Revenue Recognition Harvard Case Solution & Analysis

CASE 1 (Solution)

To: Chem Inc.

From: Officer

Date: December 2009

Subject: Accounting Issues and Revenue Reorganization

Extracting details of Chem Inc. with the relevant policies and rules of financial accounting boards and international rules of accounting and following answer of each query are given below with regarding references also:


Accounting Issue

The Current issues relating of Accounting are many which some of are mentioned  below with the status of the issue and further more implementation on the issues:

  1. Assessing the Financial Assets and Financial Liabilities of a Financing Entity


Reporting Entity holds a controlling Financial interest in a variable Interest entity (VIE), that entity is seen to be the main financial beneficiary of the VIE and is taken to consolidate the VIE. Characteristics  (a) the power to conduct the actions of the VIE that most significantly to absorb losses of the VIE or the right to receive benefits from the VIE that could potentially be substantial to the VIE (the losses/ benefits criterion).


The scope has been set on three broad Views in which, considering fact and figures relating to the financial Instruments

  • View A: There is no scope-out for financial Assets that are legally held by a Company, even if those assets originated from the parents.
  • View B: It is a narrower scope-out only for financial assets that would have failed to the conditions for sale.
  • View C: Scope-out as per company with financial assets that are originated from the parents so it is a matter of consideration.


Another issue is much which having the same steams which are referred in the bibliography of these reports and Relevant Component are related to the 2nd issue of financial instruments


Chem Inc. can shipment to the MCA because of the agreements to the organization by the end of Year, but as far as revenue reorganization concerned the risk and rewards of the revenue are associated with MCA till in the year of 2010. As per Internationally Accounting Standard “IAS 18” states that revenue is recognized when following criteria fall on the Contracts and leases treatments regarding to IAS 37also:

v  The gross inflow of economic benefits (cash, receivables, other assets) arising from the ordinary operating activities of an entity (such as sales of goods, sales of services, interest, royalties, and dividends). [IAS 18.7] (18, 2014)

v  Revenue should be measured at the fair value of the consideration received or receivable. [IAS 18.9] (18, 2014)

v  Accounting for arrangements between an enterprise and an investor should reflect the substance of the arrangement. All aspects of the arrangement should be evaluated to determine its substance, with weight given to those aspects and implications that have an economic effect. (37, 2014).

v  Obligations of an arrangement, including any guarantees provided and obligations incurred upon early termination, should be accounted for under IAS 37 Provisions, Contingent Liabilities and Contingent Assets or IAS 39Financial Instruments: Recognition and Measurement, depending on the terms (37, 2014).

v  So therefore sale of Chem Inc. should not recognize sale, but the agreement as carried as obligation towards the MCA.

v  Revenue should be recognized in the year of 2010 as per the above point given in this scenario.

v  Along with the scenario of the revenue recognize also analyze with the obligation of the revenue.

Issues before deciding the decision:

  • The company should have a sound financial position in the sales
  • Assure the liquidity position of the company, also verify the gearing analyze.
  • The company should assure all legal procedure of the agreement of sales regarding the obligation of the company.
  • Follow all the business rules which are in norm of the business.


Date Particular P/R Debit Credit
15/Dec/09 Bond Receivable   1000,000  
         Financial Liability     1000,000
  (To Record the Substance over form transaction)      
31/March/10 Financial Liability   1000,000  
         Sales     1000,000
  (To Record the Substance over form changes)      


Preparing the journal entries as per the substance over form and preparing assumptions are as follows:

  • Assume as this transaction takes place as substance over form and record as bond receivables interest in the transaction.
  • Record as financial liability also because of the sale does not take place at the time of agreement.
  • Assumed that the risk and reward are transferred at year 2010 in the month of march.





To: Assembly Lines Incorporated (ALI)

From: Analyst

Date: September 2009

Subject: Accounting issues and Revenue Reporting Periods

Extracts details of Assembly Lines Incorporated with the relevant policies and regulations of financial accounting boards, international principles of accounting and management accountancy concept; following solution of each question are given below with regarding references also:


Accounting Issues:

The issues relating of accounting are few which some of are as follows.................

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