selling price method, III must determine Neither it has vendor-specific objective evidence (VOSS) of selling price (as defined below) for either or both of the separate units of accounting.
If III has VOSS of selling price for a unit of accounting, it should use that selling price in the relative selling price method. If III does not have VOSS of selling price for a unit of accounting, it should determine whether it has third party evidence (TAPE) of selling price (as defined below).
If III does not have VOSS of selling price, but does have TAPE of selling price for a unit of accounting, then III should use TAPE of selling price in the relative selling price method.
If III has neither VOSS of selling price nor TAPE of selling price, then it must determine its best estimate of selling price (as defined in FAST ACS 605-25-30-c) and use that price in the relative selling price method. As discussed in FAST ACS 605-25-30-AAA, VOSS of selling price exists if the vendor sells the unit of accounting separately and, thus, knows the price it charges for that unit on a standalone basis. The case facts indicate that III occasionally sells its assembly line system without installation for $95,000.
If there is sufficient evidence to support selling the assembly line system without installation at that price, III should use a price of $95,000 for the assembly line system in the relative selling price method.
Because III does not sell the installation services separately, it does not have VOSS of selling price for that unit of accounting. Requirement 4′ Now, assume that sufficient evidence exists to support the selling price of $95,000 for the assembly line system. However, there is some concern grading the $12,000 charged for the installation services that III heard about from prior customer.
What type of analysis must be done related to the $12,000 price for installation services to decide whether it should be used to allocate revenue to the components in the sales agreement? Explain your answer. As discussed in FAST ACS 505-25-30-b, third-party evidence of selling price exists if the product or service is available to the customer from another vendor. The issue to consider is whether there is sufficient evidence to support the selling price for the installation services hat III learned of from one of its customers as TAPE.
If so, III should use that price for the installation services in the relative selling price method.
The following issues should be identified before deciding that the $12,000 sales price is rep: 1 . Are the outside technicians qualified to install the system? 2. Have customers who have used outside technicians been satisfied with the installation of the system, or has more work had to be done? 3. How many times have customers used outside technicians to provide installation services (I.
E. , there may not be sufficient evidence to support the selling prices of the installation services)? 4. Is there evidence other than “III has heard” (e. G. , written contracts or binding quotes) that verify the price charged by other technicians?
Alfred, Dementia, Hill, and Stevens 120113 OR Athletic Oakland Analysis 3 Assuming that the outside technicians are qualified, that prior installations by outside technicians have been satisfactory, that it is not uncommon for customers to use outside technicians, that III has documentation for the price it has charged customers that have bought the assembly line system but not the installation, and hat III has documentation that verifies the price charged by outside technicians to perform the installation, sufficient evidence does exist to support the selling prices for the assembly line system unit of accounting and the installation services unit of accounting.
