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Accounting Case 5-5
Boston Automation
Systems and SAB 101
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Group Members
Shannon Barbour
Jillian Kavanagh
Jean Manning
Steven Penney
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Introduction
Boston Automation Systems
Old practice of recognizing
revenue before it is earned
Recognizes losses in the
period when they are
determined
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SAB 101
Revenue should not be recognized until it
is realized and earned
Stricter definitions of when a transaction is
complete and when a product / service is
delivered
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SAB 101
SAB 101 requires contractual customerprovisions to be satisfied before revenue
can be recognized Two exceptions:
the sellers remaining performance obligationis inconsequential or perfunctory
a portion of contract revenue may berecognized when the seller has substantiallycompleted or fulfilled the terms of a separatecontact element
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SAB 101
contracts include customer acceptance
provisions
Under SAB 101, in most cases, revenue
will be recognized after customers have
accepted the product
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Fishers Concerns
organizations revenue recognition policywill need to be redeveloped to reflect the
new guidelines guidelines are to be implemented no later
than the fourth quarter of the 2000 fiscalyear
as of the third quarter Boston AutomationSystems has not implemented any newpolicies
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Fishers Concerns
GAAP requires consistency
Other three quarters of 2000 will need to be
prepared according to new guidelines
financial statements of at least previous year
will need to be prepared with SAB 101 for
comparison purposes Will have significant time and money costs
to the company
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Glendale Division
Selected
Transactions
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Trycom, Inc.
Equipment ordered is the standard model
of the divisions main product
Tested before leaving division
No reason to believe that it would not work
in customer facility
Revenue can be recognized upon delivery
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White Electronics Company
Equipment ordered is a modified version
of the standard product to fit in a specified
space
Division created a testing chamber
Performance specifications were met
Revenue recognized upon delivery
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Silicon Devices, Inc.
Equipment ordered is a modified version
of the standard product to be integrated
into assembly line
Unable to be tested prior to shipping
Customer acceptance required before
revenue recognized
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Advanced Technology
Division
Selected
Transactions
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Analog Technology, Inc.
Technology previously developed by division
Customer requires specific technical and
product criteria Performance cannot be verified until installation
occurs
Payment terms: 80% due 30 days after deliveryand 20% due 30 days after customer
acceptance
Revenue recognized in installments
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Specialty Semiconductor, Inc.
Customer requires specific technical and
product criteria
Performance can be verified before
installation
Payment due upon installation
Revenue recognized upon customer
acceptance
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Micro Applications, Inc.
Customer require specific technical and
product criteria
Specifications can be tested prior to
shipment
Customer obligated to pay 100% of the fee
no later than 90 days after delivery
Revenue is recognized upon delivery
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XL Semi, Inc.
Initial customer acceptance occurs at
division before shipment
Revenue recognized upon delivery
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Technical Devices Division
Selected
Transaction
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Distributors
A sales strategy shift is occurring
Discontinuing direct sales
Sales will only occur through distributors
Distributors will have to increaseinventories significantly
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Distributors
To help financingdistributors will make
five small monthly payments and one large
payment at end of six months
Revenue will be recognized in installments
Revenue recognition method may change
if payment terms to distributors change
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Do we agree with SAB 101?
Yes.
SAB 101 contains much more detail then
the original revenue recognition policy.
Detail helps to eliminate ambiguity with
how and when to recognize revenue.
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Is SAB 101 too detailed?
No.
The level of detail in SAB 101 is essential -
financial statements are prepared by and
for more than one person.
Ambiguity in accounting guidelines can
lead to misrepresentation of anorganizations true economic health.
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Should the standards be more general?
No.
General is easier to understand but leaves
more room for individual interpretation.
Individual interpretations can lead to
misrepresentation of an organizations
economic position.
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Questions
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