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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