Importance of proper revenue recognition in a company

• Accurately recognize revenue is vital to a assess the company's financial performance

• Existence of revenue recognition accordance with Generally Accepted Accounting Principles

(GAAP) is crucial to accurately assess the company’s financial health.

• A proper revenue recognition will ensure there is accuracy, transparency, occurrence, cut off
and completeness which will enhance the quality of information in the financial statement.

How should cash incentive in Eterno be treated?

• Cash incentives are promotion techniques that encourage customers to purchase the item
from the company and in return the company will offer discounts or free gift to customers.
The standard states that the company should include the incentives in the revenue.
• Discount: For instance, Eterno sells the car for RM80,000 and decided to give 20% discount.
Based on IFRS 15 Revenue recognition, the accountant is required to record the revenue for

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RM64,000 and RM 16,000 is considered as liability. The accountant is required to state the

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amount of discount received from the customer in the Statement of Profit or Loss.

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• Free gift: For instance, Eterno offering free gift to customers who purchase the car in a form
of voucher such as free tinted, free coating and free Eterno VIP key chain. The price of the

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car is RM80, 000 and the customer will receive 3 free gifts which are tinted, coating and key
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chain which worth RM500. Under IFRS 15, the company sold 4 things which are the car and
the free gifts.
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Contract components Standalone selling price Revenue (RM)

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(RM)
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The car 80,000 80,000

80,000 × 80,500 = 79, 503

Free gifts (tinted, coating and key 500 500

80,000 × 80,500 = 497
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chain)
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80, 500 80, 000

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 Do you agree with Eterno’s ways of recognizing its revenue? Explain your answer.

• Based on the case study, I strongly disagree with Eterno’s ways of recognizing its revenue
because it is considered as unethical.

• The company needs to ensure that the techniques complied with GAAP although earnings
management such as overestimating revenues or inventory manipulation in creative
accounting are allowed as it is important for companies to show good profitability of the
that the.

• It is unethical to present reports that are intended to mislead users as it is considered as

fraud. For instance, Louise wanted to use a strategy in marketing approach to attract more
customers by helping to save the consumer personal property tax liability

• It is unethical to record earnings that do not exist. For instance, Louise had instructed Neil to
open a new account for incentives to show that the sales are increasing.

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• Types of creative accounting that are unethical recognition of fictitious revenue and

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misreported Assets and Liabilities

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• The attributes that causes the fraudulent in financial reporting are weakness in internal

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control, the company does not have an audit committee and there is relationship between
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the CEO and the General Manager.
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