Chester’s Games Corporation (CGC) Case Study Analysis
Problem Analysis
Revenue recognition analysis
Description
In this case, it is acknowledged that the company recognizes its revenue out of its durable goods when the cash is received by the company through online platforms. However, it is a wrong accounting treatment practiced by the company as it is not aligned with the IFRS standards. Because the revenue out of the company’s consumable goods is recognized whenever these goods are delivered to the customers via online platforms.
According to the revenue recognition rule regarding IAS 18, the company must recognize the revenue when the rewards and risks of the goods are being delivered to the customers, which in this case are the players of the games provided by the company. Hence, according to that rule, the company revenue recognition process regarding its consumable goods is right, whereas the revenue recognition process of its durable goods is not aligned with that rule, i.e. IAS 18.
Impact
If the accurate rules and IAS standards regarding the recognition of revenues are not being followed by the company, then it could severely harm the company’s integrity. The accurate compliance of financial reporting standards makes it convenient and easier to the companies to provide standard financial reporting. This ultimately enables the external players of the company that include its analysts and investors to assess the overall financial performance of the company the most accurate.
However, in the case, there is no consistency of the rule regarding the revenue of the company through sales of different types of goods, which includes the durable as well as the consumable goods. The revenue out of the sales from consumable goods is recorded by the company when goods are delivered, but revenue out of the sales from durable goods is recorded by the company when the case is received from the customers.
This could generate a wrong perception regarding the company to the users of company’s reports, either external or internal, such as the company does not follow the report its revenue in alignment with the accurate accounting standards. Given that the company is considering for its initial public offerings (IPO) very soon in the future, the company must follow the required reporting standards and must be consistent to them in order to maintain its integrity.
Treatment
Since it is mentioned in the case that the CGC follows the IFRS standards for all of its reporting processes hence it is important to the company to comply with all the IAS standards. The company’s revenue recognition out of the sales of its goods that includes the consumable and durable goods, must also be aligned with these standards. (Víghová, 2021)
It is prescribed that, for the revenue recognition, the company must follow the IAS 18 standard as guided by the IFRS. The standard sates that the companies should recognize their revenues when rewards and risks related to the goods and services provided by the company are delivered to the customers. The principle of recognizing the revenues after transferring the all risks and rewards related to goods/services to the customers, is referred to as accrual accounting principal.
The revenue recognition of a company from the sales of its consumable goods is already based on the accrual based accounting principle, hence it does not require any modification in its accounting treatment. But, the revenue recognition of a company from the sales of its durable goods is not aligned with the accrual based accounting principle. Instead, it is based on the cash based accounting principle (i.e. recognition of revenue when the cash is received). Hence, the company must comply with IAS 18 standard for the revenue recognition of sales from durable goods.
Impairment of assets analysis
Description
In this case, it is acknowledged that the company operates in a highly technologically advanced industry with high volatility and variations. This is a clear indication that an impairment test should be performed because the assets the company currently owns may not generate the expected return in the future.(Özdemir, 2021)
Impact
As stated earlier, the assets the company currently owns may not generate the expected return in the future.If the impairment testing is not been regularly practiced by the company, this may tends to depict a wrong picture of the company regarding the fair values of the assets. The avoidance of assets impairment reporting would result in high disposal losses when the assets are disposed by the company after many years because these assets might be wrongly valued over underestimated amount.
Treatment
When the stock market is erratic and a company’s share is losing a large amount of value, this is a serious problem. As a result, the corporation must assess if its asset base is impaired.As stated in IAS 36, a share’s decline in market value is also an indicator that impairment testing is necessary.According to IAS 36 paragraph 12, the company shall do an impairment test whenever an external indicator materializes and becomes apparent. By definition, an external indicator is a change that is detrimental to the economy, laws, or regulations.
Conclusion
From the case analysis, it is observed that the Chester Games Corporation (CGC) operates under a highly competitive industry that has a high growth potential. Soon, the company’s stakeholders are considering going for an IPO. For that matter, the company must comply with all the regulatory requirements. The company follows IFRS standards for its financial reporting, but few of its reporting processes, like impairment and revenue reporting, are not aligned with those standards. In order to maintain the integrity of its financial reports, the company must follow the treatments as prescribed in this report..........................
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