Summarize the five-step revenue recognition standards as presented in Chapter 4 of the textbook
Analyzing Revenue
Assessment Description
The purpose of this assignment is to apply accounting revenue recognition concepts in a case study.
Read the article “Revenue Recognition Guidance and the Potential for Fraud and Abuse,” located in the Topic resources. In addition, refer to the Starbucks Financial Data – SEC Filings, Form 10-K for the most recent fiscal year and locate the note on revenue recognition in the notes to the financial statements. Provide a 500- to 750-word paper addressing the following items:
- Summarize the five-step revenue recognition standards as presented in Chapter 4 of the textbook.
- Refer to the Starbucks Form 10-K and provide examples of how Starbucks follows the five-step revenue recognition model.
- Refer to the article “Revenue Recognition Guidance and the Potential for Fraud and Abuse” and discuss how the five-step revenue recognition model may prevent Starbucks from committing financial statement fraud. Provide examples to support your points. Note in the article that there are subheadings for “Fraud and Abuses” and “Implications of New Guidance;” these may provide some helpful ideas for this portion of the assignment.
Name the Microsoft Word document “LastnameFirstinitial.ACC502.
Prepare this assignment according to the guidelines found in the APA Style Guide, located in the Student Success Center. An abstract is not required. This assignment uses a rubric. Please review the rubric prior to beginning the assignment to become familiar with the expectations for successful completion.
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Expert Answer and Explanation
Accounting Revenue Recognition
Revenue Recognition Standards
Chapter 4 of the textbook indicates the five-step process of revenue recognition. The first step is identifying the contract with a customer. IFRS 15 provides a clear guideline for a contract with a customer. A contract is an agreement between parties that attracts enforceable rights and obligations. A contract could be expressed, implied, or oral.
Both parties in the contract have a right to terminate the agreement if there is a breach of requirement. The second step is the determination of the performance obligations in the contract. The contract must be clear on the goods or services delivered to the customer. The third step is the determination of the transaction price. Transaction prices engross the value of a product or service, which the seller expects from the customer (Mary, 2020).
The fourth step is allocating the transaction price to the performance obligation. The process will entail assigning each price to the performed obligation. The last step is the recognition of revenues. Recognition happens when there is satisfaction with the obligation and transaction price, and ownership has been transferred to the customer.
The transfer of ownership is different, with some demanding future delivery of the item while others are at the point of sale. Public companies like Starbucks employ revenue recognition as part of accounting standards.
Starbucks Revenue Recognition
Starbucks also follows the revenue recognition standards as captured in Chapter 4. The customer and the coffee chain contract when the former orders food or beverage in the store to pay. The company evaluates the service provider’s contractual terms in case they sell products via delivery platforms. The company also evaluates performance obligations to determine the ability to deliver what the customer needs as part of a contract (Starbucks, 2024).
The evaluation process includes the determination of gross versus net presentations. The revenue recognition includes determining the transaction fees (Lynch & Chen, 2021). The transaction fees are costs plus margin. The allocation of these transaction costs is paramount, given that the company deals with multiple items, and transaction taxes are needed.
The company recognizes revenues when the payment is tendered at the point of sale, and customers are satisfied upon completing performance obligations. For the case of the gift cards, the company recognizes the revenue whenever it provides services after customers redeem the points. The delivery of “items” or “services” in this case is after Starbuck customers redeem these points.
Prevention for Committing Financial Statement Frauds
The revenue recognition model is instrumental in preventing Starbucks from committing financial statement fraud. Typically, firms such as Starbucks could inflate revenue generated in a specific financial period to overstate profits. The five-step process provides a clear guideline about what constitutes a legal revenue recognition process.
Carmichael (2019) noted that revenue recognition is only possible with a valid contract. The FASB is clear about what indicates the existence of a contract. The article provided an example of Best and Satyam, which were involved in fictitious contracts to allow revenue recognition (Carmichael, 2019). Firms have also been on record for backdating agreements to make them qualify as premature revenues.
However, FASB demands the existence of a contract before the recognition of revenues is set to eliminate these fraudulent activities. The new demand by FASB is likely to force the management and auditors to be keen on a valid contract before revenue recognition. Specifically, the management must be eager to ensure the presence of the five revenue recognition criteria before allowing auditors to examine their books.
References
Carmichael, D. (2019). New Revenue Recognition Guidance and the Potential for Fraud and Abuse: Are Companies and Auditors Ready? https://www.cpajournal.com/2019/04/08/new-revenue-recognition-guidance-and-the-potential-for-fraud-and-abuse/
Lynch, E., & Chen, A. (2021). Starbucks: Identifying & Writing Up a Critical Audit Matter (While Contemplating the Starbucks Experience). The Accounting Educators’ Journal, 31(1). https://aejournal.com/ojs/index.php/aej/article/view/736
Mary, S. S. R. (2020). Coordinator, Assistant Professor, Department of Commerce (Shift II), Patrician College of Arts & Science, Chennai, India. Business Management, p. 114. https://www.researchgate.net/profile/Ram-Singh-63/publication/354522153_MUTUAL_FUND_INDUSTRY_IN_INDIA-_AN_OVERVIEW/links/63e07a83c465a873a2973edf/MUTUAL-FUND-INDUSTRY-IN-INDIA-AN-OVERVIEW.pdf#page=120
Starbuck. (2024). Starbucks: Annual Filings. https://d18rn0p25nwr6d.cloudfront.net/CIK-0000829224/f46ecb43-3db3-4e70-9959-103e92951d49.pdf
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FAQs
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