BOSTON AUTOMATION SYSTEMS, Inc. Boston automation systems, Inc. Is a capital equipment and testing instrument m anufacturer and supplies to highly cyclical electronics based industries includi ng semiconductor industry. The CEO of the company- Daniel Fischer was reviewing the revenue recognition practises of its three divisions in anticipation of disc losing in the firm’s third quarter 2000 form 10-Q filing with the SEC and was cons idering the possible impact on the company’s financial statements dur to the new p olicies of SAB 101. Q1. What revenue recognition methods did Boston Automation Systems adopt? Which of these policies were most likely to be impacted by SAB 101? As mentioned in the company’s 1999 annual report, it follows the following 5 revenue recognition methods1. Revenue related to product is recognized upon shipment of the products. 2. Revenue related to warranty of products is recognized separately when pr oduct revenue is recognized. 3. The Service Revenue is recognized when services are delivered or over t he period of related contract. 4. The revenue from installation and maintenance services is recognized se parately as and when such elements are separately sold. 5. For contracts unde AICPA statement of position No.81-1, revenue recognit ion is done based on Percentage –of-Completion Method based upon Efforts-Expended. The following policies were most likely to be impacted by SAB 1011. Product Revenue which was earlier recognized upon the shipment of produc ts can now be realized only upon delivery. I.e. after it reaches the customers’ lo cation and the risks and rewards of ownership of the goods are transferred to t he customers. 2. Service Revenue: which was earlier recognized upon delivery can now be r ealized only upon receiving of customer acceptance certainty. 3. Warranty revenue whose recognition was earlier dependent upon the need of such service can now be recognized rather than deferred so long as provision can be reasonably determined for the amount of future returns based upon histori cal return experience of a similar sufficiently large volume of homogeneous tran saction.

Q2. Why might Fisher be concerned about the impact of SAB 101 on Boston Automati on Systems’ revenue recognition Practice? Be as specific as possible. Fisher should be concerned regarding the implications of the new guideli nes due to the following reasons1. The present methods of revenue recognition are quite lenient which accou nt for revenues regardless of whether they are actually or can be actually reali zed or not. 2. However, the new guidelines uphold that “revenue should not be recognized unless it is realizable and earned”. Thus, the new policies would require the comp any to account for revenues only upon their certainty, which implies recognition after considerable periods of time. This would affect the balance sheet and mor e importantly the healthy looking income sheet of the company which might affect its future investors and the firm’s reputation. 3. The present methods are easy to incorporate. However, the new methods ar e too complex to be implemented. Even a slight error in accounting can lead to d angerous consequences. Thus, utmost care has to be taken. 4. Because revenue will now be realized after considerable periods of time after dispatching of product, the company needs to be concerned about the qualit y of after-service offered and preferable acceptance by the customer so as to mi nimize the risks of rejection or return of the products and faster revenue recog nition.

Q3. What revenue recognition accounting was required by the facts of each of the eight sales transactions reviewed by Fisher? Justify your Conclusions. The revenue recognition methods of each of the 8 entities can be discussed as fo llows: A).GLENDALE DIVISION: 1) Trycom, Inc.: in this case, the company should recognize the revenue imm ediately as it is a standard model and there is no uncertainty or any reason to account for the fact that the equipment shall not operate in the same way at th e customer’s facility. It has also met the divisions published specifications for a standard model. 2) White Electronics Company: Here, the company should recognize the revenu e because it fulfills all the terms specified in the sales arrangement. We assum e that there is no uncertainty about acceptance. And since the testing has also been done, the revenue can be recognized. 3) Silicon Devices, Inc.: The revenue should not be recognized immediately as the customer has the right to reject the equipment if it could not be satisf actorily integrated into the new line. Though the Glendale division modified th e standard model, it was unable to replicate the new assembly line conditions in its testing. This treatment is mentioned under Performance Criteria of SAB 101- Custo mer Specified Objective Criteria where the seller can recognize the revenue only after it reliably demonstrates that a delivered product meets the customer –speci fied objective criteria. B) ADVANCED TECHNOLOGY DIVISION: 4) Analog Technology, Inc.: Boston Inc. can recognize the 20 % of the amoun t i.e. amount to be paid after the installation if: The equipment’s capabilities are not significantly altered by installation . Other companies are available to perform that Job But since it was unable to demonstrate the customer-specific specifications befo re installation due to the nature of the equipment, it is reasonably uncertain w hether the customer will accept the equipment or not. Therefore the revenue shou ld not be recognized. 5) Speciality Semiconductor, Inc.: Boston Inc. should recognize the revenu e because: Integration of the product into the production line was not complex

Product was tested in the divisions facility before shipment Virtually no uncertainty about product performance In spite of the obligation of the customer to pay the amount after complete inst allation, Boston Inc. should recognize the revenue before the installation itsel f. 6) Micro Applications Inc.: the company cannot recognize the revenue becau se the customer does not have any right to reject. The customer has to pay the 1 00% amount even if the installation is not complete within 30 days. 7) XL Semi, Inc. :Boston Inc. should not recognize the revenue immediately. It should recognize the revenue only after the installation is complete and the product meets the expected performance. Since it is a complex product and that the engineers have to disassemble and reassemble the equipment, they cannot be s ure whether it would meet the specifications. Since the division used its own engineers to install and set up its prod ucts, no other parties had installed the division’s equipment in the past. C) 8) Technical Devices Division: Earlier the division used the both distributor network and its direct sales force for the sale of its products. Now they have changed their sales strategy and asked the distributors to increase their invent ory to as much as 2 year’s sales. It has decided to scrap its direct sales force. The Boston Inc. should not recognize the revenue because: There might be a possibility of repurchase/ return The seller provides interest-free or significantly below-market financin g to the buyer beyond the seller’s customary sales terms The seller has the practice of taking back any excess dealer inventories of mechanical testing devices Q4. Do you agree with the SEC’s revenue recognition accounting conclusion and gui delines set forth in SAB 101? Are they too detailed? Should accounting standards be expressed in more general terms? -Yes, I agree with SEC’s revenue recognition accounting conclusion and gui delines set forth in SAB 101. It proposes an accounting method for every possib le nature of revenue transaction and provides guidelines for the costs associat ed with the revenue. - The SAB 101 is too detailed because has to cover all the revenue types and there should not be any ambiguity. - I believe the accounting standards should not be expressed in more gen eral terms. This is because if they are expressed in general terms, people will take advantage of the relaxations in the provisions.

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